UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

☒QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended ~~January 31, 2018~~June 30, 2021

Commission File No. ~~000-51128~~001-32404

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

~~DELAWARE~~delaware		06-1529524
(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

1960 SS. 4250 W

West, Salt Lake City, UT84104

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code:~~(732) 225-8910~~(800)560-3983

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class		Trading Symbol		Name of each exchange on which registered
Common Stock, Par Value $0.001		PTE		Nasdaq Capital Market NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ~~[X]~~ ☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T ~~(232.4.05~~(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ~~[X]~~ ☒ No ~~[ ]~~☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	~~[ ]~~☐		Accelerated filer	~~[ ]~~☐
Non-accelerated filer	~~[ ]~~☒	~~(Do not check if smaller reporting company)~~	Smaller reporting company	~~[X]~~☒
			Emerging growth company	~~[ ]~~	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ~~[ ]~~☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ~~[ ]~~ ☐ No ~~[X]~~ ☒

As of ~~March 14, 2018,~~August 5, 2021, there were ~~16,457,664~~81,382,372 shares of the Registrant’s common stock outstanding.

~~INDEX~~

INDEX

	Page
PART I - FINANCIAL INFORMATION	3

Item 1. Financial Statements:	3
Condensed Consolidated Balance Sheets as of ~~January~~June 30, 2021, and December 31, ~~2018~~2020 (unaudited) ~~and October 31, 2017~~	3
Condensed Consolidated Statements of Operations for the three and six months ended ~~January 31, 2018~~June 30, 2021 and ~~2017~~2020 (unaudited)	4
Condensed Consolidated ~~Statement~~Statements of ~~Changes in~~Comprehensive Loss for the three and six months ended June 30, 2021 and 2020 (unaudited)	5
Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended ~~January 31, 2018~~June 30, 2021 and 2020 (unaudited)	56
Condensed Consolidated Statements of Cash Flows for the ~~three~~six months ended ~~January 31, 2018~~June 30, 2021 and ~~2017~~2020 (unaudited)	67
Notes to Condensed Consolidated Financial Statements (unaudited)	78
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2126
Item 3. Quantitative and Qualitative Disclosures about Market Risk	2336
Item 4. Controls and Procedures	2336

PART II - OTHER INFORMATION	36

~~Item 1. Legal Proceedings~~	24
Item 1A. Risk Factors	2436
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4537
~~Item 3. Defaults Upon Senior Securities~~	45
~~Item 4. Mine Safety Disclosures~~	45
Item 5. Other Information	4537
Item 6. Exhibits	4638

SIGNATURES	4739

As used in this report, the terms “we,” “us,” “our,” “the Company,” and “PolarityTE” mean PolarityTE, Inc., a Delaware corporation, and our wholly owned Nevada subsidiaries (direct and indirect), PolarityTE, Inc., PolarityTE MD, Inc., Arches Research, Inc., Utah CRO Services, Inc., IBEX Preclinical Research, Inc., and IBEX Property LLC., unless otherwise indicated or required by the context.

POLARITYTE, the PolarityTE Logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, COMPLEX SIMPLICITY, IBEX, ARCHES, and SKINTE are all trademarks or registered trademarks of PolarityTE. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.

PART I.I - FINANCIAL INFORMATION

Item 1. Financial ~~Statements~~Statements:

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

~~(in thousands, except share and per share amounts)~~

January 31, 2018 October 31, 2017
(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents $ 9,990 $ 17,667
Prepaid expenses and other current assets 626 237
Receivable from Zift 60 60
Total current assets 10,676 17,964
Non-current assets:
Property and equipment, net 4,452 2,173
Security desposits – non-current 111 -
Receivable from Zift, non-current - 15
Total non-current assets 4,563 2,188
TOTAL ASSETS $ 15,239 $ 20,152

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued expenses $ 3,312 $ 1,939
Warrant liability and embedded derivative 10,128 13,502
Total current liabilities 13,440 15,441
Total liabilities 13,440 15,441

Commitments and Contingencies

Redeemable convertible preferred stock - Series F - 6,455 shares authorized, issued and outstanding at January 31, 2018 and October 31, 2017; liquidation preference - $17,750. 5,414 4,541

STOCKHOLDERS’ EQUITY (DEFICIT):
Convertible preferred stock - 9,993,545 shares authorized, 1,656,838 and 3,230,655 shares issued and outstanding at January 31, 2018 and October 31, 2017, aggregate liquidation preference $1,089 and $2,140, respectively 109,104 109,995
Common stock - $.001 par value; 250,000,000 shares authorized; 7,094,544 and 6,515,524 shares issued and outstanding at January 31, 2018 and October 31, 2017, respectively 7 7
Additional paid-in capital 160,368 149,173
Accumulated deficit (273,094 ) (259,005 )
Total stockholders’ equity (deficit) (3,615 ) 170
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) $ 15,239 $ 20,152

~~See accompanying notes to condensed consolidated financial statements.~~

~~POLARITYTE, INC.~~

~~CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS~~

(Unaudited, in thousands, except share and per share amounts)

For the three months ended
January 31,
2018 2017
Net revenues $ 13 $ -
Cost of sales 1 -
Gross profit 12 -

Operating costs and expenses
Research and development 6,602 -
General and administrative 10,898 5,225
17,500 5,225
Operating loss (17,488 ) (5,225 )
Other (expenses) income
Interest income 25 4
Change in fair value of derivative liabilities 3,374 (8 )
Net loss from continuing operations (14,089 ) (5,229 )
Loss from discontinued operations - (432 )
Net loss (14,089 ) (5,661 )
Deemed dividend – accretion of discount on Series F preferred stock (904 ) -
Cumulative dividends on Series F preferred stock (275 ) -
Net loss attributable to common shareholders $ (15,268 ) $ (5,661 )

Net loss per share, basic and diluted:
Loss from continuing operations $ (2.13 ) $ (1.56 )
Loss from discontinued operations - (0.13 )
Deemed dividend – accretion of discount on preferred stock (0.14 ) -
Cumulative dividends on Series F preferred stock (0.04 ) -
Net loss attributable to common shareholders $ (2.31 ) $ (1.69 )

Weighted average shares outstanding, basic and diluted 6,615,350 3,346,788

	June 30, 2021			December 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	32,614		$	25,522
Accounts receivable, net		2,042			3,819
Inventory		76			883
Prepaid expenses and other current assets		2,286			992
Total current assets		37,018			31,216
Property and equipment, net		8,684			10,550
Operating lease right-of-use assets		1,756			2,452
Intangible assets, net		447			542
Goodwill		278			278
Other assets		227			472
TOTAL ASSETS	$	48,410		$	45,510

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	3,924		$	4,148
Other current liabilities		2,509			2,106
Current portion of long-term notes payable		–			2,059
Deferred revenue		86			168
Total current liabilities		6,519			8,481
Common stock warrant liability		14,059			5,975
Operating lease liabilities		550			1,476
Other long-term liabilities		514			723
Long-term notes payable		–			1,517
Total liabilities		21,642			18,172

Commitments and Contingencies (Note 14)		-			-

STOCKHOLDERS’ EQUITY
Preferred stock - 25,000,000 shares authorized, 0 shares issued and outstanding at June 30, 2021 and December 31, 2020		–			–
Common stock – $.001 par value; 250,000,000 shares authorized; 80,742,443 and 54,857,099 shares issued and outstanding at June 30, 2021 and December 31, 2020, respectively		81			55
Additional paid-in capital		525,496			505,494
Accumulated deficit		(498,809	)		(478,211	)
Total stockholders’ equity		26,768			27,338
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	48,410		$	45,510

~~See~~The accompanying notes toare an integral part of these condensed consolidated financial ~~statements.~~statements

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED ~~STATEMENT~~STATEMENTS OF ~~CHANGES IN STOCKHOLDERS’ EQUITY~~OPERATIONS

(Unaudited, in thousands, except share and per share amounts)

Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders’
Number Amount Number Amount Capital Deficit Equity (Deficit)
Balance as of October 31, 2017 3,230,655 $ 109,995 6,515,524 $ 7 $ 149,173 $ (259,005 ) $ 170
Issuance of common stock in connection with:
Conversion of Series A preferred stock to common stock (1,544,572 ) (378 ) 350,000 - 378 - -
Conversion of Series C preferred stock to common stock (2,578 ) (201 ) 59,950 - 201 - -
Conversion of Series D preferred stock to common stock (26,667 ) (312 ) 44,445 - 312 - -
Proceeds from option exercises - - 10,417 - 45 - 45
Stock-based compensation expense - - 102,500 - 11,132 - 11,132
Deemed dividend – accretion of discount on Series F preferred stock - - - - (904 ) - (904 )
Cumulative dividends on Series F preferred stock - - - - (275 ) - (275 )
Series F preferred stock dividends paid in common stock - - 11,708 - 306 - 306
Net loss - - - - - (14,089 ) (14,089 )
Balance as of January 31, 2018 1,656,838 $ 109,104 7,094,544 $ 7 $ 160,368 $ (273,094 ) $ (3,615 )

	2021			2020			2021			2020
	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Net revenues
Products	$	1,195		$	944		$	2,924		$	1,372
Services		1,342			1,322			4,322			1,827
Total net revenues		2,537			2,266			7,246			3,199
Cost of sales
Products		207			275			448			615
Services		717			607			2,641			783
Total cost of sales		924			882			3,089			1,398
Gross profit		1,613			1,384			4,157			1,801
Operating costs and expenses
Research and development		4,190			3,164			6,621			6,537
General and administrative		4,941			5,211			11,312			15,816
Sales and marketing		1,099			2,024			2,625			5,718
Restructuring and other charges		11			2,084			436			2,536
Total operating costs and expenses		10,241			12,483			20,994			30,607
Operating loss		(8,628	)		(11,099	)		(16,837	)		(28,806	)
Other income (expenses)
Gain on extinguishment of debt		3,612			–			3,612			–
Change in fair value of common stock warrant liability		1,807			(1,591	)		(2,220	)		2,941
Inducement loss on sale of liability classified warrants		–			–			(5,197	)		–
Interest expense, net		(39	)		(65	)		(77	)		(77	)
Other income, net		60			78			121			225
Net loss	$	(3,188	)	$	(12,677	)	$	(20,598	)	$	(25,717	)

Net loss per share attributable to common stockholders
Basic	$	(0.04	)	$	(0.33	)	$	(0.26	)	$	(0.72	)
Diluted	$	(0.04	)	$	(0.33	)	$	(0.26	)	$	(0.72	)
Weighted average shares outstanding
Basic		80,602,931			38,428,289			78,392,881			35,724,141
Diluted		81,162,256			38,428,289			78,392,881			35,724,141

~~See~~The accompanying notes toare an integral part of these condensed consolidated financial ~~statements.~~statements

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

	2021			2020			2021			2020
	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2021			2020			2021			2020
Net loss	$	(3,188	)	$	(12,677	)	$	(20,598	)	$	(25,717	)
Other comprehensive income/(loss):
Unrealized gain on available-for-sale securities		–			7			–			11
Reclassification of realized gains included in net loss		–			(10	)		–			(83	)
Comprehensive loss	$	(3,188	)	$	(12,680	)	$	(20,598	)	$	(25,789	)

The accompanying notes are an integral part of these condensed consolidated financial statements

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(Unaudited, in thousands, except share and per share amounts)


	For the Three and Six Months Ended June 30, 2021
	Common Stock					Additional Paid-in			Accumulated Other		Accumulated			Total Stockholders’
	Number			Amount		Capital			Comprehensive Income		Deficit			Equity
Balance – December 31, 2020		54,857,099		$	55	$	505,494		-	-	$	(478,211	)	$	27,338
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $114		6,670,000			7		1,248		-			–			1,255
Issuance of common stock, net of issuance costs of $1,319
Issuance of common stock, net of issuance costs of $1,319, shares										-
Issuance of common stock upon exercise of warrants		10,713,543			10		6,661					–			6,671
Reclassification of warrant liability upon exercise		–			–		8,964					–			8,964
Issuance of common stock upon exercise of pre-funded warrants		7,658,953			8		–					–			8
Stock-based compensation expense		–			–		1,651					–			1,651
Stock option exercises		2,500			–		3					–			3
Purchase of ESPP shares
Purchase of ESPP shares, shares
Vesting of restricted stock units		565,427			–		–					–			–
Shares withheld for tax withholding		(116,593	)		–		(139	)				–			(139	)
Forfeiture of restricted stock awards		(34,620	)		–		–					–			–
Cancellation of restricted stock awards
Cancellation of restricted stock awards, shares
Other comprehensive loss
Net loss		–			–		–					(17,410	)		(17,410	)
Balance – March 31, 2021		80,316,309		$	80	$	523,882		-	-	$	(495,621	)	$	28,341
Stock-based compensation expense		–			–		1,640					–			1,640
Purchase of ESPP shares		49,248			–		28					–			28
Vesting of restricted stock units		434,144			1		(1	)	-	-		–			–
Shares withheld for tax withholding		(57,258	)		–		(53	)				–			(53	)
Net loss		–			–		–					(3,188	)		(3,188	)
Balance – June 30, 2021		80,742,443		$	81	$	525,496		-	-	$	(498,809	)	$	26,768

	For the Three and Six Months Ended June 30, 2020
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Number			Amount		Capital			Income			Deficit			Equity
Balance – December 31, 2019		27,374,653		$	27	$	474,174		$	72		$	(435,357	)	$	38,916
Issuance of common stock, net of issuance costs of $1,319		10,854,710			11		12,588			–			–			12,599
Stock-based compensation expense		–			–		3,221			–			–			3,221
Stock option exercises		10,000			–		31			–			–			31
Vesting of restricted stock units		158,513			–		–			–			–			–
Shares withheld for tax withholding		(4,587	)		–		(5	)		–			–			(5	)
Other comprehensive loss		–			–		–			(69	)		–			(69	)
Net loss		–			–		–			–			(13,040	)		(13,040	)
Balance – March 31, 2020		38,393,289		$	38	$	490,009		$	3		$	(448,397	)	$	41,653
Balance		38,393,289		$	38	$	490,009		$	3		$	(448,397	)	$	41,653
Stock-based compensation expense		–			–		563			–			–			563
Purchase of ESPP shares		38,293			–		40			–			–			40
Vesting of restricted stock units		119,132			–		–			–			–			–
Shares withheld for tax withholding		(6,918	)		–		(9	)		–			–			(9	)
Cancellation of restricted stock awards		(46,886	)		–		–			–			–			–
Other comprehensive loss		–			–		–			(3	)		–			(3	)
Net loss		–			–		–			–			(12,677	)		(12,677	)
Balance – June 30, 2020		38,496,910		$	38	$	490,603		$	–		$	(461,074	)	$	29,567
Balance		38,496,910		$	38	$	490,603		$	–		$	(461,074	)	$	29,567

The accompanying notes are an integral part of these condensed consolidated financial statements

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

For the three months ended
January 31,

2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (14,089 ) $ (5,661 )
Loss from discontinued operations - 432
Loss from continuing operations (14,089 ) (5,229 )
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Depreciation and amortization 256 -
Stock based compensation expense 11,132 3,975
Change in fair value of warrant liability and embedded derivative (3,374 ) 8
Changes in operating assets and liabilities:
Prepaid expenses and other current assets 46 (204 )
Security deposits – non-current (111 ) -
Accounts payable and accrued expenses 1,067 694
Net cash used in continuing operating activities (5,073 ) (756 )
Net cash provided by discontinued operating activities - 395
Net cash used in operating activities (5,073 ) (361 )

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (2,664 ) (1,538 )
Net cash used in continuing investing activities (2,664 ) (1,538 )
Net cash provided by discontinued investing activities 15 -
Net cash used in investing activities (2,649 ) (1,538 )

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised 45 -
Proceeds from the sale of common stock - 2,278
Net cash provided by financing activities 45 2,278

Net decrease in cash and cash equivalents (7,677 ) 379
Cash and cash equivalents - beginning of period 17,667 6,523
Cash and cash equivalents - end of period $ 9,990 $ 6,902

Supplemental schedule of non-cash investing and financing activities:
Conversion of Series A preferred stock to common stock $ 378 $ 297
Conversion of Series B preferred stock to common stock $ - $ 513
Conversion of Series C preferred stock to common stock $ 201 $ 90
Conversion of Series D preferred stock to common stock $ 312 $ 721
Unpaid liability for acquisition of property and equipment $ 360 $ 54
Warrant exchange for common stock shares $ - $ 78
Deemed dividend – accretion of discount on preferred stock $ 904 $ -
Cumulative dividends on Series F preferred stock $ 275 $ -
Series F preferred stock dividends paid in common stock $ 306 $ -

	2021			2020
	For the Six Months Ended June 30,
	2021			2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(20,598	)	$	(25,717	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		3,124			3,784
Depreciation and amortization		1,437			1,549
Amortization of intangible assets		95			95
Amortization of debt discount		–			13
Bad debt expense		134			–
Inventory write-off		697			–
Gain on extinguishment of debt – PPP loan		(3,612	)		–
Change in fair value of common stock warrant liability		2,220			(2,941	)
Inducement loss on sale of liability classified warrants		5,197			–
Loss on restructuring and other charges		269			–
Loss on abandonment of property and equipment		–			1,529
Loss on sale of property and equipment		7			–
Other non-cash adjustments		–			(21	)
Changes in operating assets and liabilities:
Accounts receivable		1,643			(384	)
Inventory		110			(29	)
Prepaid expenses and other current assets		(1,294	)		(1,189	)
Operating lease right-of-use assets		666			899
Other assets		245			3
Accounts payable and accrued expenses		(221	)		(2,109	)
Other current liabilities		(14	)		9
Deferred revenue		(82	)		(1	)
Operating lease liabilities		(728	)		(903	)
Net cash used in operating activities		(10,705	)		(25,413	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(18	)		(1,170	)
Proceeds from sale of property and equipment		10			–
Purchase of available-for-sale securities		–			(14,144	)
Proceeds from maturities of available-for-sale securities		–			16,945
Proceeds from sale of available-for-sale securities		–			16,171
Net cash (used in) provided by investing activities		(8	)		17,802
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term note payable and financing arrangements		1,028			4,629
Principal payments on term note payable and financing arrangements		(359	)		(830	)
Principal payments on financing leases		(272	)		(243	)
Net proceeds from the sale of common stock and warrants		–			24,276
Net proceeds from the sale of common stock, warrants and pre-funded warrants		9,884			–
Proceeds from the sale of new warrants		1,002			–
Proceeds from warrants exercised		6,671			–
Proceeds from pre-funded warrants exercised		8			–
Cash paid for tax withholdings related to net share settlement		(188	)		(6	)
Proceeds from stock options exercised		3			31
Proceeds from ESPP purchase		28			40
Net cash provided by financing activities		17,805			27,897
Net increase in cash and cash equivalents		7,092			20,286
Cash and cash equivalents - beginning of period		25,522			10,218
Cash and cash equivalents - end of period	$	32,614		$	30,504

Supplemental cash flow information:
Cash paid for interest	$	66		$	81

Supplemental schedule of non-cash investing and financing activities:
Fair value of placement agent warrants issued in connection with offering	$	838		$	–
Reclassification of warrant liability to stockholders’ equity upon exercise of warrant	$	8,964		$	–
Accrued offering costs	$	400		$	–
Allocation of proceeds to warrant liability	$	8,629		$	11,677

~~See~~The accompanying notes toare an integral part of these condensed consolidated financial ~~statements.~~statements

POLARITYTE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

PolarityTE, Inc. (together with its subsidiaries, the “Company”) is a ~~commercial-stage~~clinical stage biotechnology ~~and regenerative biomaterials~~ company ~~focused on transforming the lives of patients by discovering, designing and~~ developing ~~a range of~~ regenerative tissue products and ~~biomaterials for~~biomaterials. The Company also operates a laboratory testing and clinical research business using equipment, personnel, and facilities it acquired to advance the ~~fields~~development of regenerative tissue products. The Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an investigational new drug application (IND) under Section 351 of that Act, under an enforcement discretion position stated by the United States Food and Drug Administration (FDA) in a regenerative medicine ~~biomedical engineering~~policy framework to help facilitate regenerative medicine therapies. On or about April 21, 2021, the FDA announced that enforcement discretion would not be extended beyond May 31, 2021. As a result of this development and ~~material sciences.~~

~~Discontinued Operations.~~ ~~On June 23, 2017,~~based on the Company’s interactions with the FDA, the Company ~~sold Majesco Entertainment Company,~~planned to file its IND in the second half of 2021 and decided to terminate commercial sales of SkinTE on May 31, 2021, and wind down its SkinTE commercial operation. As a ~~Nevada corporation~~result, there will be no revenues from commercial SkinTE sales after June 2021, and ~~wholly-owned subsidiary of~~ the Company ~~(“Majesco Sub”) to Zift Interactive LLC, a Nevada limited liability company pursuant to a purchase agreement. Pursuant~~expects corresponding costs will be lower in the second half of 2021 compared to the ~~terms~~first half of the agreement, the Company sold 100% of the issued and outstanding shares of common stock of Majesco to Zift, including all of the right, title and interest in and to Majesco Sub’s business of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the agreement, the Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues valued at $0. As of January 31, 2018, the Company received $40,000 in cash consideration and $60,000 remains receivable.2021.

~~Segments.~~~~With the sale of Majesco Sub on June 23, 2017, the Company now solely operates in its Regenerative Medicine segment.~~

The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim ~~period.~~periods presented. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. ~~The Company’s financial results are impacted by the seasonality of the retail selling season and the timing of the release of new titles.~~ The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at ~~October~~December 31, ~~2017~~2020, has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the ~~Company’s~~audited consolidated financial statements and notes thereto for the year ended ~~October~~December 31, ~~2017~~2020, filed with the Securities and Exchange Commission on Form 10-K on ~~January~~March 30, ~~2018.~~2021.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of ~~Consolidation.~~Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned ~~subsidiaries: Polarity NV and Majesco Sub (through the date sold). Majesco Sub was sold on June 23, 2017.~~subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

~~Cash and Cash Equivalents.~~ ~~Cash equivalents consist~~Use of highly liquid investments with original maturities of three months or less at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.

~~Accounts Payable and Accrued Expenses.~~ ~~The carrying amounts of accounts payable and accrued expenses approximate fair value as these accounts are largely current and short term in nature.~~

~~Property and Equipment.~~ Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets, generally five years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.

~~Income Taxes.~~ The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely than not.

~~Stock Based Compensation.~~ The Company measures all stock-based compensation to employees using a fair value method and records such expense in general and administrative and research and development expenses. Compensation expense for stock options with cliff vesting is recognized on a straight-line basis over the vesting period of the award, based on the fair value of the option on the date of grant. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on the Company’s historical stock prices.

The value of restricted stock and restricted stock unit grants is measured based on the fair market value of the Company’s common stock on the date of grant and amortized over the vesting period of, generally, six months to three years.

~~Loss Per Share.~~ Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect would be anti-dilutive due to our net loss.

~~Commitments and Contingencies.~~ We are subject to claims and litigation in the ordinary course of our business. We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.

~~Accounting for Warrants~~estimates. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet as a current liability.

~~Change in Fair Value of Derivatives.~~ The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that certain instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in fair value of warrant liability” in the consolidated statements of operations. The fair value of the warrants has as well as other derivatives have been estimated using a Monte-Carlo or Black-Scholes valuation model.

~~Revenue Recognition.~~The Company recognizes revenue upon the shipment of products when each of the following four criteria is met: (i) persuasive evidence of an arrangement exists; (ii) products are delivered; (iii) the sales price is fixed or determinable; and (iv) collectability is reasonably assured.

~~Estimates.~~The preparation of financial statements in conformity with ~~accounting principles generally accepted in the United States of America~~U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements ~~are~~is the extent of progress toward completion of contracts, stock-based compensation, the valuation of common stock warrant ~~liability, valuation of derivative liability, stock-based compensation~~liabilities, and the ~~valuation allowances for deferred tax benefits.~~impairment of property and equipment. Actual results could differ from those estimates.

~~Recently Adopted Accounting Pronouncements~~

~~In April 2016,~~Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the ~~FASB issued ASU No. 2016-09,~~~~Share-Based Payment: Simplifying~~date of purchase. As of June 30, 2021, the ~~Accounting~~Company did not hold any cash equivalents.

Inventory. Inventory comprises raw materials, which are valued at the lower of cost or net realizable value, on a first-in, first-out basis. The Company evaluates the carrying value of its inventory on a regular basis, taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand to record an inventory reserve. The Company recorded inventory charges of $0.3 million for ~~Share-Based Payments~~the three months ended June 30, 2021, in research and development within the accompanying consolidated statement of operations. The Company recorded inventory charges of $0.7 million for the six months ended June 30, 2021, of which $0.3 million and $0.4 million were recorded in research and development and cost of sales, respectively, within the accompanying consolidated statement of operations. No inventory reserve was recorded as of June 30, 2021, or December 31, 2020.

Leases. The ~~standard addresses several aspects~~Company determines if an arrangement is a lease at inception. Right-of-use (ROU) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Finance leases are reported in the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The current portion of operating lease obligations are included in other current liabilities. The classification of the accounting for employee share-based payment transactions, including the accounting for income taxes, forfeitures and statutory tax withholding requirements, as well as classification in the statement of cash flows. The Company adopted ASU 2016-09 during the first quarter of 2018 and the Company elected to account for forfeitures as they occur. The amendment was applied using a modified retrospective transition method. The provisions of ASU 2016-09 had no impact on the Company’s ~~consolidated financial statements.~~

~~Recent Accounting Pronouncements.~~

~~In February 2016, FASB issued ASU No. 2016-02,~~~~Leases (Topic 842),~~ ~~which supersedes FASB ASC Topic 840,~~~~Leases (Topic 840)~~~~and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying~~ leases as ~~either~~operating or finance ~~or operating~~ leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities is performed at the lease commencement date. The measurement of lease liabilities is based on the ~~principle~~present value of ~~whether or not~~future lease payments over the lease term. As the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the present value of future lease payments. The ROU asset is ~~effectively a financed purchase by~~based on the ~~lessee. This classification~~measurement of the lease liability and also includes any lease payments made prior to or on lease commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is reasonably certain the Company will ~~determine whether lease~~exercise any such options. Rent expense for the Company’s operating leases is recognized ~~based~~ on ~~an effective interest method or~~a straight-line basis over the lease term. Amortization expense for the ROU asset associated with its finance leases is recognized on a straight-line basis over the term of the lease ~~respectively. A lessee~~and interest expense associated with its finance leases is ~~also required to record a right-of-use asset and a~~recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing rate.

The Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease and non-lease components for ~~all~~any leases involving real estate and office equipment classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of ASC 842 to leases with a term of ~~greater than twelve months regardless of classification. Leases with a term of twelve~~12 months or less ~~will be accounted~~ for ~~similar to existing guidance for operating leases. The standard~~all classes of assets.

Revenue Recognition. Under ASC 606, revenue is ~~effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. When adopted,~~recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company records product revenues primarily from the sale of SkinTE, its regenerative tissue product. When the Company marketed its SkinTE product, it was sold to healthcare providers (customers), primarily through direct sales representatives. Product revenues consist of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognizes product revenue upon delivery to the customer.

In the contract services segment, the Company records service revenues from the sale of its preclinical research services, which includes delivery of preclinical studies and other research services to unrelated third parties. Service revenues generally consist of a single performance obligation that the Company satisfies over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. The Company believes that this method provides an appropriate measure of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue are recognized based on payment timing and work completed. Generally, a portion of the payment is due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services include research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer. As of June 30, 2021, and December 31, 2020, the Company had unbilled receivables of $0.3 million and $0.2 million, respectively, and deferred revenue of $0.1 million and $0.2 million, respectively. The unbilled receivables balance is included in consolidated accounts receivable. Revenue of $0.2 million was recognized during the six months ended June 30, 2021, that was included in the deferred revenue balance as of December 31, 2020.

Research and Development Expenses. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements with third party research organizations are deferred and recognized as an expense as the related goods are delivered or the related services are performed.

Accruals for Clinical Trials. As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.

Common Stock Warrant Liability. The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant agreements. Under certain change of control provisions, some warrants issued by the Company could require cash settlement which necessitates such warrants to ~~have~~be recorded as liabilities. Warrants classified as liabilities are remeasured each period until settled or until classified as equity.

Stock-Based Compensation. The Company measures all stock-based compensation to employees and non-employees using a ~~material impact~~fair value method and records such expense in general and administrative, research and development, and sales and marketing expenses. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards based on the fair value on the date of grant.

The fair value of options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the option. The volatility factor is determined based on the Company’s ~~balance sheet.~~historical stock prices. Forfeitures are recognized as they occur.

The fair value of restricted stock grants is measured based on the fair market value of the Company’s common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.

Net Loss Per Share. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Gains on warrant liabilities are only considered dilutive when the average market price of the common stock during the period exceeds the exercise price of the warrants. All common stock warrants issued participate on a one-for-one basis with common stock in the distribution of dividends, if and when declared by the Board of Directors, on the Company’s common stock. For purposes of computing earnings per share (EPS), these warrants are considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and diluted EPS using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed earnings. No income was allocated to the warrants for the three and six months ended June 30, 2021 as results of operations were a loss for each period and the warrant holders are not required to absorb losses. The Company has issued pre-funded warrants from time to time at an exercise price of $0.001 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing earnings per share because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date.

810

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~In May 2017, the FASB issued ASU 2017-09, Compensation-Stock Compensation (Topic 718): Scope~~Impairment of Modification Accounting. ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017.Long-Lived Assets. The Company ~~is currently assessing~~reviews long-lived assets, including property and equipment, and intangible assets for impairment whenever events or changes in business circumstances indicate that the ~~potential impact of adopting ASU 2017-09 on its consolidated financial statements and related disclosures.~~

~~In July 2017, the FASB issued ASU 2017-11,~~~~Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815)~~:~~I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement~~carrying amount of the ~~Indefinite Deferral for Mandatorily Redeemable Financial Instruments~~assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of ~~Certain Nonpublic Entities~~the business in relation to expectations, significant negative industry or economic trends, and ~~Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception,~~ (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that resultsignificant changes or planned changes in the ~~strike price being reduced~~use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the ~~basis~~excess of the ~~pricing~~carrying value of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that requirethe impaired asset over its fair value, ~~measurement~~determined based on discounted cash flows.

Goodwill. Under accounting guidelines, goodwill is not amortized, but must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the ~~entire instrument~~reporting unit below the carrying amount. The Company reviews goodwill for impairment annually and whenever events or ~~conversion option. Part II~~changes indicate that the carrying value of ~~this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content~~an asset may not be recoverable. These events or circumstances could include a significant change in the ~~FASB~~business climate, legal factors, operating performance indicators, competition, or sale or disposition of significant assets or products. Application of these impairment tests requires significant judgment. There were 0 goodwill impairments recorded during the six months ended June 30, 2021 and 2020.

Recent Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.Pronouncements

In ~~August~~June 2016, the FASB issued ASU ~~2016-15,~~No. 2016-13, ~~Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments~~Financial Instruments-Credit Losses (Topic 326), which ~~addresses eight specific cash flow issues with~~requires entities to measure all expected credit losses for financial assets held at the ~~objective of reducing~~reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing ~~diversity in practice in how certain cash receipts~~incurred loss model and ~~cash payments are presented and classified in~~is applicable to the ~~statement~~measurement of ~~cash flows. The~~credit losses on financial assets measured at amortized cost. This standard is effective for fiscal years beginning after December 15, ~~2017,~~2019, including interim periods within those fiscal ~~years. Early~~years with early adoption permitted. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates, which defers the effective date of Topic 326. As a smaller reporting company, Topic 326 will now be effective for the Company beginning January 1, 2023. As such, the Company plans to adopt this ASU beginning January 1, 2023. The Company is ~~permitted, including adoption in an interim period. The adoption of this update is not expected to~~currently evaluating the impact that the standard will have ~~a material impact the Company’s~~on its consolidated financial statements and related disclosures.

In ~~May 2014,~~August 2020, the FASB issued ASU ~~2014-09, “Revenue~~No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (ASU 2020-06). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. It also removes from ASC 815-40-25-10 certain conditions for equity classification and amends certain guidance in ASC Topic 260 on the computation of EPS for convertible instruments and contracts in an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. As a smaller reporting company, the Company is required to adopt this ASU for the fiscal year beginning January 1, 2024, with early adoption permitted for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company is currently assessing the impact and timing of adoption of this ASU.

In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts ~~with Customers (Topic 606)”,~~in Entity’s Own Equity (Subtopic 815-40) (ASU 2021-04). ASU 2021-04 updates current accounting guidance for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange as an exchange of the original instrument for a new ~~accounting standard~~instrument. The ASU specifies that ~~requires recognition~~the effects of ~~revenue~~modifications or exchanges of freestanding equity-classified written call options that remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing transaction to ~~depict~~raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the ~~transfer of promised goods~~modification or ~~services to customers in an amount that reflects the consideration to which~~exchange does not fall under topics 340, 470, or 835, an entity ~~expects~~may be required to ~~be entitled~~account for the effects of such modifications or exchanges as dividends which should adjust net income (or loss) in ~~exchange for those goods~~the basic EPS calculation. The Company is required to apply the amendments within this ASU prospectively to modifications or ~~services.~~exchanges occurring on or after the effective date of the amendment. The ~~FASB has also issued several updates~~Company plans to adopt this ASU ~~2014-09. The new standard supersedes U.S. GAAP guidance~~ on ~~revenue recognition~~January 1, 2022, and requires the use of more estimates and judgments than the present standards. It also requires additional disclosures regarding the nature, amount, timing and uncertainty of cash flows arising from contracts with customers. Topic 606 is ~~effective for our fiscal year 2019 beginning on November 1, 2018. We are still~~currently evaluating the ~~overall effect~~impact that the standard will have on ~~our~~its consolidated financial statements and ~~accompanying notes~~related disclosures.

Recently Adopted Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the current guidance, and improving the consistent application of and simplification of other areas of the guidance. The Company adopted this standard prospectively on January 1, 2021. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial ~~statements.~~statements and related disclosures.

3. ~~GOING CONCERN~~LIQUIDITY AND NEED FOR ADDITIONAL CAPITAL

The Company has experienced recurring losses and cash outflows from operating activities. As of June 30, 2021, the Company had an accumulated deficit of $498.8 million. As of June 30, 2021, the Company had cash and cash equivalents of $32.6 million. The Company has been funded historically through sales of equity and debt.

On January 14, 2021, the Company completed a registered direct offering of 6,670,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant were sold together with a common warrant. The combined offering price of each common share and accompanying common warrant was $1.100 and for each pre-funded warrant and accompanying common warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each common warrant is exercisable for one share of the Company’s common stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering, warrants to purchase up to 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent warrants have substantially the same terms as the common warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $1.375 per share). The Company received net proceeds of $9.2 million in connection with the offering, after deducting placement agent fees and related offering expenses.

On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase 10,688,043 shares of common stock at an exercise price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder new common warrants to purchase up to 8,016,033 shares of the Company’s common stock, par value $0.001 per share, at a price of $0.125. Each new warrant is exercisable for one share of common stock at an exercise price of $1.20 per share. The new warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering in December 2020, warrants to purchase 6.0% of the aggregate number of new warrants issued under the letter agreement (or warrants to purchase up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The Company received net proceeds of $6.7 million from the exercise of the existing warrants and $0.9 million from the sale of the newly issued warrants, after deducting placement agent fees and related offering expenses. The offering closed on January 25, 2021.

These financial statements have been prepared on a going concern basis, which ~~contemplates~~assumes the ~~realization of~~Company will continue to realize its assets and ~~the satisfaction of~~settle its liabilities in the normal course of business. The ~~Company has experienced net~~Company’s significant operating losses and negative cash flows from operations during each of the last two fiscal years. The Company has experienced negative cash flows from continuing operations of approximately $5.1 million for the three months ended January 31, 2018. Given these negative cash flows and forecasted increased spending, the continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, potential collaborations, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. The Company cannot make any assurances that additional financings will be available to it and, if available, completed on a timely basis, on acceptable terms or at all. If the Company is unable to complete a debt or equity offering, execute a collaboration arrangement or otherwise obtain sufficient financing when and if needed, it would negatively impact its business and operations and could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to cease operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going ~~concern. These~~concern for at least one year from the date of issuance of these condensed consolidated financial statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts ~~and classification~~or amounts of liabilities that might ~~be necessary should~~result from the ~~Company be unable to continue as a going concern.~~

~~POLARITYTE, INC.~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

~~4. PREPAID EXPENSES AND OTHER CURRENT ASSETS~~

~~Prepaid expenses and other current assets consist~~outcome of ~~the following (in thousands):~~

January 31, 2018 October 31, 2017
Legal retainer $ - $ 15
Prepaid insurance 64 69
Other prepaids 88 126
Advances on equipment purchases 435 -
Other assets 39 27
Total prepaid expenses and other current assets $ 626 $ 237
~~5. PROPERTY AND EQUIPMENT, NET~~
~~Property and equipment, net, consist of the following (in thousands):~~
January 31, 2018 October 31, 2017
Medical equipment $ 4,911 $ 2,418
Computers and software 238 211
Furniture and equipment 45 30
Total property and equipment, gross 5,194 2,659
Accumulated depreciation (742 ) (486 )
Total property and equipment, net $ 4,452 $ 2,173
~~Depreciation expense for the three months ended January 31, 2018 and 2017 was approximately $256,000 and $83,000, respectively.~~
~~6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES~~
~~Accounts payable and accrued expenses consist of the following (in thousands):~~
January 31, 2018 October 31, 2017
Accounts payable $ 25 $ 25
Due to Zift - 36
Medical study and supplies 511 362
Medical equipment purchase 360 54
Salaries and other compensation 1,312 574
Legal and accounting 737 555
Other accruals 367 333
Total accounts payable and accrued expenses $ 3,312 $ 1,939
~~Salaries and other compensation include accrued payroll expense and employer 401K plan contributions.~~
10
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~7. PREFERRED SHARES AND COMMON SHARES~~
~~Convertible preferred stock as of January 31, 2018 consisted of the following (in thousands, except share amounts):~~

Shares
Authorized

Shares Issued and
Outstanding

Net Carrying
Value

Aggregate
Liquidation
Preference

Common Shares
Issuable Upon
Conversion

Series A 8,830,000 1,602,099 $ 391 $ 1,089 363,142
Series B 54,250 47,689 4,020 - 794,816
Series C 26,000 - - - -
Series D 170,000 - - - -
Series E 7,050 7,050 104,693 - 7,050,000
Series F 6,455 6,455 5,414 17,750 645,455
Other authorized, unissued 906,245 - - - -
Total 10,000,000 1,663,293 $ 114,518 $ 18,839 8,853,413
~~Convertible preferred stock as of October 31, 2017 consisted of the following (in thousands, except share amounts):~~

Shares
Authorized

Shares Issued and
Outstanding

Net Carrying
Value

Aggregate
Liquidation
Preference

Common Shares
Issuable Upon
Conversion

Series A 8,830,000 3,146,671 $ 769 $ 2,140 713,245
Series B 54,250 47,689 4,020 - 794,816
Series C 26,000 2,578 201 - 59,953
Series D 170,000 26,667 312 - 44,445
Series E 7,050 7,050 104,693 - 7,050,000
Series F 6,455 6,455 4,541 17,750 645,455
Other authorized, unissued 906,245 - - - -
Total 10,000,000 3,237,110 $ 114,536 $ 19,890 9,307,914
~~Series A Convertible Preferred Stock~~
The Series A Convertible Preferred Stock (“Series A Preferred Shares”) is convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such date of determination, divided by the conversion price. The stated value of each Series A Preferred Share is $0.68 and the initial conversion price was $4.08 (current conversion price at January 31, 2018 is $3.00) per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of its common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of PolarityTE, Inc., the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor in the Company’s December 2016 private placement as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.
The holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however, that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common stock outstanding at such time.
The Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.
11
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~Series B Convertible Preferred Stock~~
The Series B Convertible Preferred Stock (“Series B Preferred Shares”) is convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series B Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series B Preferred Share is $140.00 and the initial conversion price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events.this uncertainty. The Company is ~~prohibited from effecting~~ a ~~conversion of~~clinical stage biotechnology company that has historically incurred losses and negative cash flows. Consequently, the Series B Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholdersfuture success of the Company depends on ~~an as converted basis, based~~its ability to attract additional capital and, ultimately, on ~~a conversion price of $8.40 per shares.~~its ability to successfully complete the regulatory approval process for its product, SkinTE, and develop future profitable operations. The Series B Preferred Shares rank junior to the Series A Preferred Shares and bear no dividends. The Series B Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares, are not redeemable and do not contain fixedCompany will seek additional capital through equity offerings or ~~indexed conversion provisions similar to~~ debt ~~instruments. Accordingly, the Series B Preferred Shares are considered equity hosts and recorded in stockholders’ equity.~~
~~Series C Convertible Preferred Stock~~
~~The Series C Convertible Preferred Stock (“Series C Preferred Shares”) is convertible into shares of common stock based on a conversion calculation equal to the stated value of~~financing. However, such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series C Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series C Preferred Share is $120.00 per share, and the initial conversion price was $7.20 (current conversion price was $5.16) per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions and provided that the conversion pricefinancing may not be ~~reduced to less than $5.16, unless and until such time as~~available in the Company obtains shareholder approval to allow for a lower conversion price. The Company is prohibited from effecting a conversion of the Series C Preferred Shares to the extent that, as a result of such conversion, a holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to the beneficial ownership limitations discussed previously, each holder is entitled to votefuture on all matters submitted to stockholders of the Company and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.80 per share. The Series C Preferred Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s Series B Preferred Shares.favorable terms, if at all.
~~The Company evaluated the guidance ASC 480-10~~~~Distinguishing Liabilities from Equity~~ ~~and ASC 815-40~~~~Contracts in an Entity’s Own Equity~~ to determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered equity hosts and recorded in stockholders’ equity.
~~Series D Convertible Preferred Stock~~
The Series D Convertible Preferred Stock (“Series Preferred D Shares”) is convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series Preferred D Shares, plus all accrued and unpaid dividends, if any, on such Series Preferred D Share, as of such date of determination, divided by the conversion price. The stated value Series Preferred D Shares is $1,000 per share and the initial conversion price is $600 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series Preferred D Shares to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Series Preferred D Shares. Upon 61 days written notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Series Preferred D Shares bear no dividends and shall rank senior to the Company’s other classes of capital stock.
12
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~Series E Convertible Preferred Stock~~
On April 7, 2017, the Company issued 7,050 shares of its newly authorized Series E Convertible Preferred Stock (the “Series E Preferred Shares”) convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017) to Dr. Lough for the purchase of the Polarity NV’s assets.
The Preferred E Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred E Shares, plus all accrued and unpaid dividends, if any as of such date of determination, divided by the conversion price. The stated value of each Preferred E Share is $1,000 and the initial conversion price is $1.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Preferred E Shares, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior to the Company’s common stock and all other securities of the Company that do not expressly provide that such securities rank on parity with or senior to the Preferred E Shares. Until converted, each Preferred E Share is entitled to two votes for every share of common stock into which it is convertible on any matter submitted for a vote of stockholders. The Preferred E Shares participate on an “as converted” basis with all dividends declared on the Company’s common stock.
~~Redeemable Series F Convertible Preferred Stock~~
On September 20, 2017, the Company sold an aggregate of $17,750,000 worth of units (the “Units”) of the Company’s securities to accredited investors at a purchase price of $2,750 per Unit with each Unit consisting of (i) one share of the Company’s newly authorized 6% Series F Convertible Preferred Stock, par value $0.001 per share (the “Series F Preferred Shares”), which are convertible into one hundred (100) shares of the Company’s common stock, and (ii) a two-year warrant to purchase 322,727 shares of the Company’s common stock, at an exercise price of $30.00 per share. The Company incurred issuance costs of approximately $356,000 associated with the Unit offering, of which approximately $82,000 was allocated to the Series F Preferred Shares and netted against the proceeds. The remaining amount was allocated to the warrants and other embedded derivative and was expensed.
The Company entered into separate registration rights agreements, and subsequently amended such agreements, with each of the investors, pursuant to which the Company agreed to undertake to file a registration statement to register the resale of the conversion shares and warrant shares within 150 days of the closing of the transaction, to cause such registration statement to be declared effective by the Securities and Exchange Commission within ninety days following its filing and to maintain the effectiveness of the registration statement until all of such conversion shares and warrant shares have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act, without any restrictions. In the event the Company fails to file, or obtain effectiveness of, such registration statement with the specified period of time, the Company will be obligated to pay liquidated damages equal to the product of one 1% percent multiplied by the aggregate subscription amount paid by such investor for every thirty (30) days during which such filing is not made and/or effectiveness obtained, such fee being subject to certain exceptions, up to a maximum of six (6) percent.
Pursuant to the subscription agreements, for as long as the lead investor holds securities, except with certain issuances, the Company shall not incur any senior debt or issue any preferred stock with liquidation rights senior to the securities sold thereunder. During this period, the Company will not, without the consent of the investors holding a majority of the then issued and outstanding shares on the date of such consent (including the lead investor), enter into any equity line of credit or similar agreement, nor issue nor agree to issue any common stock, common stock equivalents, floating or variable priced equity linked instruments nor any of the foregoing or equity with price reset rights (subject to adjustment for stock splits, distributions, dividends, recapitalizations and the like).
The Series F Preferred Shares are convertible into shares of the Company’s common stock based on a conversion calculation equal to the stated value of the Series F Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series F Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each share of Series F Preferred Shares is $2,750 and the initial conversion price is $27.50 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events.
Each holder of a Series F Preferred Share is entitled to receive dividends, in cash or in shares of the Company’s common stock on the stated value of each share at the dividend rate, which shall be cumulative and shall continue to accrue and compound quarterly whether or not declared and whether or not in any fiscal year there shall be net profits or surplus available for the payment of dividends in such fiscal year. Dividends are payable quarterly in arrears on the fifteenth (15th) day of the next applicable quarter, to the record holders of the Series F Preferred Shares on the last day of the calendar quarter immediately preceding the dividend payment date in shares of common stock, calculated using the VWAP of the common stock on the ninety (90) days immediately preceding the dividend record date; provided, however, that the Company may, at its option, pay dividends in cash or in a combination of common shares and cash.
13
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
Upon the liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, each holder of preferred shares shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefor, a preferential amount in cash equal to (and not more than) $2,750.
On the two (2) year anniversary of the initial issuance date, any Series F Preferred Shares outstanding and not otherwise already converted, shall, at the option of the holder, either (i) automatically convert into common stock of the Company at the conversion price then in effect or (ii) be repaid by the Company based on the stated value of such outstanding Series F Preferred Shares. In addition, in the event that the Company’s common stock attains a consolidated bid price of $45 or greater for any four (4) trading days during any eight (8) trading day period, the Series F Preferred Shares shall be automatically converted to common stock, without any further action by the holder (subject to the conversion limitation in the event that such conversion would result in such holder holding in excess of four and ninety-nine one-hundredths (4.99%) percent of the common stock of the Company).
The warrants issued in connection with the Series F Preferred Shares are liabilities pursuant to ASC 815. The warrant agreement provides for an adjustment to the number of common shares issuable under the warrant and/or adjustment to the exercise price, including but not limited to, if: (a) the Company issues shares of common stock as a dividend or distribution to holders of its common stock; (b) the Company subdivides or combines its common stock (i.e., stock split); (c) adjustment of exercise price upon issuance of new securities at less than the exercise price. Under ASC 815, warrants that provide for down-round exercise price protection are recognized as derivative liabilities.
The conversion feature within the Series F Preferred Shares is not clearly and closely related to the identified host instrument and, as such, is recognized as a derivative liability measured at fair value pursuant to ASC 815.
The initial fair value of the warrants and bifurcated embedded conversion feature, estimated to be approximately $4.3 million and $9.3 million, respectively, was deducted from the gross proceeds of the Unit offering to arrive at the initial discounted carrying value of the Series F Preferred Shares. The resulting discount to the aggregate stated value of the Series F Preferred Shares of approximately $13.6 million will be recognized as accretion using the effective interest method similar to preferred stock dividends, over the two-year period prior to optional redemption by the holders. The Company recognized accretion of the discount to the stated value of the Series F Preferred Shares of approximately $904,000 in the three months ended January 31, 2018 as a reduction of additional paid-in capital and an increase in the carrying value of the Series F Preferred Shares. The accretion is presented in the Statement of Operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common stockholders.
~~Preferred Share Conversion Activity~~
During the three months ended January 31, 2018, 1,544,572 Series A Preferred Shares, 2,578 Series C Preferred Shares and 26,667 Series D Preferred Shares were converted into 454,395 shares of common stock.
8. 4. FAIR VALUE ~~MEASUREMENTS~~
In accordance with ASC 820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:
● ● Level 1: Observable inputs such as quoted prices in active markets for identical ~~instruments~~instruments.
● ● Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the ~~market~~market.
● ● Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.
In connection with the offering of Units in September 2017, the Company issued warrants to purchase an aggregate of 322,727 shares of common stock. These warrants are exercisable at $30.00 per share and expire in two years. The warrants are liabilities pursuant to ASC 815. The warrant agreement provides for an adjustment to the number of common shares issuable under the warrant and/or adjustment to the exercise price, including but not limited to, if: (a) the Company issues shares of common stock as a dividend or distribution to holders of its common stock; (b) the Company subdivides or combines its common stock (i.e., stock split); (c) adjustment of exercise price upon issuance of new securities at less than the exercise price. Under ASC 815, warrants that provide for down-round exercise price protection are recognized as derivative liabilities.
14
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
The Series F Preferred Shares contain an embedded conversion feature that is not clearly and closely related to the identified host instrument and, as such, is recognized as a derivative liability measured at fair value. The Company classifies these derivatives on the consolidated balance sheet as a current liability.
The fair value of the bifurcated embedded conversion feature was estimated to be approximately $7.4 million and $9.2 million, respectively, at January 31, 2018 and October 31, 2017 as calculated using the Monte Carlo simulation with the following assumptions:
Series F Conversion Feature
January 31, 2018 October 31, 2017
Stock price $ 21.30 $ 25.87
Exercise price $ 27.50 $ 27.50
Risk-free rate 2.053 % 1.581 %
Volatility 86.4 % 96.0 %
Term 1.64 1.89
The fair value of the warrant liability was estimated to be approximately $2.8 million and $4.3 million, respectively, at January 31, 2018 and October 31, 2017 as calculated using the Monte Carlo simulation with the following assumptions:
Warrant Liability
January 31, 2018 October 31, 2017
Stock price $ 21.30 $ 25.87
Exercise price $ 30.00 $ 30.00
Risk-free rate 2.053 % 1.581 %
Volatility 86.4 % 96.0 %
Term 1.64 1.89
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. There were no transfers within the hierarchy for any of the periods presented.
The fair value hierarchy of financial instruments, measured at fair value on a recurring basis on the consolidated balance sheets as of January 31, 2018 and October 31, 2017 is as follows (in thousands):
Fair Value Measurement as of January 31, 2018
Level 1 Level 2 Level 3 Total
Liabilities
Warrant liability $ - $ - $ 2,765 $ 2,765
Derivative liability - - 7,363 7,363
Total $ - $ - $ 10,128 $ 10,128
Fair Value Measurement as of October 31, 2017
Level 1 Level 2 Level 3 Total
Liabilities
Warrant liability $ - $ - $ 4,256 $ 4,256
Derivative liability - - 9,246 9,246
Total $ - $ - $ 13,502 $ 13,502
15
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
The following table sets forth the ~~changes~~fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):
SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED ON RECURRING BASIS
June 30, 2021
Level 1 Level 2 Level 3 Total
Liabilities:
Common stock warrant liability $ – $ – $ 14,059 $ 14,059
Total $ – $ – $ 14,059 $ 14,059
December 31, 2020
Level 1 Level 2 Level 3 Total
Liabilities:
Common stock warrant liability $ – $ – $ 5,975 $ 5,975
Total $ – $ – $ 5,975 $ 5,975
13
The following table presents the change in fair value of the liability classified common stock warrants for the six months ended June 30, 2021 (in thousands):
SCHEDULE OF FAIR VALUE OF LIABILITY CLASSIFIED COMMON STOCK WARRANTS
Fair Value at December 31, 2020 Initial Fair Value at Issuance (Gain) Loss Upon Change in Fair Value Liability Reduction Due to Exercises Fair Value on June 30, 2021
Warrant liabilities
February 14, 2020 issuance $ 328 $ – $ 168 $ – $ 496
December 23, 2020 issuance 5,647 – 3,802 (8,964 ) 485
January 14, 2021 issuance – 8,629 (1,700 ) – 6,929
January 25, 2021 issuance – 6,199 (50 ) – 6,149
Inducement loss on initial fair value (1) – – 5,197 – –
Total $ 5,975 $ 14,828 $ 7,417 $ (8,964 ) $ 14,059
(1) Concurrent with the issuance of the January 25, 2021 warrants, upon the exercise of the December 23, 2020 warrants, an inducement loss of $5.2 million was recorded as the fair value of the initial warrant liability for the new warrants of $6.2 million exceeded the gross proceeds received upon sale of the new warrants of approximately $1.0 million
The following table presents the change in fair value of the liability classified common stock warrants for the six months ended June 30, 2020 (in thousands):
Fair Value at December 31, 2019 Initial Fair Value at Issuance (Gain) Loss Upon Change in Fair Value Liability Reduction Due to Exercises Fair Value on June 30, 2020
Warrant liabilities
February 14, 2020 issuance $ – $ 11,677 $ (2,941 ) $ – $ 8,736
The Company uses the Monte Carlo simulation model to determine the fair value of the liability classified warrants. Input assumptions used to measure the fair value of these freestanding instruments during the six months ended June 30, 2021, are as follows:
SCHEDULE OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY
For the Six Months ended
June 30,
2021
Stock price $ 1.02 – 1.21
Exercise price $ 0.10 – 1.38
Risk-free rate 0.42 – 1.13 %
Volatility 99.0 – 102.8 %
Remaining term (years) 4.48 – 5.87
Input assumptions used to measure the fair value of these freestanding instruments during the six months ended June 30, 2020, are as follows:

For the Six Months ended
June 30,

2020
Stock price $ 1.24 – 1.69
Exercise price $ 2.80
Risk-free rate 0.45 – 1.51 %
Volatility 93.4 – 97.5 %
Remaining term (years) 6.62 – 6.99
14
5. PROPERTY AND EQUIPMENT, NET
The following table presents the components of property and equipment, net (in thousands):
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
June 30, 2021 December 31, 2020
Machinery and equipment $ 11,139 $ 12,232
Land and buildings 2,000 2,000
Computers and software 1,129 1,240
Leasehold improvements 2,107 2,107
Construction in progress 7 87
Furniture and equipment 144 148
Total property and equipment, gross 16,526 17,814
Accumulated depreciation and amortization (7,842 ) (7,264 )
Total property and equipment, net $ 8,684 $ 10,550
The Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. On or about April 21, 2021, the FDA announced that enforcement discretion would not be extended beyond May 31, 2021. As a result of this development and based on the Company’s interactions with the FDA, the Company decided to file an IND in the ~~estimated fair value~~second half of 2021, cease commercial sales of SkinTE by May 31, 2021, and wind down its SkinTE commercial operation. At March 31, 2021, approximately $3.0 million of total property and equipment was related to commercial SkinTE operations, of which approximately $2.5 million was repurposed by the Company primarily as research and development equipment. The Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately $0.4 million during the first quarter of 2021. The impairment charges occurred within the Company’s regenerative medicine business segment and are included in restructuring and other charges within the accompanying consolidated statement of operations for ~~our Level 3 classified derivative warrant liability (in thousands):~~

2017 Series F Preferred Stock -
Warrant Liability
2017 Series F Preferred Stock - Embedded Derivative Total Warrant and Derivative Liability
Fair value - October 31, 2017 $ 4,256 $ 9,246 $ 13,502
Change in fair value (1,491 ) (1,883 ) (3,374 )
Fair value - January 31, 2018 $ 2,765 $ 7,363 $ 10,128
~~9. STOCK BASED COMPENSATION ARRANGEMENTS~~
In the ~~three~~six months ended ~~January 31, 2018~~June 30, 2021. There was no impairment charge recorded during the second quarter of 2021.
Depreciation and ~~2017, the Company recorded stock-based compensation~~amortization expense ~~related to restricted stock awards~~for property and ~~stock options~~equipment, including assets acquired under financing leases was as follows (in thousands):
SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE

For the Three Months Ended
January 31,

2018 2017
General and administrative expense:
Continuing operations $ 8,910 $ 3,975
Discontinued operations - 442
8,910 4,417
Research and development expense:
Continuing operations 2,221 -
Total stock-based compensation expense $ 11,132 $ 4,417
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2021 2020 2021 2020
General and administrative expense $ 292 $ 408 $ 596 $ 800
Research and development expense 444 389 841 749
Total depreciation and amortization expense $ 736 $ 797 $ 1,437 $ 1,549
6. LEASES
The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through June 2024. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may include options to extend or terminate the lease at the election of the Company. These optional periods have not been considered in the determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.
Operating Leases
On December 27, 2017, the Company entered into a commercial lease agreement with Adcomp LLC, a Utah limited liability company, pursuant to which the Company leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah from the landlord. The initial term of the lease is five years, and it expires on November 30, 2022. The Company has a one-time option to renew for an additional five years. The initial base rent under this lease is $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increases 3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 10% to determine the present value of the lease payments.
15
In April 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space. The original term of the lease expired in April 2024 and required monthly lease payments subject to annual increases. During the third quarter of 2020, the Company initiated a business analysis to determine the long-term strategy of the remote facility and cost to remain operational. During the fourth quarter of fiscal year 2020, it was determined that the Company would cease operations and vacate the facility. As a result, the Company determined that the approved plan to vacate the lease represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances, the Company determined that the carrying value of the related assets of the disposal group were not recoverable. As a result, the carrying values were reduced to $0 as of December 31, 2020. During the second quarter of 2021, the Company terminated the lease effective June 30, 2021. The Company recorded a net gain on termination of $0.3 million which was included in restructuring and other charges on the condensed consolidated statement of operations.
Financing Leases
In November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development activities. The financing leases have remaining terms that range from 9 to 34 months as of June 30, 2021, and include options to purchase equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of approximately 10% to determine the present value of the lease payments for these leases.
As of June 30, 2021, the maturities of operating and finance lease liabilities were as follows (in thousands):
SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES
Operating leases Finance leases
2021 (excluding the six months ended June 30, 2021) $ 744 $ 327
2022 1,219 405
2023 3 336
2024 2 43
Total lease payments 1,968 1,111
Less: ��
Imputed interest (122 ) (116 )
Total $ 1,846 $ 995
Supplemental balance sheet information related to leases was as follows (in thousands):
Finance leases
SHCEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO FINANCE AND OPERATING LEASES
June 30, 2021 December 31, 2020
Finance lease right-of-use assets included within property and equipment, net $ 961 $ 1,301

Current finance lease liabilities included within other current liabilities $ 483 $ 556
Non-current finance lease liabilities included within other long-term liabilities 512 711
Total finance lease liabilities $ 995 $ 1,267
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Operating leases
June 30, 2021 December 31, 2020
Current operating lease liabilities included within other current liabilities $ 1,296 $ 1,485
Operating lease liabilities – non current 550 1,476
Total operating lease liabilities $ 1,846 $ 2,961
The components of lease expense were as follows (in thousands):
SUMMARY OF COMPONENTS OF LEASE EXPENSE
2021 2020 2021 2020
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Operating lease costs included within operating costs and expenses $ 393 $ 548 $ 787 $ 1,104
Finance lease costs:
Amortization of right-of-use assets $ 163 $ 174 $ 328 $ 349
Interest on lease liabilities 26 39 56 82
Total $ 189 $ 213 $ 384 $ 431
Supplemental cash flow information related to leases was as follows (in thousands):
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
For the Six Months Ended June 30,
2021 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases $ 849 $ 1,108
Operating cash out flows from finance leases $ 56 $ 82
Financing cash out flows from finance leases $ 272 $ 243
Lease liabilities arising from obtaining right-of-use assets:
Remeasurement of operating lease liability due to lease modification/termination $ 386 $ 131
As of June 30, 2021, and December 31, 2020, the weighted average remaining lease term for operating leases was 1.4 and 2.1 years, respectively, and the weighted average discount rate used for operating leases was 9.94% and 9.75%, respectively. As of June 30, 2021, and December 31, 2020, the weighted average remaining lease term for finance leases was 2.3 and 2.6 years, respectively, and the weighted average discount rate used for finance leases was 9.78% for both periods.
7. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The following table presents the major components of accounts payable and accrued expenses (in thousands):
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
June 30, 2021 December 31, 2020
Accounts payable $ 265 $ 1,193
Salaries and other compensation 1,463 1,129
Legal and accounting 151 241
Accrued severance 147 330
Benefit plan accrual 560 659
Clinical trials 534 –
Accrued offering costs 400 –
Other 404 596
Total accounts payable and accrued expenses $ 3,924 $ 4,148
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8. OTHER CURRENT LIABILITIES
The following table presents the major components of other current liabilities (in thousands):
SCHEDULE OF OTHER CURRENT LIABILITIES
June 30, 2021 December 31, 2020
Current finance lease liabilities $ 483 $ 556
Current operating lease liabilities 1,296 1,485
Short-term financing arrangement 709 20
Other 21 45
Total other current liabilities $ 2,509 $ 2,106
The short-term financing balance is related to a financing arrangement entered into during the six months ended June 30, 2021 to fund an insurance contract. Under the financing arrangement, the amounts will be repaid in nine equal monthly installments, with an interest rate of 3.85%.
9. STOCK-BASED COMPENSATION
2020, 2019 and 2017 Equity Incentive Plans
2020 Plan
On October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2020 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 7,191,917 shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the 2020 plan administrator. As of June 30, 2021, the Company had 1,423,724 shares available for future issuances under the 2020 Plan.
2019 Plan
On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2019 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 3,000,000 shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on October 5, 2028. As of June 30, 2021, the Company had 11,159 shares available for future issuances under the 2019 Plan.
2017 Plan
On December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 7,300,000 shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on December 1, 2026. As of June 30, 2021, the Company had 184,467 shares available for future issuances under the 2017 Plan.
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A summary of the Company’s employee ~~stock option activity in the three months ended January 31, 2018 is presented below:~~

Number of
shares

Weighted-Average
Exercise Price

Outstanding - October 31, 2017 3,525,530 $ 6.34
Granted 1,030,500 $ 24.47
Exercised (10,794 ) $ 5.10
Forfeited (34,167 ) $ 18.90
Outstanding - January 31, 2018 4,511,069 $ 10.39
Options exercisable - January 31, 2018 1,930,500 $ 5.79
Weighted-average fair value of options granted during the period $ 16.57
~~A summary of the Company’s~~and non-employee stock option activity infor the ~~three~~six months ended ~~January 31, 2018~~June 30, 2021, is presented below:
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY

Number of
shares

Weighted-Average
Exercise Price

Outstanding - October 31, 2017 293,000 $ 19.61
No activity - $ -
Outstanding - January 31, 2018 293,000 $ 19.61
Options exercisable - January 31, 2018 63,292 $ 14.24

Number of
Shares

Weighted-
Average
Exercise Price

Outstanding – December 31, 2020 4,794,567 $ 10.03
Granted 1,410,231 $ 1.29
Exercised (1) (2,500 ) $ 1.10
Forfeited (262,082 ) $ 12.38
Outstanding – June 30, 2021 5,940,216 $ 7.85
Options exercisable, June 30, 2021 4,370,581 $ 10.18
(1) The number of exercised options includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.
Employee Stock ~~options are generally granted to employees or non-employees~~Purchase Plan (ESPP)
In May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 500,000 shares of common stock for purchase under the ESPP. The initial offering period began January 1, 2019, and ended on June 30, 2019, with the first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares of common stock at ~~exercise prices~~a price per share equal to85% of the lesser of (1) the fair market value per share of the common stock on the offering date or (2) the fair market value of the common stock on the purchase date.
Restricted Stock
A summary of the Company’s employee and non-employee restricted-stock activity is presented below:
SCHEDULE OF SHARE-BASED COMPENSATION, RESTRICTED STOCK ACTIVITY
Number of
Shares
Unvested - December 31, 2020 3,468,969
Granted 3,363,997
Vested (1) (1,233,371 )
Forfeited (165,870 )
Unvested – June 30, 2021 5,433,725
(1) The number of vested restricted stock units and awards includes shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.
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Stock-Based Compensation Expense
The stock-based compensation expense related to stock options, restricted stock awards, and the employee stock purchase plan was as follows (in thousands):
SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2021 2020 2021 2020
General and administrative expense $ 1,104 $ 143 $ 2,333 $ 3,220
Research and development expense 273 404 596 367
Sales and marketing expense 96 16 195 197
Restructuring and other charges 167 – 167 –
Total stock-based compensation expense $ 1,640 $ 563 $ 3,291 $ 3,784
10. SALE OF COMMON STOCK, WARRANTS AND PRE-FUNDED WARRANTS
On January 14, 2021, the Company completed a registered direct offering of 6,670,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant was $1.10 and for each pre-funded warrant and accompanying warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each warrant is exercisable for one share of the Company’s common stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years form the ~~dates~~date of ~~grant. Stock options generally vest over one~~issuance. The holder of the warrants may not exercise any portion of the warrants to ~~three years~~the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $1.375 per share). The net proceeds to the Company from the offering were $9.2 million, after direct offering expenses of $0.8 million payable by the Company.
As the common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $8.1 million and $0.5 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants were classified as a ~~term~~component of ~~five to ten years.~~stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants, based on their estimated fair values, with the residual $1.4 million allocated to the common stock and pre-funded common stock warrants in equity. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.1 million were recorded as a reduction to additional paid-in capital. Issuance costs allocated to the liability classified warrants of $0.7 million were recorded as an expense. The Company measured the fair value of ~~employee options~~the accompanying common warrants and placement agent warrants using the Monte Carlo simulation model at issuance and again at June 30, 2021, using the following inputs:
Accompanying common warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 14, 2021 June 30, 2021
Stock price $ 1.21 $ 1.02
Exercise price $ 1.20 $ 1.20
Risk-free rate 0.49 % 0.78 %
Volatility 100.1 % 102.0 %
Remaining term (years) 5.0 4.5
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Placement agent warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 14, 2021 June 30, 2021
Stock price $ 1.21 $ 1.02
Exercise price $ 1.38 $ 1.38
Risk-free rate 0.49 % 0.78 %
Volatility 99.3 % 102.0 %
Remaining term (years) 5.0 4.5
On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase 10,688,043 shares of common stock at an exercise price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder common warrants to purchase up to 8,016,033 shares of the Company’s common stock, par value $0.001 per share, at a price of $0.125. Each warrant is exercisable for one share of Common Stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years from the date of issuance. A holder may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The 10,688,043 warrants issued on December 23, 2020, were exercised on January 22, 2021, and closing of the offering occurred on January 25, 2021. The Company received gross proceeds of approximately $6.7 million from the exercise of the existing warrants and gross proceeds of approximately $1.0 million from the sale of the new warrants.
Immediately prior to the exercise of the existing 10,688,043 liability classified common stock warrants, a remeasurement loss of $3.6 million was recorded. The Company measured the fair value of the common stock warrants using the Monte Carlo simulation model on January 22, 2021, using the following inputs:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 22, 2021
Stock price $ 1.05
Exercise price $ 0.62
Risk-free rate 0.43 %
Volatility 99.4 %
Remaining term (years) 4.9
As the new common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.8 million and $0.4 million, respectively. Cash issuance costs of $0.1 million were recorded as an expense. The Company measured the fair value of the accompanying common stock warrants and placement agent common stock warrants using the Monte Carlo simulation model at issuance and again at June 30, 2021, using the following inputs:
Accompanying new common stock warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 25, 2021 June 30, 2021
Stock price $ 1.02 $ 1.02
Exercise price $ 1.20 $ 1.20
Risk-free rate 0.42 % 0.78 %
Volatility 99.0 % 102.0 %
Remaining term (years) 5.0 4.6
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Placement agent warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 22, 2021 June 30, 2021
Stock price $ 1.05 $ 1.02
Exercise price $ 1.20 $ 1.20
Risk-free rate 0.44 % 0.78 %
Volatility 99.6 % 102.0 %
Remaining term (years) 5.0 4.6
The following table summarizes warrant activity for the six months ended June 30, 2021.
SUMMARY OF WARRANT ACTIVITY
Outstanding December 31, 2020 Warrants Issued Warrants Exercised Outstanding June 30, 2021
Transaction
February 14, 2020 common warrants 565,000 – (25,500 ) 539,500
December 23, 2020 common warrants 10,688,043 – (10,688,043 ) –
December 23, 2020 placement agent warrants 641,283 – – 641,283
December 23, 2020 pre-funded warrants 5,238,043 – (5,238,043 ) –
January 14, 2021 common warrants – 9,090,910 – 9,090,910
January 14, 2021 placement agent warrants – 545,455 – 545,455
January 14, 2021 pre-funded warrants – 2,420,910 (2,420,910 ) –
January 25, 2021 common warrants – 8,016,033 – 8,016,033
January 22, 2021 placement agent warrants – 480,962 – 480,962
Total 17,132,369 20,554,270 (18,372,496 ) 19,314,143
On March 30, 2021, the Company entered into a sales agreement with Cantor Fitzgerald & Co. to sell shares of common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity offering program under which Cantor Fitzgerald & Co. will act as sales agent. As of June 30, 2021, no common stock had been sold.
Pursuant to an Equity Purchase Agreement dated as of December 5, 2019 (the “Purchase Agreement”) that the Company entered into with Keystone Capital Partners, LLC (“Keystone”), Keystone agreed to purchase up to $25.0 million of shares of our common stock, subject to certain limitations, at our direction from time to time during the 36-month term of the Purchase Agreement. In anticipation of the “at the market” equity offering program described above, the Company provided notice to Keystone of its decision to terminate the Purchase Agreement, which was effective on March 26, 2021.
11. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share:
SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED
2021 2020 2021 2020
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
Numerator: 2021 2020 2021 2020
Net loss $ (3,188 ) $ (12,677 ) $ (20,598 ) $ (25,717 )
Less: Gain from change in fair value of warrant liabilities (107 ) – – –
Net loss available to common stockholders $ (3,295 ) $ (12,677 ) $ (20,598 ) $ (25,717 )
22
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
Denominator: 2021 2020 2021 2020
Basic weighted average number of common shares (1) 80,602,931 38,428,289 78,392,881 35,724,141
Incremental shares from assumed exercise of warrants 559,325 – – –
Diluted weighted average number of common shares 81,162,256 38,428,289 78,392,881 35,724,141
(1) In December 2020 and January 2021, the Company sold pre-funded warrants to purchase up to 5,238,043 and 2,420,910 shares of common stock, respectively. The shares of common stock associated with the pre-funded warrants are considered outstanding for the purposes of computing earnings per share prior to exercise because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date. The pre-funded warrants sold in December 2020 and January 2021 were exercised during the period and included in the denominator for the period of time the warrants were outstanding.
The following outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:
SCHEDULE OF ANTI-DILUTIVE POTENTIAL SHARES OUTSTANDING ACTIVITY
For the Three Months Ended For the Six Months Ended
June 30, June 30, June 30, June 30,
2021 2020 2021 2020
Stock Options 5,940,216 5,110,582 5,940,216 5,110,582
Restricted stock 5,433,725 4,331,324 5,433,725 4,331,324
Common stock warrants 18,133,360 10,638,298 19,314,143 10,638,298
12. DEBT
PPP Loan
On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loan in the amount of $3,576,145 made to it under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of a loan granted under the PPP. On October 15, 2020, the Borrower applied to the Lender for forgiveness of the PPP loan in its entirety based on the Borrower’s use of the PPP loan for payroll costs, rent, and utilities. In June of 2021, the Company received notice of forgiveness of the PPP loan in whole, including all accrued unpaid interest. The Company recorded the forgiveness of $3.6 million of principal and accrued interest, which were included in gain on extinguishment of debt on the condensed consolidated statement of operations for both the three and six months ended June 30, 2021.
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13. RESTRUCTURING AND OTHER CHARGES
As discussed in Note 5, the Company decided to file an IND in the second half of 2021, cease commercial sales of SkinTE by May 31, 2021, and wind down its SkinTE commercial operation. As a result, management approved several actions as part of a restructuring plan. Costs associated with the restructuring plan were included in restructuring and other charges on the condensed consolidated statement of operations.
The Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately $0.4 million for the three months ended March 31, 2021. No property and equipment impairment charges were recorded during the three months ended ~~January 31, 2018 was approximately $17.1 million.~~ June 30, 2021. The intrinsic value of options outstanding at January 31, 2018 was $54.7 million. The intrinsic value of options exercised during the three months ended January 31, 2018 was $141,000. The weighted average remaining contractual term of outstanding and exercisable options at January 31, 2018 was 9.1 years and 8.9 years, respectively. As of January 31, 2018, there was approximately $18.3Company recognized $0.1 million of ~~unrecognized compensation cost~~expense related to ~~stock options, which is expected to be recognized over a remaining weighted-average vesting period of 0.8 years.~~
16
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions~~employee severance and benefit arrangements for the three ~~months~~and six-month periods ended ~~January 31, 2018:~~
~~Risk free annual interest rate~~ ~~2.01%-2.65~~ %
~~Expected volatility~~ ~~81.32-85.54~~ %
~~Expected life~~ ~~5.00-6.01~~
~~Assumed dividends~~ ~~None~~
~~Restricted stock and restricted stock units activity for employees and non-employees in~~June 30, 2021. Severance costs will be paid by the ~~fiscal year ended October 31, 2017:~~

Number of
shares

Weighted-Average
Grant-Date
Fair Value

Unvested - October 31, 2017 227,132 $ 7.83
Granted 102,500 $ 23.91
Vested (97,049 ) $ 12.53
Unvested - January 31, 2018 232,583 $ 12.95
~~The total fair value of restricted stock and restricted stock units granted during the three months ended January 31, 2018 was approximately $2.5 million.~~
~~The value of restricted stock and restricted stock unit grants is measured based on the fair market value~~end of the ~~Company’s common stock on the date~~third quarter of grant and amortized over the vesting period of, generally, six months to three years. As of January 31, 2018, there was approximately $2.1 million of unrecognized compensation cost related to unvested restricted stock and restricted stock unit awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.5 years.
~~10. INCOME TAXES~~
2021. The Company calculates its provision for federal and state income taxes based on current tax law. The Tax Cuts and Jobs Act (tax reform) was enacted on December 22, 2017 (“Enactment Date”), and has several key provisions impacting accounting for and reportingalso recognized incremental expense of income taxes. The most significant provision reduces the U.S. corporate statutory tax rate from 35% to 21% beginning on January 1, 2018. Although most provisions of tax reform are not effective until 2018, the Company is required to record the effect of a change in tax law as of the Enactment Date on its deferred tax assets. As the Company maintains a full valuation allowance against its deferred tax assets, there is no income tax expense recorded related to this change. As of the Enactment Date, the Company estimates that its deferred tax asset and related valuation allowance were each reduced by approximately $2.2 million.
Additionally, the Securities Exchange Commission staff has issued SAB 118, which allows the Company to record provisional amounts during a measurement period not to extend beyond one year of the enactment date. On December 22, 2017, Staff Accounting Bulletin No. 118 (“SAB 118”) was issued to address the application of U.S. GAAP in situations when a registrant does not have the necessary information available, prepared, or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax effects of the Act. Because the Company is still in the process of analyzing certain provisions of the Tax Act, the Company has determined that the adjustment to its deferred taxes was a provisional amount as permitted under SAB 118.
Due to the Company’s history of losses and uncertainty of future taxable income, a valuation allowance sufficient to fully offset net operating losses and other deferred tax assets has been established. The valuation allowance will be maintained until sufficient positive evidence exists to support a conclusion that a valuation allowance is not necessary. The issuance of Preferred Stock in connection with the Polarity acquisition will likely result in limitations on the utilization of the Company’s net operating loss carryforwards under IRS section 382.
~~11. LOSS PER SHARE~~
Shares of common stock issuable under convertible preferred stock, warrants and options and shares subject to restricted stock grants were not included in the calculation of diluted earnings per common share$0.2 million for the three ~~months ended January 31, 2018~~ and ~~2017, as~~six-month periods ending June 30, 2021, related to the ~~effect~~remeasurement of ~~their inclusion would be anti-dilutive.~~
~~For periods when shares of participating preferred~~employee stock ~~(as defined in ASC 260 earnings per share) are outstanding, the two-class method is used~~options that were modified due to calculate basic and diluted earnings (loss) per common share. The two-class method is an earnings allocation formula that determines earnings per share for each class of common stock and participating security according to dividends declared (or accumulated) and participation rights in undistributed earnings. Under the two-class method, basic earnings (loss) per common share is computed by dividing net earnings (loss) attributable to common share after allocation of earnings to participating securities by the weighted-average number of shares of common stock outstandingrestructuring. Lastly, during the ~~year. Diluted earnings (loss) per common share, when applicable, is computed using~~second quarter of 2021 and effective June 30, 2021, the ~~more dilutive~~Company terminated a lease which included manufacturing, laboratory, and office space. The Company recorded a net gain on termination of $0.3 million.
14. COMMITMENTS AND CONTINGENCIES
Commitments
On September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provides that Arches will perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics will arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches bills Co-Diagnostics for the testing services and Co-Diagnostics manages all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provides that Co-Diagnostics will make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the ~~two-class method or the if-converted method. In periods of net loss, no effect~~rental agreement is ~~given~~12 months and requires Arches to ~~participating securities since they do not contractually participate~~use Co-Diagnostics tests exclusively in the ~~losses~~machine. In the second quarter of 2021, the ~~Company.~~
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~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
rental agreement was amended to remove the minimum monthly purchase obligation of reagents and was replaced by a $3,300 monthly rental fee. The ~~table below provides total potential shares outstanding, including those that are anti-dilutive, on January 31, 2018 and 2017:~~
January 31,
2018 2017
Shares issuable upon exercise of warrants 322,727 -
Shares issuable upon conversion of preferred stock 8,853,413 2,357,232
Shares issuable upon exercise of stock options 4,804,069 2,922,020
Non-vested shares under restricted stock grants 232,583 640,184
~~12. COMMITMENTS AND CONTINGENCIES~~
~~Contingencies~~
~~On February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas~~COVID-19 Laboratory Services Agreement can be canceled by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, Majesco Entertainment Company (“Majesco DE”), and a number of other game publisher defendants. The complaint alleged that the Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. The case was subsequently transferred to the Western District of Washington. On June 16, 2017, final judgment was entered in favor of the defendants. The plaintiff has appealed that decision to the Court of Appeals for the Federal Circuit. The appeal is currently pending. On June 23, 2017, as part of a purchase agreement, liabilities and claims relating to this litigation were assumed by Zift Interactive LLC. The Company cannot be certain about the outcome of the appeal, or whether litigation regarding the assumption of liabilities by Zift Interactive LLC may occur.
~~In addition to the item above,~~ the Company at ~~times may~~any time by providing 60 days written notice, and the Rental Agreement can be canceled at any time by written notice given within 60 days after termination of the Laboratory Services Agreement. On May 27, 2021, the Company gave written notice to Co-Diagnostics of termination of the COVID-19 Laboratory Services Agreement, so the last day of that agreement is July 26, 2021, and no longer in effect on July 27, 2021.
On June 25, 2021, the Company entered into a ~~party~~statement of work with a contract research organization to ~~claims and suits~~provide services for a proposed clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the ~~ordinary course~~treatment of business. We record a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.
~~Commitments~~
~~The Company leases office space in Hazlet, New Jersey~~full-thickness diabetic foot ulcers at a cost of approximately ~~$1,100 per month under~~$5.1 million with an initial payment due in July 2021 of $510,857, and then payable periodically as services are provided over the nearly three-year term of the clinical trial. Either party may terminate the agreement without cause on 60 days’ notice to the other party.
Legal Proceedings
In the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. At June 30, 2021, the Company was not party to any legal or arbitration proceedings that may have significant effects on its financial position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a ~~lease~~party to any material proceedings in which any director, member of senior management or affiliate of the Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries.
15. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On August 21, 2019, the Company and Dr. Denver Lough, a principal shareholder and former officer and director, signed a settlement terms agreement that ~~expires on March 31, 2018. This lease has been renewed for another year.~~
~~The Company also leases space~~provides, in ~~Salt Lake City, Utah at a cost of approximately $24,044 per month under a lease agreement~~part, that ~~expires on March 31, 2018.~~
~~On December 27, 2017,~~ the Company ~~signed a five-year lease with one five-year option~~pay to ~~renew~~Dr. Lough $1,500,000 in cash on ~~approximately 178,528 rentable square feet.~~October 1, 2019, and an additional $1,500,000 in cash in equal monthly installments beginning November 1, 2019, and ending April 1, 2021. In addition, the Company agreed to award to Dr. Lough 200,000 restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. As of June 30, 2021, the Company has no remaining liability related to future cash payments under the agreement. The ~~base rent for the first year~~fair value of the ~~lease is $1,178,285~~restricted stock units was $0.8 million and ~~escalates at the rate of 3% per annum thereafter.~~was fully expensed upon Dr. Lough’s termination.
~~Rent expense for the three months ended January 31, 2018 and 2017 was approximately $249,000 and $17,000, respectively.~~
~~The Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.~~
~~13. RELATED PARTIES~~
In January 2015, the Company entered into an agreement with Equity Stock Transfer LLC for transfer agent services. A former Board member of the Company is a co-founder and chief executive officer of Equity Stock Transfer LLC. Fees under the agreement were approximately $0 and $2,000, in the three months ended January 31, 2018 and 2017, respectively.
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~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
~~14. DISCONTINUED OPERATIONS~~
~~The results of operations from the discontinued business for the three months ended January 31, 2018 and 2017 are as follows (in thousands):~~
For the Three Months Ended
January 31,
2018 2017
Revenues $ - $ 156
Expenses - 588
Loss from discontinued operations $ - $ (432 )
~~The cash flows from the discontinued business for the three months ended January 31, 2018 and 2017 are as follows (in thousands):~~

For the three months ended
January 31,

2018 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from discontinued operations - (432 )
Adjustments to reconcile net loss from discontinued operations to net cash used in discontinued operating activities:
Depreciation and amortization - 83
Stock based compensation expense - 442
Changes in operating assets and liabilities:
Accounts receivable - 12
Accounts payable and accrued expenses - 290
Net cash provided by discontinued operating activities - 395

CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from sale of Majesco Sub 15 -
Net cash provided by discontinued investing activities 15 -
~~15. SUBSEQUENT EVENTS~~
~~Asset Purchase Agreement~~
~~On March 2,~~October 2018, the Company entered into an ~~asset purchase agreement (the “APA”) with~~office lease covering approximately 7,250 square feet of rental space in the building located at 40 West 57th Street in New York City. The lease is for a ~~Utah limited liability~~term of three years. The annual lease rate is $60 per square foot. Initially the Company will occupy and pay for only 3,275 square feet of space, and the Company is not obligated under the lease to pay for the remaining 3,975 square feet covered by the lease unless it elects to occupy that additional space. The Company believes the terms of the lease are very favorable to us, and the Company obtained these favorable terms through the assistance of Peter A. Cohen, a director, which he provided so that the company he owns, Peter A. Cohen, LLC (“~~Seller”~~Cohen LLC”), ~~along with its related entity (“Seller Corp.”), wherein Seller Corp. agreed~~could sublease a portion of the office space. During Q1 2021, the Company decreased the space leased from 5,500 square feet to ~~sell~~4,747 square feet. The Company is using 1,099 square feet, and Cohen LLC is using approximately 3,648 square feet as of June 30, 2021. The monthly lease payment for 4,747 square feet is $23,737. Of this amount $18,243 is allocated pro rata to Cohen, LLC based on square footage occupied. Additional lease charges for operating expenses and taxes are allocated under the ~~assets and rights to its preclinical research and veterinary sciences business and related real estate (as more fully described below). The business consists~~sublease based on the ratio of ~~a “~~~~good laboratory practices~~” (GLP) compliant preclinical research facility, including vivarium, operating rooms, preparation rooms, storage facilities, and surgical and imaging equipment. A broad range of veterinary services related to orthopedics, soft tissue surgery, neurosurgery, and non-surgical research and development are performed at the facilities and are intended to be utilizedrent paid by the Company and Cohen LLC to ~~expand its research~~total rent. Once the space is fully occupied, the Company will reduce the overall annual lease rate for the Cohen LLC space to $58.60 per square foot. However, the Company has yet to fully occupy the 7,250 square feet covered by the office lease and ~~development capabilities for development~~the lease expires at the end of ~~its skin, bone, muscle, cartilage, fat,~~October 2021. The Company recognized $55,000 and ~~other technologies and derivative products and technologies~~$63,000 of sublease income related to this agreement for the ~~Company’s “TE” technology pipeline.~~three months ended June 30, 2021 and 2020, respectively, and $109,000 and $132,000 for the six months ended June 30, 2021 and 2020, respectively. The ~~Company also intends to continue to operate~~sublease income is included in other income, net in the condensed consolidated statement of operations. As of June 30, 2021, and ~~expand~~December 31, 2020, there were 0 amounts due from the ~~contract preclinical research business currently operated by~~related party under this agreement.
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16. SEGMENT REPORTING
Reportable segments are presented in a manner consistent with the ~~Seller.~~
~~Pursuant~~internal reporting provided to the ~~APA,~~chief operating decision maker (CODM), the $1.6 million purchase price is payable as follows: $266,667 payable in cash and a promissory note for approximately $1.3 million. payable in 5 equal installments beginning on the six (6) month anniversary of issuance and continuing on each 6-month anniversary thereafter with interest at the rate of 3.5% per annum.
~~Purchase and Sale Agreement~~
~~Concurrently with the execution and delivery~~Chief Executive Officer of the ~~APA, on March 2, 2018,~~Company.
The CODM allocates resources to and assesses the ~~Company entered into a purchase~~performance of each segment using information about its revenue and sale agreement with Seller to purchase two parcels of real property in Cache County, Utah, consisting of approximately 1.75 combined gross acres of land including all related rights, real and personal property on the land (collectively, the “Property”)operating income (loss).
19
~~POLARITYTE, INC.~~
~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~
The purchase price for the Property is $2.0 million, is payable $25,000 in cash and the remaining will be deposited by the Company into escrow pursuant to a loan to be obtained by the Company from a lender of its choice.
~~Exchange of 100% of Outstanding Series F Preferred Stock Shares and Warrants~~
On March 6, 2018, the Company entered into separate exchange agreements (the “Exchange Agreements”) with holders (each a “Holder”, and collectively the “Holders”) of 100% of the Company’s outstanding Series F Preferred Shares, and the Company’s warrants to purchase shares of the Company’s common stock issued in connection with the Series F Preferred Shares (such “Warrants” and Series F Preferred Shares collectively referred to as the “Exchange Securities”) to exchange the Exchange Securities and unpaid dividends on the Series F Preferred Shares, for common stock (the “Exchange”).
~~The Exchange resulted~~ These measures are presented in the following issuances: (A) all outstanding Series F Preferred Shares were converted into 972,067 shares of restricted common stock at an effective conversion price of $18.26 per share of common stock (the closing price of Common Stock on the NASDAQ Capital Market on February 26, 2018); (B) the right to receive 6% dividends underlying Series F Preferred Shares wastables (in thousands).
SCHEDULE OF SEGMENT INFORMATION
For the Three Months Ended For the Six Months Ended
June 30, June 30,
2021 2020 2021 2020
Net revenues by segment:
Reportable segments:
Regenerative medicine $ 1,195 $ 944 $ 2,924 $ 1,372
Contract services 1,342 1,322 4,322 1,827
Total net revenues $ 2,537 $ 2,266 $ 7,246 $ 3,199

Net (loss)/income by segment:
Reportable segments:
Regenerative medicine $ (3,229 ) $ (12,567 ) $ (20,931 ) $ (25,270 )
Contract services 41 (110 ) 333 (447 )
Total net loss $ (3,188 ) $ (12,677 ) $ (20,598 ) $ (25,717 )
17. SUBSEQUENT EVENT
The COVID-19 Laboratory Services Agreement between Arches and Co-Diagnostics described in Note 14, above, terminated and was no longer in ~~exchange 31,324 shares of restricted common stock~~effect on July 27, 2021. On July 28, 2021, Arches gave written notice to Co-Diagnostics that it was issued; (C) 322,727 Warrants to purchase common stock was exchanged for 151,872 shares of restricted common stock; and (D) the Holders of the Warrants relinquished any and all other rights pursuant to the Warrants, including exercise price adjustments.
As part of the Exchange, the Holders also relinquished any and all other rights related to the issuance of the Exchange Securities, the respective governing agreements and certificates of designation, including any related dividends, adjustment of conversion and exercise price, and repayment option. The existing registration rights agreement with the holders of the Series F Preferred Shares was also terminated and the holders of the Series F Preferred Shares waived the obligation of the Company to register the common shares issuable upon conversion of Series F Preferred Shares or upon exercise of the warrants, and waived any damages, penalties and defaults related to the Company failing to file or have declared effective a registration statement covering those shares.
~~Preferred Stock Conversion and Elimination~~
~~On February 6, 2018, 15,756 Series B Preferred Shares were converted into 262,606 shares of common stock.~~
On March 6, 2018, the Company received conversion notices from holders of 100% of the outstanding Series A Preferred Shares, Series B Preferred Shares, Series E Preferred Shares and exchanged the Series F Preferred Shares and warrants and issued an aggregate of 9,100,515 shares of common stock to such holders.
The Series E Preferred Shares were held by Dr. Denver Lough, the Company’s Chief Executive Officer. On March 6, 2018, the Company entered into a new registration rights agreement (the “Lough Registration Rights Agreement”) with Dr. Denver Lough, pursuant to which the Company agreed to file a registration statement to register the resale of 7,050,000 shares of Common Stock issued upon conversion of the Series E Preferred Shares within six months, to cause such registration statement to be declared effective by the Securities and Exchange Commission as promptly as possible following its filing and, with certain exceptions set forth in the Lough Registration Rights Agreement, to maintain the effectiveness of the registration statement until all of such shares have been sold or are otherwise able to be sold pursuant to Rule 144 under the Securities Act without restriction. Any sales of shares under the registration statement are subject to certain limitations as specified with more particularity in the Lough Registration Rights Agreement.
~~On March 7, 2018, the Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware~~ terminating the ~~Company’s Series A, Series B, Series C, Series D, Series E~~Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and ~~Series F Preferred Stock and thereafter no shares of Company preferred stock will remain outstanding.~~Co-Diagnostics effective that day.
2025
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
~~Statements in this quarterly report on Form 10-Q that are not historical facts constitute~~The discussion and analysis below includes certain forward-looking statements that are ~~made pursuant~~subject to risks, uncertainties and other factors, as described in “Risk Factors” in our Annual Report on Form 10-K for the ~~safe harbor provisions of Section 21E of~~year ended December 31, 2021, Current Report on Form 8-K filed with the Securities and Exchange ~~Act of 1934, as amended, or the “Exchange Act”. Examples of forward-looking statements include statements relating to industry prospects,~~Commission (“SEC’) on July 26, 2021, and this report, that could cause our ~~future economic performance including anticipated revenues and expenditures,~~actual growth, results of operations, orperformance, financial position and ~~other financial items, our~~ business ~~plans~~prospects and ~~objectives, including our intended product releases,~~opportunities for this fiscal year and ~~may include certain assumptions~~periods that ~~underlie forward-looking statements. Risks and uncertainties that may affect our future results, levels of activity, performance or achievements~~follow to differ materially from those expressed in or implied by ~~these~~those forward-looking statements. Readers are cautioned that forward-looking statements ~~include, among other things, those discussed~~contained in this ~~section as well as factors described~~Quarterly Report on Form 10-Q should be read in Part II, Item 1A—“Risk Factors”. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” orconjunction with our disclosure under the negative of these terms or other comparable terminology. These statements are subject to business and economic risk and reflect management’s current expectations and involve subjects that are inherently uncertain and difficult to predict. Actual events or results may differ materially. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results. References herein to “we,” “us,” and “the Company” are to heading “Disclosure Regarding Forward-Looking Statements” below.
Overview
PolarityTE, Inc. ~~and its consolidated subsidiaries.~~
~~Overview~~
~~PolarityTE, Inc.~~, headquartered in Salt Lake City, Utah, is a ~~commercial-stage~~clinical stage biotechnology ~~and regenerative biomaterials~~ company ~~focused on transforming the lives of patients by discovering, designing and~~ developing ~~a range of~~ regenerative tissue products and ~~biomaterials~~biomaterials. We also operate a laboratory testing and clinical research business using equipment, personnel, and facilities we acquired to advance our development of regenerative tissue products.
Regenerative Tissue Product
Our first regenerative tissue product is SkinTE. SkinTE was registered and listed with the United States Food and Drug Administration (“FDA”) in August 2017 based on our determination that SkinTE should be regulated solely under Section 361 of the Public Health Service Act and Part 1271 of Title 21 of the Code of Federal Regulations (i.e., as a so-called 361 HCT/P) and that, as a result, no premarket review or approval by the FDA was required. We proceeded to develop sales and manufacturing capabilities for SkinTE and focused on advancing commercialization of SkinTE. We began a regional commercial rollout of SkinTE in October 2018, and while it was marketed it was used in complex wounds, such as diabetic foot ulcers penetrating to tendon, capsule, and bone classified, Stage 3 and 4 pressure injuries, and acute wounds. Given our significant real-world experience with the application of SkinTE and several supporting publications, we believe SkinTE could significantly improve clinical outcomes.
Following informal, voluntary discussions between us and the FDA we were advised by the FDA in April 2020 that its preliminary assessment is that SkinTE does not meet the requirements to be regulated solely as a 361 HCT/P. Rather, the FDA’s preliminary assessment was that SkinTE is a biological product that should be regulated under Section 351 of the Public Health Service Act. We re-evaluated our regulatory approach and determined it is prudent to submit an investigational new drug application (“IND”) for SkinTE and an eventual biologics license application (“BLA”) because we believe it will create a more valuable asset with a greater likelihood of achieving widespread commercial adoption, and to avoid the possibility of a protracted dispute with the FDA. On July 23, 2021, we submitted an IND through our subsidiary, PolarityTE MD, Inc., and our business resources and activities are now focused primarily on advancing our IND, which if accepted by the FDA, will allow us to conduct clinical trials of a type that could potentially support a BLA application. We continued to sell SkinTE until the end of May 2021, when the period of enforcement discretion previously announced by the FDA with respect to its IND and premarket approval requirements for 361 HCT/Ps came to an end. As a result, we will not generate any revenue from the sale of SkinTE after the second quarter of 2021. We also eliminated our sales team on June 1, 2021, and moved to cut other costs associated with our commercial sales activity to offset the loss of SkinTE revenue.
Testing and Research Services
Beginning in 2017 we developed internally a laboratory and research capability to advance the development of SkinTE and related technologies, which we operate through our subsidiary, Arches Research, Inc. (“Arches”). At the beginning of May 2018, we acquired a preclinical research and veterinary sciences business to be used, in part, for preclinical studies on our regenerative tissue products, which we operate through our subsidiary IBEX Preclinical Research, Inc. (“IBEX”). Through Arches and IBEX, we also offer research and laboratory testing services to unrelated third parties on a contract basis. At the end of May 2020, we began to offer COVID-19 testing services to generate additional revenue in the contract services segment and thereby help defray our operating expenses.
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In the first quarter of 2021, 57% of our testing and research services net revenues were generated by COVID-19 testing and 93% of our COVID-19 testing revenues were obtained under 30-day renewable testing agreements with multiple nursing home and pharmacy facilities in the state of New York controlled by a single company (the “NY Client”). On March 26, 2021, we were advised by the NY Client it is adopting on-site employee testing at its facilities as allowed under new regulations in the state of New York. In June 2021, the number of tests performed for the ~~fields~~NY Client was nil and we have not found customers to replace the revenue lost from the NY Client. In the second quarter of ~~medicine, biomedical engineering~~2021, 10% of our testing and ~~material sciences.~~research services net revenues were generated by COVID-19 testing, and we expect this percentage will continue to decline unless and until we are able to locate new customers. We are a relatively unknown testing laboratory, so we have relied on word of mouth and management relationships to connect with prospects and vied for new business on the basis of price and service. We cannot predict how well, if at all, this marketing approach will work in finding new customers, how quickly we may be able to find new customers to replace the net revenues lost from the NY Client, or how much any such revenues may be. Even if we are able to find new customers for the COVID-19 testing business there remain substantial uncertainties around the COVID-19 testing business due to rapid developments in testing and vaccines. We intend to carefully monitor the performance of our COVID-19 testing business and scale our laboratory testing operations accordingly, and in the future may discontinue the testing business if we are unable to grow the business to a level where it is a positive contributor to our capital resources.
The COVID-19 pandemic had a significant adverse effect on the preclinical research services offered by IBEX in 2020, but there has been a resurgence in that business during the first six months of 2021. The increase in revenues from IBEX services helped to offset the loss of COVID-19 testing revenues in the second quarter of 2021. Nevertheless, revenues from our services business declined 55% in the second quarter of 2021 compared to the first quarter of the year. Revenues from our services business were $4.3 million for the first six months of 2021. Due to the circumstances described above, we expect revenues from our services business will be significantly less in the last six months of 2021 compared to the last six months of 2020.
~~Research~~PPP Loan

As previously reported in the Current Report on Form 8-K filed with the SEC on April 15, 2020, our subsidiary, PolarityTE MD, Inc. (the “Borrower”), entered into a promissory note with KeyBank, N.A., a national banking association (the “Lender”) evidencing an unsecured loan in the amount of $3,576,145 made to the Borrower under the Paycheck Protection Program (the “PPP Loan”). The Paycheck Protection Program was established under the Coronavirus Aid, Relief, and ~~Development Expenses.~~ ~~Research~~Economic Security Act (the “CARES Act”) and ~~development~~is administered by the U.S. Small Business Administration (the “SBA”).

On October 15, 2020, the Borrower applied to the Lender for forgiveness of the PPP Loan in its entirety (as provided for in the CARES Act) based on the Borrower’s use of the PPP Loan for payroll costs, rent, and utilities. On October 26, 2020, the Borrower was advised that the Lender approved the application, and that the Lender was submitting the application to the SBA for a final decision. The SBA subsequently approved the Borrower’s application for forgiveness of the PPP Loan, and the principal and interest of $3,612,376 was fully paid by the SBA on June 12, 2021, relieving the Borrower of any liability.

Our Plan Going Forward

Our business resources are, and will be for the foreseeable future, focused primarily on the advancement of our IND and subsequent BLA to attain a license to manufacture and distribute SkinTE in interstate commerce for one or more therapeutic indications. An IND is a request for authorization from the FDA to ship and administer an investigational drug or biological product to humans. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA within the 30-day time period raises concerns or questions about the conduct of the clinical trial. In such a case, the IND sponsor must resolve any outstanding concerns with the FDA before the clinical trial may begin.

The proposed therapeutic indication listed in the IND for SkinTE is chronic cutaneous ulcers. The IND proposes an initial Phase 2/3 clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the treatment of full-thickness diabetic foot ulcers (the “DFU Trial”). As proposed, we will seek to qualify approximately 20 sites for the DFU Trial and enroll 100 subjects, and the estimated length of the DFU Trial is approximately 32 months from commencement after acceptance of our IND by the FDA, assuming the IND is accepted. It should be noted that the design and parameters of the DFU Trial could change as a result of the FDA’s response to our IND. The IND includes a proposal for a second clinical trial for diabetic foot ulcer or another form of chronic cutaneous ulcer, such as venous leg ulcer or pressure ulcer, which we plan to determine through a dialogue with the FDA. A separate submission to our IND must be made for each successive clinical trial to be conducted under the IND.

Our preliminary experience indicates that SkinTE may benefit patients with immediately life-threatening conditions and other serious diseases or conditions. In 2009, the FDA implemented new regulations related to Expanded Access Investigational New Drug Applications (“Expanded Access INDs”), which are often colloquially referred to as “compassionate use,” and pertain to the use of an investigational drug or biologic when the primary purpose is to diagnose, monitor, or treat a patient’s disease or condition, rather than to obtain the kind of information about the drug that is generally derived from clinical trials. The FDA has proposed several processes for obtaining Expanded Access INDs, which we will evaluate for potential implementation in connection with a successful opening of our IND for SkinTE. Under FDA regulations the amount that may be charged for SkinTE used under an Expanded Use IND is limited to our direct costs of manufacture. Accordingly, Expanded Access INDs are not a means of replacing revenue we lost when we ceased commercial sale of SkinTE, but we believe this may enable us to provide SkinTE to providers treating persons with life-threatening or serious diseases and conditions and maintain on-going relationships with physicians we believe to be key opinion leaders in the wound care industry.

Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our clinical trials and our expenditures for satisfying all the conditions of obtaining FDA premarket approval for SkinTE. Cash used to fund operating expenses ~~primarily represent employee related costs, including stock compensation, for~~is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued research and development ~~executives and staff, lab and office expenses~~ and other ~~overhead charges.~~current liabilities.

~~General~~Liquidity and ~~Administrative Expenses.~~ ~~General~~Capital Resources

As of June 30, 2021, we had $32.6 million in cash and ~~administrative expenses~~cash equivalents and working capital of approximately $30.5 million. We believe the cash and cash equivalents on our balance sheet will fund our business activities through the end of 2021 and into, but not beyond, the third quarter of 2022. In the second quarter of 2021 cash used in operating activities was $4.1 million, or an average of $1.4 million per month, compared to $6.6 million cash used in operating activities, or an average of $2.2 million per month, in the first quarter of 2021 and compared to $11.6 million cash used in operating activities, or an average of $3.9 million per month, in the second quarter of 2020.

In June 2021 our PPP Loan in the amount of $3.6 million was forgiven, so we will not need to use our capital resources to repay the PPP Loan in future periods.

As noted above, we are focused primarily ~~represent employee related costs, including stock compensation,~~on the advancement of our IND and subsequent BLA to attain a license to manufacture and distribute SkinTE. To that end, in June 2021, we engaged a contract research organization to provide services for ~~corporate executive~~the DFU Trial at a cost of approximately $5.1 million with an initial payment due in July 2021 of $0.5 million and ~~support staff, general office expenses, professional fees and various other overhead charges. Professional fees, including legal and accounting expenses, typically represent one~~then payable periodically as services are provided over the nearly three-year term of the ~~largest components~~DFU Trial. Our expectation is that the second clinical trial would be similar to the DFU Trial with respect to size, length of time to complete, and cost. In the course of advancing our IND and subsequent BLA we may propose additional clinical trials to advance our applications or broaden the therapeutic indications of use for SkinTE. Clinical trials are the major expense we see in the near and long term, and while we are pursuing clinical trials we will continue to incur the costs of maintaining our business. In addition to clinical trials, the most significant uses of cash to maintain our business going forward are compensation and costs of occupying and maintaining our facilities.

In the six-month period ended June 30, 2021, the gross profit on sales of SkinTE was $2.5 million, which contributed to covering our operating costs for the period. As discussed above, we ceased SkinTE sales at the end of May 2021, so SkinTE sales will not contribute to defraying our operating costs in the foreseeable future. To mitigate the effect of this lost revenue we eliminated some staff and resources that supported the SkinTE commercial effort, but we do not expect to see the benefit of these cost reductions until the fourth quarter of 2021 because of severance and other costs associated with winding down our SkinTE commercial activity. The cessation of our ~~general and administrative expenses. These fees are partially attributable~~commercial SkinTE operation in the second quarter is likely to have an adverse effect on our ~~required activities as~~working capital in future periods that we cannot predict at this time.

In the six-month period ended June 30, 2021, the gross profit from services amounted to approximately $1.7 million, which contributed to covering our operating costs for the period. As discussed above, we expect our service revenue will be substantially diminished on a ~~publicly traded company, such as SEC filings, and corporate- and business-development initiatives.~~

~~Income Taxes.~~ Income taxes consist of our provisions for income taxes, as affected by our net operating loss carryforwards. Future utilization of our net operating loss, or NOL, carryforwards may be subject to a substantial annual limitationgo forward basis due to the ~~“change~~loss of COVID-19 testing business. There was a significant loss of COVID-19 testing revenues in ~~ownership” provisions~~the second quarter of 2021 that was partially offset by increased preclinical research revenues generated by IBEX, so services revenues decreased in the second quarter of 2021, compared to the first quarter of the ~~Internal Revenue Code. The annual limitation may result~~year. We took steps in the ~~expiration~~second quarter of ~~NOL carryforwards before utilization. Due~~2021 to ~~our history~~mitigate the effect of ~~losses, a valuation allowance sufficient to fully offset our NOL~~losing COVID-19 testing revenue, including reduction of temporary labor and other ~~deferred tax assets has been established under current accounting pronouncements, and~~resources used for COVID-19 testing. We cannot predict whether or to what extent our COVID-19 testing business will recover, if at all, in future periods. The volatility in revenues generated by our services business makes it impossible to predict whether or to what extent our services business will contribute to defray our operating costs in future periods. The loss of COVID-19 business in the second quarter of 2021 will likely have an adverse effect on our working capital in future periods that we cannot predict at this ~~valuation allowance will be maintained unless sufficient positive evidence develops to support its reversal.~~time.

~~Critical Accounting Estimates~~

~~Our discussion and analysis~~As of the ~~financial condition and results~~date of ~~operations is based upon our consolidated~~issuance of these unaudited interim condensed financial statements, ~~which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.~~

~~The preparation of these condensed consolidated financial statements requires us to make estimates and judgments~~we expect that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates under different assumptions or conditions.

We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management’s discussion and analysis of financial condition and results of operations when such policies affect our reported and expected financial results.

~~Accounting for Stock-Based Compensation.~~ Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including, in the case of stock option awards, estimating expected stock volatility.

~~Accounting for Common and Preferred Stock and Warrant transactions.~~ We issued units consisting of preferred shares and warrants and common stock and warrants and subsequently remeasured certain of those warrants. Determining the fair value of the securities in these transactions requires significant judgment, including adjustments to quoted share prices and expected stock volatility. Such estimates may significantly impact our results of operations and losses applicable to common stockholders.

~~Commitments and Contingencies.~~ ~~We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.~~

~~Results of Operations~~

~~Three months ended January 31, 2018 versus three months ended January 31, 2017~~

~~Net Revenues.~~ ~~For the three-month period ended January 31, 2018, net revenues from product sales were $13,000 which represents the first sale of the Company’s core product SkinTE.~~

~~Cost of Sales.~~~~For the three-month period ended January 31, 2018, cost of sales was approximately $1,000 and represents the freight charges associated with the $13,000 in product sales.~~

~~Research and Development Expenses.~~ For the three-month period ended January 31, 2018, research and development expenses were approximately $6.6 million. Research and development expenses mostly consist of stock-based compensation of approximately $2.2 million, salaries of approximately $1.9 million, medical studies of approximately $0.5 million, bonuses of approximately $0.5 million, medical samples of approximately $0.3 million, medical equipment depreciation of approximately $0.3 million, rent of approximately $0.2 million, and office expense of approximately $0.2 million.

~~General and Administrative Expenses.~~ For the three-month period ended January 31, 2018, general and administrative expenses were approximately $10.9 million compared to $5.2 million for the three months ended January 31, 2017. The increase is primarily due to increased stock-based compensation of $5.0 million.

~~Net loss from continuing operations.~~ Net loss for the three months ended January 31, 2018 was approximately $14.1 million, compared to a net loss of approximately $5.2 million in the comparable period in 2017, primarily reflecting the $7.2 million increase in stock-based compensation expenses and research and development offset by the gain from derivative liabilities.

~~Liquidity and Capital Resources~~

~~As of January 31, 2018,~~ our cash and cash equivalents ~~balance was approximately $10.0~~of $32.6 million as of June 30, 2021, will not be sufficient to fund our current business plan including related operating expenses and ~~our working~~ capital ~~deficit was approximately $2.8 million, compared to cash and equivalents of $17.7 million and working capital of $2.5 million at October 31, 2017.~~

As reflected in the condensed consolidated financial statements, we had an accumulated deficit of approximately $273.1 million at January 31, 2018, a net loss of approximately $14.1 million from continuing operations and approximately $5.1 million net cash used in continuing operating activities for the three months ended January 31, 2018. These factors raiseexpenditure requirements beyond July 2022. Accordingly, there is substantial doubt about ~~the Company’s~~our ability to continue as a going ~~concern.~~

We will continue to pursue fundraising opportunities that meet our long-term objectives, however, our cash position is not sufficient to support our operations for the foreseeable future. The condensed consolidated financial statementsconcern, as we do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

~~Based upon the current status of our product development and commercialization plans, we~~ believe that our ~~existing~~ cash and cash equivalents ~~and marketable securities~~ will be ~~adequate~~sufficient to ~~satisfy~~fund such business plan for at least twelve months from the date of issuance of these interim financial statements. We plan to address this condition by raising additional capital to finance our operations. Although we have been successful in raising capital needs to approximately October 2018. We anticipate needing substantial additional financing to continue clinical deployment and commercialization of our lead product SkinTE, development of our other product candidates, and scalingin the ~~manufacturing capacity for our products and product candidates, and prepare for commercial readiness. Such~~past, financing may not be available on terms favorable to us, if at all, ~~which raises~~so there is no assurance that we will be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that our plans to raise additional capital will alleviate the substantial doubt ~~about~~regarding our ability to continue as a going concern as of the date of this report. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our product development programs. We plan to meet our capital requirements primarily through issuances of equity securities, debt financing, revenue from product sales and future collaborations. Failure to generate revenue or raise additional capital would adversely affect our ability to achieve our intended business objectives.concern.

Our actual capital requirements will depend on many factors, including ~~among other things: our ability to scale~~ the manufacturing for and to commercialize successfully our lead product, SkinTE; the progress and success of clinical evaluation and acceptance of SkinTE; our ability to develop our other product candidates; and the costscost and timing of ~~obtaining any required regulatory registrations or approvals.~~our IND and subsequent BLA for SkinTE, the cost and timing of clinical trials, the cost of establishing and maintaining our facilities in compliance with cGMP and cGTP (current good tissue practices) regulations, and the cost and timing of advancing our product development initiatives related to SkinTE. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. ~~The foregoing factors, along with the other factors described in the section, Item 1A, “Risk Factors” in Part II of this Report on Form 10-Q,~~

We will ~~impact our future capital requirements and the adequacy of our available funds. If we are required~~need to raise additional ~~funds,~~capital in the future to fund our effort to obtain FDA approval of SkinTE and maintain our operations in the future. On March 30, 2021, we entered into a sales agreement (the “Sales Agreement”) with Cantor, Fitzgerald & Co. (“Cantor”), to sell shares of our common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity offering program under which Cantor will act as sales agent. We have not sold any shares under the Sales Agreement as of the date of this filing. Although we have been successful in raising capital in the past, financing may not be available on terms favorable to us, if at all, so there is no assurance that we will be successful in obtaining additional financing. Any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders, and debt financing, if available, may involve restrictive covenants. ~~Collaborative~~If we elect to pursue collaborative arrangements, ~~if necessary to raise additional funds,~~the terms of such arrangements may require us to relinquish rights to certain of our technologies, products, or marketing territories. Our failure to raise additional capital when needed, and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to ~~respond to competitive pressures or unanticipated requirements to develop our product candidates and to~~ continue operations, any of which would have a material adverse effect on our business, financial condition, and results of operation.

~~As previously reported, we identified a material weakness in the effectiveness~~Results of ~~our internal controls over financial reporting, a factor that could affect our liquidity and capital resources. At present, management believes that the recent improvement~~Operations

Comparison of the ~~processes for granting equity awards~~six months ended June 30, 2021, compared to ~~certain employees and service providers will ultimately correct~~ the ~~material weakness.~~six months ended June 30, 2020.

	For the Six Months Ended						Increase (Decrease)
(in thousands)	June 30, 2021			June 30, 2020			Amount			%
	(Unaudited)
Net revenues
Products	$	2,924		$	1,372		$	1,552			113	%
Services		4,322			1,827			2,495			137	%
Total net revenues		7,246			3,199			4,047			127	%
Cost of sales
Products		448			615			(167	)		-27	%
Services		2,641			783			1,858			237	%
Total cost of sales		3,089			1,398			1,691			121	%
Gross profit		4,157			1,801			2,356			131	%

Operating costs and expenses
Research and development		6,621			6,537			84			1	%
General and administrative		11,312			15,816			(4,504	)		-28	%
Sales and marketing		2,625			5,718			(3,093	)		-54	%
Restructuring and other charges		436			2,536			(2,100	)		-83	%
Total operating costs and expenses		20,994			30,607			(9,613	)		-31	%
Operating loss		(16,837	)		(28,806	)		11,969			-42	%
Other income (expense)
Gain on extinguishment of debt		3,612			–			3,612			*
Change in fair value of common stock warrant liability		(2,220	)		2,941			(5,161	)		-175	%
Inducement loss on sale of liability classified warrants		(5,197	)		–			(5,197	)		*
Interest income (expense), net		(77	)		(77	)		–			0	%
Other income, net		121			225			(104	)		-46	%
Net loss	$	(20,598	)	$	(25,717	)	$	5,119			-20	%

~~Preferred Share Conversion and Exchange Activity~~* Not meaningful

~~During~~Comparison of the three months ended ~~January 31, 2018, 1,544,572 Series A Preferred Shares, 2,578 Series C Preferred Shares and 26,667 Series D Preferred Shares were converted into 454,395 shares of common stock.~~

~~On February 6, 2018, 15,756 Series B Preferred Shares were converted into 262,606 shares of common stock.~~

On March 6, 2018, the Company received conversion notices from holders of 100% of the outstanding Series A Preferred Shares, Series B Preferred Shares, and Series E Preferred Shares, and the Company completed an exchange of the Series F Preferred Shares. In connection with the conversion and exchange, the Company issued an aggregate of 9,100,515 shares of common stockJune 30, 2021, compared to such holders. The Company filed a Certificate of Elimination with the Secretary of State of the State of Delaware terminating the Company’s Series A, Series B, Series C, Series D, Series E and Series F Preferred Stock and thereafter no shares of Company preferred stock remain outstanding and all rights under the Series F Preferred Shares, among other things, to price adjustment in the event of future issuances will be terminated.

~~Common Stock~~

~~During~~ the three months ended ~~January 31, 2018, certain employees exercised their options at a weighted-average exercise price~~June 30, 2020.

	For the Three Months Ended						Increase (Decrease)
(in thousands)	June 30, 2021			June 30, 2020			Amount			%
	(Unaudited)
Net revenues
Products	$	1,195		$	944		$	251			27	%
Services		1,342			1,322			20			2	%
Total net revenues		2,537			2,266			271			12	%
Cost of sales
Products		207			275			(68	)		-25	%
Services		717			607			110			18	%
Total cost of sales		924			882			42			5	%
Gross profit		1,613			1,384			229			17	%

Operating costs and expenses
Research and development		4,190			3,164			1,026			32	%
General and administrative		4,941			5,211			(270	)		-5	%
Sales and marketing		1,099			2,024			(925	)		-46	%
Restructuring and other charges		11			2,084			(2,073	)		-99	%
Total operating costs and expenses		10,241			12,483			(2,242	)		-18	%
Operating loss		(8,628	)		(11,099	)		2,471			-22	%
Other income (expense)
Gain on extinguishment of debt		3,612			–			3,612			*
Change in fair value of common stock warrant liability		1,807			(1,591	)		3,398			-214	%
Inducement loss on sale of liability classified warrants		–			–			–			*
Interest income (expense), net		(39	)		(65	)		26			-40	%
Other income, net		60			78			(18	)		-23	%
Net loss	$	(3,188	)	$	(12,677	)	$	9,489			-75	%

* Not meaningful

Discussion of ~~$5.10~~Results of Operations

There have been significant changes in ~~exchange~~items affecting our results of operations for the ~~Company’s common stock for an aggregated amount~~six-month period ended June 30, 2021, compared to the six-month period ended June 30, 2020, due to:

●

The decision in April 2020 to file an IND with the FDA for SkinTE and, as a result, transition from a commercial stage company to a clinical stage company;

●

The COVID-19 testing business that began in the last week of May 2020 that generated significant services revenues through March 2021, but has since substantially diminished; and

●

The COVID-19 pandemic, which had a negative impact on revenues from the sale of SkinTE and IBEX services in the six-month period ended June 30, 2020, but not in the six-month period ended June 30, 2021.

As a result of ~~10,417 shares.~~the foregoing developments, we made a number of changes to our operations that impacted our results of operations. These included reductions in our work force in March and May 2020 and on June 1, 2021, and reducing the services and infrastructure needed to support a larger work force and commercial sales effort.

~~Off-Balance Sheet Arrangements~~

~~As of January 31, 2018, we had no off-balance sheet arrangements.~~

2231

~~Inflation~~

~~Our management currently believes that inflation has not had, and does not currently have, a material impact on continuing operations.~~

~~Cash Flows~~

~~Cash and cash equivalents and working capital deficit were approximately $10.0~~Net Revenues. Net revenues increased $4.0 million, ~~and $2.8 million, respectively, as of January 31, 2018~~or 127%, for the six months ended June 30, 2021, compared to ~~cash and cash equivalents and working capital of approximately $17.7 million and $2.5 million at October 31, 2017, respectively.~~

~~Operating Cash Flows.~~ ~~Cash used in continuing operating activities in~~ the ~~three~~six months ended ~~January 31, 2018 amounted to approximately $5.1~~June 30, 2020, and $0.3 million, compared to approximately $756,000 for the 2017 period. The increase in net cash used in continuing operating activities mostly relates to the increase in net loss, partially offset by the increase in share-based compensation.

~~Cash provided by discontinued operating activities in the three months ended January 31, 2018 amounted to approximately $0 compared to approximately $395,000 for the 2017 period.~~

~~Investing Cash Flows.~~ Cash used in continuing investing activities in the three months ended January 31, 2018 amounted to approximately $2.7 million compared to $1.5 million for the 2017 period. For both the 2018 and 2017 periods, the activity relates to the purchase of property and equipment (mostly medical equipment).

~~Financing Cash Flows~~~~. Net cash provided by financing activities~~or 12%, for the three months ended ~~January 31, 2018 amounted to approximately $45,000~~June 30, 2021, compared to ~~approximately $2.3 million~~the same period in 2020.

We effectuated a substantial reduction in force for our commercial operations in May 2020, which together with the effect of COVID-19 on selling product to healthcare institutions caused us to adopt a sales strategy in May 2020 to focus on regions and facilities where we had repeat users of SkinTE. As a result of this strategy, products net revenues increased by 113% for the ~~2017 period. For~~six-month period ended June 30, 2021, compared to the same period in 2020. Products net revenues also showed an increase 27% for the three-months ended June 30, 2021, compared to the same period in 2020, even though we ceased making product sales at the end of May 2021.

Net revenues from services remained essentially unchanged for the three months ended ~~January 31, 2018,~~June 30, 2021, compared to the ~~$45,000 related~~same period in 2020, but the mix of business activity generating those revenues changed from a majority of service revenues generated by COVID-19 testing in the second quarter of 2020 to ~~proceeds from option exercises. For~~a majority of service revenues generated by pre-clinical research services in 2021. Our COVID-19 testing services continued to be a significant contributor to overall services revenues in the first quarter of 2021 and, as a result, our services revenues increased 137% for the six months ended June 30, 2021, compared to the same period in 2020.

Cost of Sales. Cost of sales increased $1.7 million, or 121%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $0.04 million, or 5%, for the three months ended ~~January 31, 2017,~~June 30, 2021, compared to the ~~$2.3~~same period in 2020.

Cost of sales for products revenues decreased 27% period over period for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and decreased 25% period over period for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, even though revenues were higher in 2021 for both the six and three-month periods, which is attributable to the economies of scale we achieved by selling product for larger wound sizes in 2021 compared to 2020.

Cost of sales for services revenues increased 237% period over period for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and increased 18% period over period for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, which is primarily attributable to the cost of sales pertaining to the COVID-19 testing service that only began in the last week of May 2020, including a write-off of inventory for the COVID-19 testing business in the first quarter of 2021 due to the substantial decrease in that business during the quarter.

Operating Costs and Expenses. Operating costs and expenses decreased $9.6 million, or 31%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $2.2 million, or 18%, for the three months ended June 30, 2021, compared to the same period in 2020.

Research and development expenses increased 1% period over period for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and increased 32% period over period for the three months ended June 30, 2021, compared to the three months ended June 30, 2020. The substantial increase in the three-month period ended June 30, 2021, is primarily attributable to the costs in our clinical trials driven by completing our diabetic foot ulcers trial, increase in lab supplies for work on preparing the technical items for our IND, and consulting services for preparing our IND, which was only partially offset by savings from reductions in staff made during the second quarter of 2020 in the research and development department.

As noted above, we effectuated a substantial reduction in force for our commercial operations in May 2020. Consequently, there were significant reductions in cash compensation, stock compensation, consulting fees, and travel expense, as well as significant credits from forfeiture of stock awards by persons no longer employed by us. As we pared down our staff and sales activity, we also reduced expenses related to ~~equity capital raises.~~a larger operation by terminating our lease for the Utah corporate office in September 2020 and ceasing operations at our manufacturing node in Georgia in the fourth quarter of 2020. The cost cutting measures described above are the primary causes of a 28% decrease in general and administrative expense period over period for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and 5% decrease period over period for the three months ended June 30, 2021, compared to the three months ended June 30, 2020.

~~Recent Accounting Pronouncements~~When we reduced our commercial sales team and related commercial activities beginning in May 2020, we also took steps to reduce staff and consultants in sales and marketing. Consequently, there were significant reductions in cash compensation, stock compensation, consulting fees, and travel expense, as well as significant credits from forfeiture of stock awards by persons no longer employed by us, which resulted in a 54% decrease in sales and marketing expense for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and 46% decrease for the three months ended June 30, 2021, compared to the same period in 2020.

~~Refer~~We realized restructuring and other charges as a result of the transition to a clinical stage company, much of which was recognized in the six-month period ended June 30, 2020. The reduction in force in March 2020 resulted in a severance charge of $0.5 million, and the subsequent reduction in May 2020 resulted in a charge of $0.6 million. In the second quarter of 2020 we also decided to abandon equipment in addition to the development of a vivarium research facility at our Salt Lake City location resulting in a charge of $1.5 million. By contrast, during the six month-period ended June 30, 2021, we recognized a loss on impairment of property and equipment in the amount of $0.4 million and severance charges of $0.3 million, which were offset by a $0.3 million gain on the termination of our Augusta node lease. Consequently, there was an 83% decrease in restructuring and other charges for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and 99% decrease for the three months ended June 30, 2021, compared to the same period in 2020.

Operating Loss and Net Loss. Operating loss decreased $12.0 million, or 42%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $2.5 million, or 22%, for the three months ended June 30, 2021, compared to the same period in 2020. Net loss decreased $5.1 million, or 20%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $9.5 million, or 75%, for the three months ended June 30, 2021, compared to the same period in 2020.

Warrants issued in connection with financings we completed in January 2021 are classified as liabilities and remeasured each period until settled or until classified as equity. As a result of the periodic remeasurement we recorded a charge for common stock warrants of $2.2 million for the six months ended June 30, 2021, and recorded a gain of $1.8 million for the three months ended June 30, 2021. For additional information on the change in fair value of common stock warrant liability please see note 10 to the Condensed Consolidated Financial Statements (unaudited) included in this report.

When the PPP Loan was forgiven in June 2021, we recognized a gain on extinguishment of debt in the amount of $3.6 million. For the six months ended June 30, 2021, this gain was offset by a day one loss on warrants issued in January 2021 of $5.2 million plus a loss on the change in fair value of common stock warrant liability of $2.2 million, which are primarily responsible for other expense of $3.8 million for the six months ended June 30, 2021, and the $3.8 million difference between our operating loss and net loss for the six months ended June 30, 2021.

As noted above, we recognized the gain on the PPP Loan forgiveness in the second quarter of 2021. There was no day one loss on warrants issued recorded in the second quarter of 2021, but there was a gain on the change in fair value of common stock warrant liability of $1.8 million. Consequently, we recognized other income for the three months ended June 30, 2021, of $5.4 million, which is the primary cause for the reduction of our net loss compared to our ~~discussion~~operating loss.

Non-GAAP Financial Measure

The table below shows adjusted net loss, which is a non-GAAP measure that shows net loss before fair value adjustments relating to our common stock warrant liability and warrant inducement loss. We believe this measure is useful to investors because it eliminates the effect of ~~recent accounting pronouncements~~non-operating items that can significantly fluctuate from period to period due to fair value remeasurements. For purposes of calculating non-GAAP per share metrics, the same denominator is used as that which was used in ~~Note 2~~calculating net loss per share under GAAP.

Adjusted Net Loss Attributable to Common Stockholders

(in thousands - ~~Summary of Significant~~unaudited non-GAAP measure)

	For the Three Months Ended June 30,						For the Six Months Ended June 30,
	2021			2020			2021			2020
GAAP Net Loss	$	(3,188	)	$	(12,677	)	$	(20,598	)	$	(25,717	)
Change in fair value of common stock warrant liability		(1,807	)		1,591			2,220			(2,941	)
Inducement loss on sale of liability classified warrants		–			–			5,197			–
Non-GAAP adjusted net loss attributable to common stockholders - basic	$	(4,995	)	$	(11,086	)	$	(13,181	)	$	(28,658	)
Gain from change in fair value of warrant liabilities		(107	)		–			–			–
Non-GAAP adjusted net loss attributable to common stockholders - diluted	$	(5,102	)	$	(11,086	)	$	(13,181	)	$	(28,658	)
GAAP net loss per share attributable to common stockholders
Basic	$	(0.04	)	$	(0.33	)	$	(0.26	)	$	(0.72	)
Diluted	$	(0.04	)	$	(0.33	)	$	(0.26	)	$	(0.72	)

Non-GAAP adjusted net loss per share attributable to common stockholders
Basic	$	(0.06	)	$	(0.29	)	$	(0.17	)	$	(0.80	)
Diluted	$	(0.06	)	$	(0.29	)	$	(0.17	)	$	(0.80	)

Critical Accounting Policies and Estimates

Revenue Recognition. With respect to revenue recognition in contract services provided by IBEX, revenues generally consist of a single performance obligation that IBEX satisfies over time using an input method based on costs incurred to date relative to the ~~accompanying condensed consolidated~~total costs expected to be required to satisfy the performance obligation. We believe that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires that our services personnel at IBEX make reasonable estimates of the extent of progress toward completion of the contract and, as a result, unbilled receivables and deferred revenue are recognized based on payment timing and work completed.

Stock-Based Compensation. We measure all stock-based compensation to employees and non-employees using a fair value method. For stock options with graded vesting, we recognize compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards based on the fair value on the date of grant. The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the option. The volatility factor is determined based on our historical stock prices. Forfeitures are recognized as they occur. The fair value of restricted stock grants is measured based on the fair market value of our common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.

Common Stock Warrant Liability. The fair value of the common stock warrant liability is estimated using the Monte Carlo simulation model, which involves simulated future stock price amounts over the remaining life of the commitment. The fair value estimate is affected by our stock price as well as estimated change of control considerations.

Disclosure Regarding Forward-Looking Statements

This Quarterly Report on Form 10-Q contains forward-looking statements. Risks and uncertainties are inherent in forward-looking statements. Furthermore, such statements may be based on assumptions that fail to materialize or prove incorrect. Consequently, our business development, operations, and results could differ materially from those expressed in forward-looking statements made in this Quarterly Report. We make such forward-looking statements pursuant to the safe harbor provisions in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. In some cases, you can identify forward-looking statements by words such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

	●	the timing or success of obtaining regulatory licenses or approvals for initiating clinical trials or marketing our products;
	●	the initiation, timing, progress, and results of our pre-clinical studies or clinical trials;
	●	sufficiency of our working capital to fund our operations over the next 12 months;
	●	infrastructure required to support operations in future periods, including the expected costs thereof;
	●	estimates associated with revenue recognition, asset impairments, and cash flows;
	●	variance in our estimates of future operating costs;
	●	future vesting and forfeitures of compensatory equity awards;
	●	the effectiveness of our disclosure controls and our internal control over financial reporting;
	●	the impact of new accounting pronouncements;
	●	size and growth of our target markets; and
	●	the initiation, timing, progress, and results of our research and development programs.

Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:

	●	the ability to comply with regulations applicable to the delivery of our services;
	●	the ability to meet demand for our services;
	●	the ability to deliver our services if employees are quarantined due to the impact of COVID-19;
	●	the scope of protection we can establish and maintain for intellectual property rights covering our product candidates and technology;
	●	developments relating to our competitors and industry;
	●	new discoveries or the development of new therapies or technologies that render our products or services obsolete or unviable;
	●	outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade, and business operations;
	●	political and economic instability, whether resulting from natural disasters, wars, terrorism, pandemics, or other sources;
	●	the ability to gain adoption by healthcare providers of our products for patient care;
	●	the ability to find and retain skilled personnel;
	●	the need for, and ability to obtain, additional financing in the future;
	●	general economic conditions;
	●	inaccuracies in estimates of our expenses, future revenues, and capital requirements;
	●	future accounting pronouncements;
	●	unauthorized access to confidential information and data on our information technology systems and security and data breaches; and
	●	the other risks and uncertainties described in this report under Item 1A. Risk Factors, beginning on page 20.

Forward-looking statements relate to future events or to our future financial ~~statements included elsewhere~~performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Any forward-looking statement in this Quarterly Report on Form ~~10-Q.~~10-Q and the documents incorporated by reference herein reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason, even if new information becomes available in the future.

This Quarterly Report on Form 10-Q also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys, studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

Item 4. Controls and Procedures

Our management, with the participation of our ~~Chief Executive Officer~~principal executive and ~~Chief Financial Officer, has~~financial officers, evaluated the effectiveness of our disclosure controls and procedures as ~~defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e), as~~ of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

Management assessed the effectiveness of our internal control over financial reporting as of January 31, 2018. In making this assessment, management used the framework set forth in the report entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013, or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management determined that our system of internal control over financial reporting was not effective as of January 31, 2018.

A material weakness is a deficiency, or a combination of deficiencies, within the meaning of Public Company Accounting Oversight Board (“PCOAB”) Audit Standard No. 5, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Management has identified the following material weakness which has caused management to conclude that as of January 31, 2018 our ICFR were not effective at the reasonable assurance level:

Due to a lack of processes in place to address personnel changes, controls over the Company’s process of accounting for stock-based compensation failed to ensure the completeness of stock options and restricted stock grants in the Company’s calculation of stock-based compensation expense.

~~During the quarter ended January 31, 2018, the Company started the process to mitigate the weakness above, and expect it to be remediated during fiscal year 2018.~~

While we believe our disclosure controls and procedures and our internal control over financial reporting are adequate, no system of controls can prevent errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur. Controls can also be circumvented by individual acts of some people, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Subject to the limitations above, management believes that the condensed consolidated financial statements and other financial information contained in this report, fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented.

Based on the evaluation of the effectiveness of our disclosure controls and procedures as of June 30, 2021, our principal executive and ~~the material weakness identified at October 31, 2017 that has not yet been remediated, our Chief Executive Officer and Chief Financial Officer~~financial officers concluded that, as of such date, our disclosure controls and procedures ~~(as defined in Exchange Act Rules 13a-15(e) and 15d-15(e))~~ were ~~not effective at a reasonable assurance level at January 31, 2018.~~

~~Changes in Internal Control Over Financial Reporting~~

~~During the three months ended January 31, 2018, there~~effective. There were no changes in our internal control over financial reporting ~~other than~~during the ~~one described above.~~three-month period ended June 30, 2021.

PART II. OTHER INFORMATION

~~Item 1. Legal Proceedings~~

The Company at times may be a party to claims and suits in the ordinary course of business. We record a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Item 1A. Risk Factors

~~Our~~You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which could materially affect our business, ~~and operations are subject to a number~~financial position, or future results of operations. The risks ~~and uncertainties as~~ described ~~below. However, the risks and uncertainties described below~~in that Annual Report are not the only ~~ones~~risks we face. Additional risks and uncertainties ~~that we are unaware of,~~not currently known to us or that we ~~may~~ currently deem to be immaterial also may ~~become important factors that could harm~~materially, adversely affect our business, financial ~~condition~~position, or future results of operations. ~~If any of the following risks actually occur, our financial condition or results of operations could suffer.~~

Risks Related to Our ~~Business~~Financial Condition

IfWe will need additional funding to pursue the ~~clinical~~regulatory process for SkinTE and sustain our operations, and may be unable to raise capital when needed, which would force us to delay, reduce, eliminate, or abandon our product development programs.

We reported a net loss of $20.6 million for the six months ended June 30, 2021, and ~~commercialization~~at June 30, 2021, we had an accumulated deficit of $498.8 million. We believe our ~~lead product candidate, SkinTE,~~cash and cash equivalents on our balance will fund our current business plan including related operating expenses and capital expenditure requirements to, but not beyond, July 2022. Accordingly, there is ~~not successful,~~substantial doubt about our ability to ~~finance our operations may be adversely affected.~~

~~Our near-term prospects depend upon our ability to effectively market our lead product candidate, SkinTE, and to demonstrate its safety and effectiveness in humans,~~continue as well as its superiority over existing therapies and standards of care. Our ability to finance our company and to generate revenues will depend in part on our ability to obtain favorable results in the planned clinical evaluations of SkinTE and to successfully develop and commercialize SkinTE.

~~SkinTE could be unsuccessful if it:~~

	●	~~does not demonstrate acceptable safety and efficacy in humans, or otherwise does not meet applicable regulatory standards;~~

	●	does not offer sufficient, clinically meaningful therapeutic or other improvements over existing or future therapies used to treat burns or other defects of skin tissues/integument for which it is being tested and evaluated;

	●	~~is not capable of being produced in commercial quantities at acceptable costs or acceptable timelines; or~~

	●	~~is not accepted as safe, efficacious, cost-effective, less costly and preferable to current therapies in the medical community and by third-party payers.~~

Ifa going concern beyond that time unless we are not successful in developing and commercializing SkinTE or are significantly delayed in doing so, our financial condition and future prospects may be adversely affected and we may experience difficulties in raising the substantialcan raise additional capital ~~required to fund our business.~~from external sources.

We ~~are an early stage company. Our limited operating history makes it difficult to evaluate our current business and future prospects, and our profitability in the future is uncertain.~~

Our limited operating history hinders an evaluation of our prospects, which should be considered in light of the risks, expenses and difficulties frequently encountered in the establishment of a business in a new industry, characterized by a number of market entrants and intense competition, and in the shift from development to commercialization of new product candidates based on innovative technologies.

~~We became a publicly traded company through our merger with Majesco Entertainment Company, and we could be liable for unanticipated claims or liabilities as a result thereof.~~

On December 1, 2016, we entered into an Agreement and Plan of Reorganization with Majesco Acquisition Corp., our wholly-owned subsidiary, PolarityTE NV and Dr. Denver Lough, the owner of 100% of the issued and outstanding shares of capital stock of PolarityTE NV pursuant to which, on April 5, 2017, we acquired the intellectual property rights and other assets of PolarityTE NV through the merger of Majesco Acquisition Corp. with and into PolarityTE NV, with PolarityTE NV surviving as our wholly-owned subsidiary.

We face substantial risks of known and unknown liabilities associated with Majesco Entertainment Company, including absence of accurate or adequate public information concerning the former public company; undisclosed liabilities; improper accounting; claims or litigation from former officers, directors, employees or stockholders; contractual obligations; and regulatory requirements. Although management performed due diligence on us, there can be no assurance that such risks will not occur. The occurrence of any such risk could materially adversely affect our financial condition.

Additionally, on February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, Majesco Entertainment Company (“Majesco DE”), and a number of other game publisher defendants. The complaint alleged that the Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. The case was subsequently transferred to the Western District of Washington. On June 16, 2017, final judgment was entered in favor of the defendants. The plaintiff has appealed that decision to the Court of Appeals for the Federal Circuit. The appeal is currently pending. On June 23, 2017, as part of a purchase agreement, liabilities and claims relating to this litigation were assumed by Zift Interactive LLC. The Company cannot be certain about the outcome of the appeal, or whether litigation regarding the assumption of liabilities by Zift Interactive LLC may occur.

~~We have a history of operating losses and may never achieve or sustain profitability.~~

~~We have to date incurred, and may continue~~expect to incur significant operating ~~losses over~~costs in the ~~next several years.~~near term as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business segments and incurring continuing fixed costs related to the maintenance of our assets and business. We ~~have incurred~~do not expect net revenues from our business segments will be enough to defray our costs of doing business. Consequently, we expect to incur significant ~~net~~ losses in each year since our inceptions, and have a net loss of $130.8 million for the year ended October 31, 2017, and $14.1 million for the quarter ended January 31, 2018. Our ability to achieve profitable operations in the future, ~~will depend in large part upon the successful development~~ and ~~commercialization of our product candidates and technologies. Factors impacting our ability to successfully develop and commercialize our product candidates include:~~

	●	~~approvals by and/or registrations with the FDA and other US and foreign government agencies;~~

	●	~~our ability to educate and train physicians and hospitals on the benefits of our product candidates;~~

	●	~~the rate at which providers adopt our technology and product candidates;~~

	●	~~our ability to scale up our global commercialization, including our selling and manufacturing activities;~~

	●	~~our ability to complete the development of our product candidates in a timely manner;~~

	●	~~our ability to obtain adequate reimbursement from third parties for our products and product candidates; and~~

	●	~~other activities generally necessary in order to introduce and bring new products and medical technologies to market.~~

~~The likelihood of the long-term success of our company must~~those losses could be considered in light of the expenses, difficulties and delays frequently encountered in the development and commercialization of new and innovative medical techniques and technologies, unknown and uncertain regulatory hurdles for a new and novel technology or technique, competitive factors and competition, as well as the uncertain nature of new business development and ongoing capital requirements.

~~We may have inadequate resources to complete the development and commercialization of our product candidates or to continue our development programs.~~

We are a development stage company, and thus we expect to continue to spend a significant amount of cash on the continued research and development of our product candidates. Until we are able to successfully commercialize our product candidates and achieve significant revenue, if any, we will be required to raise additional capital to fund our ongoing operations. We may not be able to raise capital on acceptable terms, or at all.

~~The cost and timing of completion of our preclinical and clinical development programs is uncertain.~~

We expect that a large percentage of our future research and development expenses will be incurred in support of current and future preclinical and clinical development programs. These expenditures are subject to numerous uncertainties in timing and cost of completion. We evaluate our objectives in preclinical models based upon our own development goals, but such evaluation may differ from requirements of regulatory authorities. We may conduct early stage clinical trials, which may differ for each of our targeted markets or markets we may target in the future (i.e., presently, skin, bone, muscle, cartilage, fat, blood vessels and nerves). As we obtain results from investigations, preclinical studies, and/or clinical trials, we may elect to discontinue or delay further evaluations for certain product candidates or programs in order to focus resources on more promising product candidates or programs. Completion of clinical trials may take several years and the length of time generally varies according to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials is uncertain and may vary significantly over the life of a product or development projectsevere as a result of ~~unanticipated differences, regulatory requirements, or~~unforeseen expenses, difficulties, complications, delays, and other ~~obligations, or challenges arising during clinical development.~~unknown events.

~~Our product development programs are based on novel technologies. As result, our product candidates are inherently risky.~~

We cannot guarantee that the results we see in clinical applications will be comparable to the preclinical results we have observed in animals. We also cannot at this stage be certain of the safety of our platform technology in humans.

We are subject to the risks of failure inherent in the development of product candidates based on new technologies. The novel nature of our products creates significant challenges in regard to product development and optimization, manufacturing, government regulation, third-party reimbursement and market acceptance. For example, if regulatory agencies have limited experience or concerns in approving cellular and tissue-based therapies for commercialization, the development and commercialization pathway for our therapies may be subject to increased uncertainty, as compared to the pathway for new conventional drugs.

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Further, when manufacturing autologous cell and tissue-based therapies, the number and the composition of the cell population varies from patient to patient, in part due to the age of the patient, since the therapy is dependent on patient-specific physiology. Such variability in the number and composition of these cells could adversely affect our ability to manufacture autologous cell and tissue-based therapies in a cost-effective manner and meet acceptable product release specifications for use in a clinical trial or, if approved and/or registered, for commercial sale. As a consequence, the development and regulatory approval and/or registration process for autologous cell and tissue-based product candidates could be delayed or may never be completed.

Our product candidates represent new classes of therapy that the marketplace may not understand or accept. Furthermore, the success of our product candidates is dependent on wider acceptance by the medical community.

The broader market may not understand or accept our product candidates. Our product candidates represent new treatments or therapies and compete with a number of more conventional products and therapies manufactured and marketed by others. The new nature of our product candidates creates significant challenges in regards to product development and optimization, manufacturing, government regulation, and third-party reimbursement.

As a result, the development pathway for our product candidates and the commercialization of our potential products may be subject to increased scrutiny, as compared to the pathway(s) for more conventional products.

~~The degree of market acceptance of any of our potential products will depend on a number of factors, including:~~

	●	~~The clinical safety and effectiveness of our products and their perceived advantage over alternative treatment methods;~~

	●	~~Our ability to convince healthcare providers that the use of our products in a particular procedure is more beneficial than the standard of care or other available methods;~~

	●	Our ability to explain clearly and educate others on the autologous use of patient-specific human cells and tissue-based products, and to avoid potential confusion with and differentiate ourselves from the ethical controversies associated with human fetal tissue and engineered human tissue;

	●	~~Adverse reactions involving our products or the products or product candidates of others that are cell- or tissue-based;~~

	●	Our ability to supply a sufficient amount of our product to meet regular and repeated demand in order to develop a core group of medical professionals familiar with and committed to the use of our products; and

	●	The cost of our products and the reimbursement policies of government and other third-party payers, including the amounts of reimbursement made for our products and the conditions for such reimbursement.

If patients or the medical community do not accept our potential products as safe and effective for any of the foregoing reasons, or for any other reason, it could affect our sales, having a material adverse effect on our business, financial condition and results of operations.

~~Our revenues from our regenerative medicine business will depend upon~~ adequate ~~reimbursement from public and private insurers and health systems.~~

Our success will depend on the extent to which reimbursement for the costs of our treatments will be available from third-party payers, such as public and private insurers and health systems, as well as the amounts that they will agree to reimburse. Government and other third-party payers attempt to contain healthcare costs by limiting both coverage and the level of reimbursement, and the amount of reimbursement of new treatments. Therefore, significant uncertainty usually exists as to the reimbursement status of new healthcare treatments. If wefunds are not successful in obtaining adequate reimbursement for our treatments from these third-party payers, the market’s acceptance of our treatments could be adversely affected. Inadequate reimbursement levels also likely would create downward price pressure on our treatments. Even if we succeed in obtaining widespread reimbursement for our treatments at adequate treatment amounts, future changes in reimbursement policies could have a negative impact on our business, financial condition and results of operations.

~~Commercial third-party payers and government payers are increasingly attempting~~available to contain healthcare costs by demanding price discounts, including by limiting coverage on which products they will pay for and the amounts that they will pay for new products, and by creating conditions to reimbursement, such as coverage eligibility requirements based upon clinical evidence development involving research studies and the collection of physician decision impact and patient outcomes data. Because of these cost-containment trends, commercial third-party payers and government payers that currently provide orus in the future, we may ~~provide reimbursement~~be required to delay, reduce the scope of, or eliminate our plans for one or more of our product candidates may reduce, suspend, revoke, or discontinue payments or coverage at any time, including those payers that designate one or more of our product candidates as experimental and investigational. Payers may also create conditions to coverage or contract with third-party vendors to manage laboratory benefit coverage, in both cases creating burdens for ordering physicians and patients that may make our product candidates more difficult to sell. The percentage of submitted claims that are ultimately paid, the length of time to receive payment on claims, and the average reimbursement of those paid claims, is likely to vary from period to period. Finally, payers may demand discounts or offer reimbursement that minimizes our ability to sell our products profitably, or simply choose to not cover or reimburse our products at all.

As a result, there is significant uncertainty surrounding whether the use of products that incorporate new technology, such as our product candidates, will be eligible for coverage by commercial third-party payers and government payers or, if eligible for coverage, what the reimbursement rates will be for these product candidates. The fact that a product has been approved for reimbursement in the past, or has received FDAobtaining regulatory approval for ~~any particular indication~~SkinTE or in any particular jurisdiction, does not guarantee that such product will remain approved for reimbursement or that similar or additional products will be approved in the future. Reimbursement of our existing and future products by commercial third-party payers and government payers may depend on a number of factors, including a payer’s determination that our existing and future products are:

	●	~~not experimental or investigational;~~

	●	~~medically reasonable and necessary;~~

	●	~~appropriate for the specific patient;~~

	●	~~cost effective;~~

	●	~~supported by peer-reviewed publications;~~

	●	~~included in clinical practice guidelines and pathways; and~~

	●	~~supported by clinical utility and health economic studies demonstrating improved outcomes and cost effectiveness.~~

Market acceptance, sales of products based upon our platform technology, and our profitability may depend on reimbursement policies and healthcare reform measures. Several entities conduct technology assessments and provide the results of their assessments for informational purposes to other parties. These assessments may be used by third-party payers and healthcare providers as grounds to deny coverage for a product. The levels at which government authorities and third-party payers, such as private health insurers and health maintenance organizations, may reimburse the price patients pay for such products could affect whether we are able to commercialize our product candidates. Our product candidates may receive negative assessments that may impact our ability to receive reimbursement of the test. Since each payer makes its own decision as to whether to establish a policy to reimburse our test, seeking these approvals may be a time-consuming and costly process. We cannot be sure that reimbursement in the United States or elsewhere will be available for any of our product candidates in the future. If reimbursement is not available or is limited, we may not be able to commercialize our product candidates.

The United States and foreign governments continue to propose and pass legislation designed to reduce the cost of healthcare. We expect that there will continue to be federal and state proposals to implement governmental controls or impose healthcare requirements. In addition, the Medicare program and increasing emphasis on managed or accountable care in the United States will continue to put pressure on product utilization and pricing. Utilization and cost control initiatives could decrease the volume of orders and payment that we would receive for any products in the future, which would limit our revenue and profitability. If we are unable to obtain reimbursement approval from commercial third-party payers and Medicare and Medicaid programs for our product candidates, or if the amount reimbursed is inadequate, our ability to generate revenues could be limited.

We are subject to numerous federal and state healthcare laws regulations, and a failure to comply with such laws and regulations could have an adverse effect on our business and our ability to compete in the marketplace.

There are numerous laws and regulations that govern the means by which companies in the healthcare industry may market their treatments to healthcare professionals and may compete by discounting the prices of their treatments, including for example, the federal Anti-Kickback Statute, the federal False Claims Act (“FCA”), the federal Health Insurance Portability and Accountability Act of 1996 (“HIPAA”), and state law equivalents to these federal laws that are meant to protect against fraud and abuse and analogous laws in foreign countries. Violations of these laws are punishable by criminal and civil sanctions, including, but not limited to, in some instances civil and criminal penalties, damages, fines, and exclusion from participation in federal and state healthcare programs, including Medicare and Medicaid. In addition, federal and state laws are also sometimes open to interpretation. Accordingly, we could potentially face legal risks if our interpretation differs from those of enforcement authorities. Further, from time to time we may find ourselves at a competitive disadvantage if our interpretation differs from that of our competitors.

Specifically, anti-kickback laws and regulations prohibit any knowing and willful offer, payment, solicitation or receipt of any form of remuneration (direct or indirect, in case or in kind) in return for the referral, use, ordering, or recommending of the use of a product or service for which payment may be made by Medicare, Medicaid or other Government-sponsored healthcare programs. We have entered into consulting agreements, research agreements and product development agreements with physicians, including some who may order our products or make decisions to use them. In addition, some of these physicians own our stock, which they purchased in arm’s length transactions on terms identical to those offered to non-physicians, or received stock awards from us as consideration for services performed by them. While these transactions were structured with the intention of complying with all applicable laws, including state anti-referral laws and other applicable anti-kickback laws, it is possible that regulatory or enforcement agencies or courts may in the future view these transactions as prohibited arrangements that must be restructured or for which we would be subject to other significant civil or criminal penalties. There can be no assurance that regulatory or enforcement authorities will view these arrangements as being in compliance with applicable laws or that one or more of our employees or agents will not disregard the rules we have established. Because our strategy relies on the involvement of physicians who consult with us on the design of our potential products, perform clinical research on our behalf or educate the market about the efficacy and uses of our potential products, we could be materially impacted if regulatory or enforcement agencies or courts interpret our financial relationships with physicians who refer or order our potential products to be in violation of applicable laws and determine that we would be unable to ~~achieve compliance with such applicable laws. This could harm our reputation and the reputations~~continue operations over a longer term, any of the physicians we engage to provide services on our behalf. In addition, the cost of noncompliance with these laws could be substantial since we could be subject to monetary fines and civil or criminal penalties, and we could also be excluded from federally-funded healthcare programs, including Medicare and Medicaid, for non-compliance. Further, even the costs of defending investigations of noncompliance could be substantial.

Also, the FCA imposes civil liability on any person or entity that submits, or causes the submission of, a false or fraudulent claim to the federal government. Damages under the FCA can be significant and consist of the imposition of fines and penalties. The FCA also allows a private individual or entity (i.e., a whistleblower) with knowledge of past or present fraud against the federal government to sue on behalf of the government and to be paid a portion of the government’s recovery, which can include both civil penalties and up to three times the amount of the government’s damages (usually the amount reimbursed by federal healthcare programs). The U.S. Department of Justice (“DOJ”) on behalf of the government takes the position that the marketing and promotional practices of life sciences product manufacturers, including the off-label promotion of products, the provision of inaccurate or misleading reimbursement guidance, or the payment of prohibited kickbacks to doctors or other referral sources may cause the submission of improper claims to federal and state healthcare entitlement programs such as Medicare and Medicaid, by health care providers that use the manufacturer’s products, which results in a violation of the FCA. In certain cases, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea agreements, paid substantial monetary amounts and entered into corporate integrity agreements that require, among other things, substantial reporting and remedial actions going forward.

In addition, there has been a recent trend of increased federal and state regulation of payments made to physicians and other health care providers. In addition to federal laws, some states, such as California, Massachusetts and Vermont, mandate implementation of commercial compliance programs, along with the tracking and reporting of gifts, compensation and other remuneration to physicians. The shifting commercial compliance environment and the need to build and maintain robust and expandable systems to comply with different compliance and/or reporting requirements in multiple jurisdictions increase the possibility that a healthcare company may run afoul of one or more of the requirements.

The scope and enforcement of all of these laws is uncertain and subject to rapid change, especially in light of the lack of applicable precedent and regulations. There can be no assurance that federal or state regulatory or enforcement authorities will not investigate or challenge our current or future activities under these laws. Any investigation or challenge couldwould have a material adverse effect on our business, financial condition, and results of operations. Any state or federal regulatory or enforcement review of us, regardless of the outcome, would be costly and time consuming. Additionally, we cannot predict the impact of any changes in these laws, whether these changes are retroactive or will have effect on a going-forward basis only.operation.

We operate in a highly competitive and evolving field and face competition from regenerative medicine, biotech, and pharmaceutical companies, tissue engineering entities, tissue processors and medical device manufacturers, as well as new market entrants.

We operate in a very competitive and continually evolving field. Competition from other regenerative medicine, biotech, and pharmaceutical companies, tissue engineering entities, tissue processors, medical device companies and from research and academic institutions is intense, expected to increase, subject to rapid change, and could be significantly affected by new product introductions. In addition, consolidation in the healthcare industry continues to drive demands for price concessions or to the exclusion of some suppliers from certain of our markets, which could have an adverse effect on our business, results of operations or financial condition. Our failure to compete effectively would have a material and adverse effect on our business, results of operations and financial condition.

Specifically, we face significant competition in both the regenerative medicine and wound care space from multiple products, including Integra Bilayer Wound Matrix, EpiFix, Apligraf, Dermagraft, Grafix, Epicel, and others. Even if we obtain regulatory approval of our product candidates, the availability and price of our competitors’ products could limit the demand and the price we are able to charge for our product candidates. We may not be able to implement our business plan if the acceptance of our product candidates is inhibited by price competition or the reluctance of physicians to switch from existing methods of treatment to our product candidates, or if physicians switch to other new drug or biologic products or choose to reserve our product candidates for use in limited circumstances.

~~Our use of sensitive patient information is subject to complex regulations at multiple levels and we would be adversely affected if we fail to adequately protect this sensitive information.~~

We process, maintain and utilize personal health and other confidential and sensitive data. In particular, we have developed a web and mobile application through which our customers can communicate with physicians and others, which may involve sharing patient identifiable health information. The use and disclosure of such information is regulated at the federal, state and international levels, and these laws, rules and regulations are subject to change and increased enforcement activity, such as the audit program implemented by HHS under HIPAA. International laws, rules and regulations governing the use and disclosure of such information are generally more stringent than in the United States, and they vary from jurisdiction to jurisdiction. Noncompliance with any privacy or security laws or regulations, or any security breach, cyber-attack or cybersecurity breach, and any incident involving the theft, misappropriation, loss or other unauthorized disclosure of, or access to, sensitive or confidential information, whether by us or by another third party, could require us to expend significant resources to remediate any damage, interrupt our operations and damage our brand and reputation, and could also result in investigations, regulatory enforcement actions, material fines and penalties, loss of customers, litigation or other actions which could have a material adverse effect on our business, brand, reputation, cash flows and operating results.

Our business depends on provider and patient willingness to entrust us with health related and other sensitive personal information. Events that negatively affect that trust, including inadequate disclosure of our uses of their information, failing to keep our information technology systems and sensitive information secure from significant attack, theft, damage, loss or unauthorized disclosure or access, whether as a result of our action or inaction or that of third parties, could adversely affect our brand, reputation and revenues and also expose us to mandatory disclosure to the media, litigation (including class action litigation) and other enforcement proceedings, material fines, penalties and/or remediation costs, and compensatory, special, punitive and statutory damages, consent orders and/or injunctive relief, any of which could adversely affect our business, cash flows, operating results or financial position. There can be no assurance that any such failure will not occur, or if any does occur, that we will detect it or that it can be sufficiently remediated.

~~Many of our competitors have substantially greater resources than we do, and we expect that all of our product candidates will face intense competition from existing or future products.~~

All of our product candidates face intense competition from existing and future products marketed by large, well-established companies (including but not limited to Integra LifeSciences, Wright Medical Group, MiMedx, Osiris, Organogenesis, Allosource and Vericel). These competitors may successfully market products that compete with our product candidates, successfully identify product candidates or develop products earlier than we do, or develop products that are more effective or cost less than our products. These competitive factors could require us to conduct substantial new research and development activities to establish new product targets, which would be costly and time consuming. These activities would adversely affect our ability to effectively commercialize products and achieve revenue and profits.

~~We depend heavily on our senior management and we may be unable to replace key executives if they leave.~~

The loss of the services of one or more members of our senior management team or our inability to attract, retain and maintain additional senior management personnel could harm our business, financial condition, results of operations and future prospects. Our operations and prospects depend in large part on the performance of our senior management team, particularly Dr. Denver Lough, our Chief Executive Officer and Chief Scientific Officer. In addition, we may not be able to find qualified replacements if his services are no longer available. We do not presently maintain “key-man” life insurance on any of our executives or key employees.

Many executive officers and employees in the regenerative medicine business are subject to strict non-compete or confidentiality agreements with their employers, which would limit our ability to recruit them to join our company. In addition, some of our existing and future employees are or may be subject to confidentiality agreements with previous employers. Our competitors may allege breaches of and seek to enforce such non-compete agreements or initiate litigation based on such confidentiality agreements. Such litigation, whether or not meritorious, may impede our ability to hire executive officers and other key employees who have been employed by our competitors and may result in intellectual property claims against us.

~~Certain key members of our management team may be subject to conflicts of interest.~~

Certain members of our management team have full or part-time interests outside of our business, including employment at other institutions. Such management team members may face conflicts of interest, including conflicts in allocating time and the ability to present research and business opportunities learned in the scope of other positions. These conflicts could result in unanticipated actions that adversely affect us. Currently, we have no policy in place to address such conflicts of interest. In addition, many universities and medical institutions have policies that apply to faculty members’ activities outside the scope of their employment at the university and medical institution. We do not independently review all of these policies or monitor our executive’s compliance with these types of third party policies and policies of former employers of our executives. Instead, we rely on representations made by the executive and periodic confirmations from the executive that he or she is in compliance with PolarityTE’s employment policies.

If serious adverse or inappropriate side effects are identified during the development of our product candidates or with any procedures with which our product candidates are used, we may need to abandon or limit our development of those product candidates.

None of our product candidates has been proven effective or safe in humans. It is impossible to predict when or if any of our product candidates will prove effective or safe in humans or, to the extent required, will receive marketing approval. If our product candidates are associated with undesirable side effects or have characteristics that are unexpected, we may need to abandon their development or limit development to certain uses or subpopulations in which the undesirable side effects or other characteristics are less prevalent, less severe or more acceptable from a risk-benefit perspective. In addition, if any of the procedures with which our product candidates are used is determined to be unsafe, we may be required to delay, alter, or abandon our product development or commercialization.

~~We rely on third parties to assist in the development of our product candidates.~~

Our research and development relies upon the efforts and support of third parties over which we have little or no control. Accordingly, we may be subject to significant delays from third parties on which we rely or may rely, including but not limited to clinical research organizations, academic institutions, and/or other research collaborators, related to a variety of factors including but not limited to contract negotiations, funding, preparing research protocols, and identifying appropriate investigators.

~~We intend to, but may not be successful in, establishing and maintaining strategic partnerships.~~

We intend to enter into strategic partnerships in the future to enhance and accelerate the development and commercialization of our proposed products. We may rely on such partnerships to assist in launching, marketing and developing our product candidates. However, we may face significant competition in seeking appropriate strategic partners and the negotiation process is time-consuming and complex. Moreover, we may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for any future proposed products and programs because our research and development pipeline may be insufficient, our proposed products and programs may be deemed to be at too early of a stage of development for collaborative effort and/or third parties may not view our product candidates and programs as having the requisite potential to demonstrate safety and efficacy (or other requirements or goals that potential strategic partners may seek). Even if we are successful in our efforts to establish strategic partnerships, the terms that we agree upon may not be favorable to us and we may not be able to maintain such strategic partnerships if, for example, development or approval of a product candidate is delayed or sales of an approved and/or registered product are disappointing.

~~Rapid technological change could cause our business to become obsolete.~~

The technologies underlying our product candidates are subject to rapid and profound technological change. Competition intensifies as technical advances in each field are made and become more widely known. We can give no assurance that others will not develop services, products, or processes with significant advantages over the products, services, and processes that we offer or are seeking to develop. Any such occurrence could have a material and adverse effect on our business, results of operations and financial condition.

~~The success of any of our product candidates or enhancements to an existing product will depend on numerous factors, including our ability to:~~

	●	~~properly identify and anticipate physician and patient needs;~~

	●	~~develop and introduce enhancements in a timely manner;~~

	●	~~adequately protect our intellectual property and avoid infringing upon the intellectual property rights of third parties;~~

	●	~~demonstrate safety and efficacy in humans; and~~

	●	~~obtain the necessary regulatory clearances, registrations, or approvals.~~

If we do not develop and, when necessary, obtain regulatory clearance, registration, or approval for product candidates or product enhancements in time to meet market demand, or if there is insufficient demand for these products or enhancements, our results of operations will suffer. Our research and development efforts may require a substantial investment of time and resources before we are adequately able to determine the commercial viability of a new product, technology, material or other innovation. In addition, even if we are able to successfully develop enhancements or new generations of our product candidates, these enhancements or new generations of product candidates may not produce sales in excess of the costs of development and they may be quickly rendered obsolete by changing customer preferences or the introduction by our competitors of product candidates embodying new technologies or features.

~~To be commercially successful, we must convince physicians that our treatments are safe and effective alternatives to existing treatments and that our treatments should be accepted and used.~~

We believe physicians will only adopt our treatment if they determine, based on experience, clinical data and published peer reviewed journal articles, that the use of our treatment is a favorable alternative to existing and conventional methods, including but not limited to skin grafting. Physicians may be slow to change their medical treatment practices for the following reasons, among others:

	●	~~lack of evidence supporting additional patient benefits from our treatments over existing and conventional methods;~~

	●	~~perceived liability risks generally associated with the use of new procedures and general resistance to change; and~~

	●	~~limited availability or amounts of reimbursement from third-party payers.~~

In addition, while acceptance by the medical community may be fostered by broad evaluation via peer-reviewed literature, we may not have the resources to facilitate sufficient publication. We also believe that recommendations for, and support of our treatments by, influential physicians are essential for market acceptance and adoption. If we do not obtain this support or are unable to demonstrate favorable long-term clinical data, physicians and hospitals may not use our treatments, which would have a material and adverse effect on our result of operations and prospects.

~~If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to sell and market our product candidates we may not be successful in commercializing them.~~

We do not have a sales or marketing infrastructure and have no experience in the sale, marketing or distribution of potential products. To achieve commercial success for any product candidate, we must either develop a sales and marketing team or outsource these functions to third parties. We also plan to recruit appropriate sales and marketing resources for countries or regions of countries in which we determine to commercialize our product candidates on our own, if any.

There are risks involved both with establishing our own sales and marketing capabilities and entering into arrangements with third parties to perform these services. For example, recruiting and training a sales force is expensive and time consuming and could delay any product launch. If the commercial launch of SkinTE, OsteoTE or another product candidate for which we recruit a sales force and establish marketing capabilities is delayed or does not occur for any reason, we would have prematurely or unnecessarily incurred these commercialization expenses. This may be costly, and our investment would be lost if we cannot retain or reposition our sales and marketing personnel.

If we enter into arrangements with third parties to perform sales, marketing and distribution services, our product revenues or the profitability of these product revenues to us are likely to be lower than if we were to market and sell any products ourselves. In addition, we may not be successful in entering into arrangements with third parties to sell and market our potential products or may be unable to do so on terms that are favorable to us. We likely will have limited control over such third parties, and any of them may fail to devote the necessary resources and attention to sell and market our potential products effectively and in compliance with applicable laws.

~~Significant disruptions of information technology systems or breaches of information security could adversely affect our business.~~

We rely to a large extent upon sophisticated information technology systems to protect our intellectual property and to operate our business. In the ordinary course of business, we collect, store and transmit large amounts of confidential information (including, but not limited to, our trade secrets and data, personal information, and intellectual property). The size and complexity of our information technology and information security systems make such systems potentially vulnerable to service interruptions or to security breaches from inadvertent or intentional actions by our employees or vendors, or from malicious attacks by third parties. Such attacks are of ever-increasing levels of sophistication and are made by groups and individuals with a wide range of motives (including, but not limited to, industrial espionage and market manipulation) and expertise. There can be no assurance that our efforts to protect our data and related information technology and intellectual property will prevent service interruptions or security breaches. Any interruption or breach in our systems could adversely affect our business operations and/or result in the loss of critical or sensitive confidential information or intellectual property, and could result in financial, legal, business and reputational harm to us or allow third parties to gain material, inside information that they use to trade in our securities.

~~We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance.~~

Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, processing and marketing of human cellular and tissue-based products. We may be subject to such claims if our product candidates cause, or appear to have caused, an injury during clinical trials or after commercialization. Claims may be made by patients, healthcare providers or others selling our product candidates. Defending a lawsuit, regardless of merit, could be costly, divert management attention and result in adverse publicity, which could result in the withdrawal of, or reduced acceptance of, our product candidates in the market.

Although we have obtained product liability insurance, such insurance is subject to deductibles and coverage limitations and we may not be able to maintain this insurance. Also, it is possible that claims could exceed the limits of our coverage. If we are unable to obtain or maintain product liability insurance at an acceptable cost or on acceptable terms with adequate coverage or otherwise protect ourselves against potential product liability claims or we underestimate the amount of insurance we need, we could be exposed to significant liabilities, which may harm our business. A product liability claim or other claim with respect to uninsured liabilities or for amounts in excess of insured liabilities could result in significant costs and significant harm to our business.

~~We may implement a product recall or voluntary market withdrawal, which could significantly increase our costs, damage our reputation and disrupt our business.~~

The manufacturing, marketing and processing of our product candidates involves an inherent risk that our tissue products or processes do not meet applicable quality standards and requirements. In that event, we may voluntarily implement a recall or market withdrawal or may be required to do so by a regulatory authority. A recall or market withdrawal of one of our product candidates would be costly and would divert management resources. A recall or withdrawal of one of our product candidates, or a similar product processed by another entity, also could impair sales of our product candidates as a result of confusion concerning the scope of the recall or withdrawal, or as a result of the damage to our reputation for quality and safety.

~~Our limited public company experience may adversely impact our ability to comply with the reporting requirements of the U.S. securities laws.~~

We have limited experience operating as a public company. As a public company, we are required to establish and maintain disclosure controls and procedures and internal control over financial reporting. Our limited public company experience could impair our ability to comply with legal and regulatory requirements such as those imposed by Sarbanes-Oxley Act of 2002. Such responsibilities include complying with federal securities laws and making required disclosures on a timely basis. We may not be able to implement programs and policies in an effective and timely manner that adequately respond to such increased legal, regulatory compliance and reporting requirements, including the establishing and maintaining internal controls over financial reporting. Any such deficiencies, weaknesses or lack of compliance could have a materially adverse effect on our ability to comply with SEC reporting requirements, which may be necessary in the future to maintain our public company status. If we were to fail to fulfill those obligations, our ability to continue as a public company would be in jeopardy.

If we fail to maintain proper and effective internal control over financial reporting in the future, our ability to produce accurate and timely financial statements could be impaired, which could harm our operating results.

Pursuant to Section 404 of the Sarbanes-Oxley Act, our management is required to report upon the effectiveness of our internal control over financial reporting. When and if we are a “large accelerated filer” or an “accelerated filer” and are no longer a “smaller reporting company,” each as defined in the Exchange Act, our independent registered public accounting firm will be required to attest to the effectiveness of our internal control over financial reporting. However, for so long as we remain a smaller reporting company, we intend to take advantage of certain exemptions from various reporting requirements that are applicable to smaller reporting companies, including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404. Once we are no longer a smaller reporting company or, if prior to such date, we opt to no longer take advantage of the applicable exemption, we will be required to include an opinion from our independent registered public accounting firm on the effectiveness of our internal controls over financial reporting. The rules governing the standards that must be met for management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. To comply with the requirements of being a reporting company under the Exchange Act, we need to upgrade our systems including information technology; implement additional financial and management controls, reporting systems, and procedures; and ensure we have hired sufficient accounting and finance staff.

We have identified a material weakness in our internal control over financial reporting. If our remedial measures are insufficient to address the material weakness, or if we otherwise fail to establish and maintain an effective system of internal control over financial reporting, we may not be able to accurately report our financial results, timely file our periodic reports, maintain our reporting status or prevent fraud.

At times we have not had sufficient accounting and supervisory personnel with the appropriate level of technical accounting experience and training necessary or adequate formally documented accounting policies and procedures to support, effective internal controls. As we grow, we will hire additional personnel and engage in external temporary resources and may implement, document and modify policies and procedures to maintain effective internal controls. However, we may identify deficiencies and weaknesses or fail to remediate previously identified deficiencies in our internal controls. If material weaknesses or deficiencies in our internal controls exist and go undetected or un-remediated, our financial statements could contain material misstatements that, when discovered in the future, and our operating results could be material impacted and we could fail to meet our future reporting obligations.

If we discover additional material weaknesses or other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult.

Our management team has supervised the completion of the first full audit of our financial statements for the year ending October 31, 2017. A material weakness was identified related to a lack of processes in place to address personnel changes and controls over the Company’s process of accounting for stock-based compensation, which resulted in a failure to ensure the completeness of stock options and restricted stock grants in the Company’s calculation of stock-based compensation expense. If we fail to comply with the rules under the Sarbanes-Oxley Act of 2002 related to disclosure controls and procedures, or, if we fail to timely remediate the material weakness or other deficiencies in our internal control and accounting procedures, our stock price could decline significantly and raising capital could be more difficult. Moreover, effective internal controls are necessary for us to produce reliable financial reports and are important to helping prevent financial fraud. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed, investors could lose confidence in our reported financial information, and the trading price of our common stock could drop significantly. In addition, we cannot be certain that material weaknesses or significant deficiencies in our internal controls will not be discovered in the future.

~~We may not be able to effectively control and manage our growth.~~

Our strategy envisions a period of potentially rapid growth. We currently maintain minimal administrative and other personnel due to the startup nature of our business, and our expected growth may impose a significant burden on our future planned administrative and operational resources. The growth of our business may require significant investments of capital and increased demands on our management, workforce and facilities. We will be required to substantially expand our administrative and operational resources and attract, train, manage and retain qualified management and other personnel. Failure to do so or to satisfy such increased demands would interrupt or would have a material adverse effect on our business and results of operations.

~~Our results may fluctuate significantly as a result of a variety of factors, many of which are outside of our control.~~

~~We are subject to the following factors, among others, that may negatively affect our operating results:~~

	●	~~the announcement or introduction of new products by our competitors;~~

	●	~~failure of government and private health plans to adequately and timely reimburse the users of our potential products;~~

	●	~~our ability to upgrade and develop our systems and infrastructure to accommodate growth;~~

	●	~~the continued availability of Dr. Denver Lough and other key executives and our ability to attract and retain additional key personnel in a timely and cost-effective manner;~~

	●	~~the amount and timing of operating costs and capital expenditures relating to the expansion of our business, operations and infrastructure;~~

	●	~~regulation by federal, state or local governments and government agencies; and/or~~

	●	~~general economic conditions as well as economic conditions specific to the healthcare industry.~~

~~The change in value of our derivative liabilities could have a material effect on our financial results.~~

Included on our balance sheet at October 31, 2017 are derivative liabilities related to embedded features bifurcated from our preferred stock and certain warrant contracts. At each reporting period, we are required to determine the fair value of such derivatives and record the fair value adjustments as non-cash unrealized gains or losses. The share price of our common stock represents the primary underlying variable that impacts the value of the derivative instruments. Additional factors that impact the value of the derivative instruments include the volatility of our stock price, our credit rating, discount rates, and stated interest rates. Due to the volatile nature of our share price, we expect that we will recognize non-cash gains or losses on our derivative instruments each reporting period and that the amount of such gains or losses could be material.

We may increasingly become a target for public scrutiny, including complaints to regulatory agencies, negative media coverage, including social media and malicious reports, all of which could severely damage our reputation and materially and adversely affect our business and prospects.

We focus on the research and development (including through preclinical, animal testing) of therapies used in the regenerative medicine and wound care space, and such therapies may be the subject of regulatory, watchdog and media scrutiny and coverage, which also raise the possibility of heightened attention from the public, the media and our participants. From time to time, these objections or allegations, regardless of their veracity, may result in public protests or negative publicity, which could result in government inquiry or harm our reputation. Corporate transactions we or related parties undertake may also subject us to increased media exposure and public scrutiny. There is no assurance that we would not become a target for public scrutiny in the future or such scrutiny and public exposure would not severely damage our reputation as well as our business and prospects.

~~Risks Related to Our Intellectual Property~~

We do not currently own any issued patents and our ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate, which could have a material and adverse effect on us.

Our success depends significantly on our ability to protect our proprietary rights in technologies that presently consist of trade secrets and patent applications. We currently have no issued patents relating to any of our product candidates. We intend to expand our patenting activities and rely on patent protection, as well as a combination of copyright, trade secret and trademark laws and nondisclosure, confidentiality and other contractual restrictions to protect our proprietary technology, and there can be no assurance these methods of protection will be effective. These legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive advantage. In addition, our presently pending patent applications include claims to material aspects of our activities that are not currently protected by issued patents. The patent application process can be time consuming and expensive. We cannot ensure that any of the pending patent applications we acquire, have acquired, or may file will result in issued patents. Competitors may be able to design around our patents or develop procedures that provide outcomes that are comparable or even superior to ours. We also cannot assure you that the inventors of the patents and applications that we expect to own or license were the first-to-invent or the first-inventor-to-file on the inventions, or that a third party will not claim ownership in one of our patents or patent applications. We cannot assure you that a third party does not have or will not obtain patents that could preclude us from practicing the patents we own or license now or in the future.

The failure to obtain and maintain patents and/or protect our intellectual property rights could have a material and adverse effect on our business, results of operations, and financial condition. We cannot be certain that, if challenged, any patents we ultimately obtain would be upheld because a determination of the validity and enforceability of a patent involves complex issues of fact and law. If one or more of any patents we obtain is invalidated and/or held unenforceable, such an outcome could reduce or eliminate any competitive advantage we might otherwise have had.

In the event a competitor infringes upon any patent we obtain, or a third party including but not limited to a university or other research institution, makes a claim of ownership over our patents or other intellectual property rights, confirming, defending or enforcing those rights may be costly, uncertain, difficult, and time consuming.

There can be no assurance that a third party, including but not limited to a university or other research institution that our founders were associated with in the past, will not make claims to ownership or other claims related to our technology. We believe we have developed our technology outside of any institutions, but we cannot guarantee such institutions would not assert a claim to the contrary. Even if successful, litigation to enforce or defend our intellectual property rights could be expensive and time consuming, and could divert our management’s attention. Further, bringing litigation to enforce our future patent(s) subjects us to the potential for counterclaims. In the event that one or more of our future patents is challenged in U.S. and/or foreign courts or the United States Patent and Trademark Office (“USPTO”) and/or foreign patent offices, the patent(s) may be found invalid and/or unenforceable, which could harm our competitive position. If any court or any patent office ultimately cancels or narrows the claims in any of our future patents through any pre- or post-grant patent proceedings, such an outcome could prevent or hinder us from being able to enforce the patent against competitors. Such adverse decisions could negatively affect our future, expected revenue.

~~We may be subject to claims that our employees have wrongfully appropriated, used, or disclosed intellectual property of their former employers.~~

We employ individuals who were previously employed by other companies, universities and/or other academic institutions. We may be subject to claims that we or our employees have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary information, of a prior employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees. Any of the foregoing could have an adverse impact on our business, financial condition, results of operations, and cash flows.

We may be subject to claims that former or current employees, collaborators, or other third parties have an interest in our patents or other intellectual property as an inventor or co-inventor. Litigation may be necessary to defend against any claims challenging inventorship. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction to management and other employees.

If we are unable to protect the confidentiality of our proprietary information and know-how related to any of our product candidates, our competitive position would be impaired and our business, financial condition and results of operations could be adversely affected.

Some of our technology, including our knowledge regarding the processing of our product candidates, is unpatented and is maintained by us as trade secrets. In an effort to protect these trade secrets, the information is restricted to our employees, consultants, collaborators and advisors on a need-to-know basis only. In addition, we require our employees, consultants, collaborators and advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that all confidential information developed by the individual or made known to the individual by us during the course of the individual’s relationship with us be kept confidential and not disclosed to third parties. These agreements, however, do not ensure protection against improper use or disclosure of confidential information, and these agreements may be breached. A breach of confidentiality could affect our competitive position. In addition, in some situations, these agreements and other obligations of our employees to assign intellectual property to the Company may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators or advisors have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information and techniques or otherwise gain access to our trade secrets.

Adequate remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets would impair our competitive position and could have a material adverse effect on our business, financial condition and results of operations.

We may become subject to claims of infringement of the intellectual property rights of others, which could prohibit us from developing our treatment, require us to obtain licenses from third parties or to develop non-infringing alternatives, and subject us to substantial monetary damages. We have not obtained and do not intend to obtain any legal opinion with regard to our freedom to practice our technology.

Third parties could assert that our processes, product candidates or technology infringe their patents or other intellectual property rights. Whether a process, product or technology infringes a patent or other intellectual property involves complex legal and factual issues, the determination of which is often uncertain. We cannot be certain that we will not be found to have infringed the intellectual property rights of others. Because patent applications may remain unpublished for certain periods of time and may take years to be issued as patents, there may be applications now pending of which we are unaware and/or that do not currently contain claims of concern that may later result in issued patents that our product candidates, procedure or processes will infringe. There may be existing patents that our product candidates, procedures or processes infringe, of which infringement we are not aware. Third parties could also assert ownership over our intellectual property. Such an ownership claim could cause us to incur significant costs to litigate the ownership issues. If an ownership claim by a third party were upheld as valid, we may be unable to obtain a license from the third party on acceptable terms, to continue to make, use, or sell technology free from claims by that third party of infringement of the third party’s intellectual property. We have not obtained and do not intend to obtain any legal opinion with regard to our freedom to practice our technology at this time.

If we are unsuccessful in actions we bring against the patents of other parties, and it is determined that we infringe upon the patents of third parties, we may be subject to injunctions, or otherwise prevented from commercializing potential products and/or services in the relevant jurisdiction, or may be required to obtain licenses to those patents or develop or obtain alternative technologies, any of which could harm our business. Furthermore, if such challenges to our patent rights are not resolved in our favor, we could be delayed or prevented from entering into new collaborations or from commercializing certain product candidates and/or services, which could adversely affect our business and results of operations.

~~If we are successful in obtaining patent protection, we may not be able to enforce those patent rights against third parties.~~

~~Successful challenge of any future patents such as through opposition, reexamination,~~~~inter partes~~ review, interference, or derivation proceedings could result in a loss of patent rights in the relevant jurisdiction. Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential or sensitive information could be compromised by disclosure in the event of litigation. In addition, during the course of litigation there could be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts or investors perceive these results to be negative, it could have a substantial adverse effect on the price of our common stock.

~~We may not be able to protect our intellectual property in countries outside of the United States.~~

Intellectual property law outside the United States is uncertain and, in many countries, is currently undergoing review and revisions. The laws of some countries do not protect patent and other intellectual property rights to the same extent as United States laws. Third parties may challenge our patents in foreign countries by initiating proceedings including pre- and post-grant oppositions, and invalidation proceedings. Developments during opposition or invalidation proceedings in one country may directly or indirectly affect a corresponding patent or patent application in another country in an adverse manner. It may be necessary or useful for us to participate in proceedings to determine the validity of our patents or our competitors’ patents that have been issued in countries other than the United States. This could result in substantial costs, divert our efforts and attention from other aspects of our business, and could have a material adverse effect on our results of operations and financial condition.

~~Risks Related to Registration and/or Regulatory Approval of Our Product Candidates and Other Government Regulations~~

Our business is subject to continuing regulatory oversight by the FDA and other authorities, compliance with whose requirements is costly, and our failure to comply could result in negative effects on our business.

The FDA has specific regulations governing human cell, tissue, and cellular and tissue-based products, commonly known as “HCT/Ps”. The FDA has broad post-market and regulatory and enforcement powers. The FDA’s regulation of HCT/Ps includes requirements for registration and listing of products, donor screening and testing, processing and distribution (“Current Good Tissue Practices”), labeling, record keeping, adverse-reaction reporting, and inspection and enforcement.

We believe that our current product candidates are appropriately regulated under Section 361 of the Public Health Service Act (so-called “361 HCT/Ps”) and that as a result no premarket review or approval by the FDA is required. If the FDA does not agree that one or more of our HCT/P products meet its regulatory criteria for regulation solely as 361 HCT/Ps, our product candidates will be regulated as drugs, devices, and/or biological products, and we could be required to withdraw those potential products from the market until the required clinical trials are complete and the applicable premarket regulatory clearances or approvals are obtained.

In addition, other products we may develop may not be 361 HCT/Ps. As result, those product candidates would be subject to additional regulatory requirements, including premarket approval or clearance. Even if pre-market clearance or approval is obtained, the approval or clearance may place substantial restrictions on the indications for which the product(s) may be marketed or to whom the product(s) may be marketed, and may require warnings to accompany the product or impose additional restrictions on the sale and/or use of the product. In addition, regulatory approval is subject to continuing compliance with regulatory standards, including the FDA’s current good manufacturing practice (cGMP) or quality system regulations and adverse event reporting regulations.

~~If we fail to comply with the FDA regulations regarding our products and manufacturing processes, the FDA could take enforcement action, including, without limitation, any of the following sanctions:~~

	●	~~Untitled letters, warning letters, fines, injunctions, consent decrees, product seizures, and/or civil penalties;~~

	●	~~Operating restrictions, partial suspension or total shutdown of clinical studies, manufacturing, marketing, or distribution;~~

	●	~~Refusing requests for clearance or approval of new products, processes, or procedures, or for certificates or approval to enable export of the same;~~

	●	~~Withdrawing or suspending current applications for approval or clearance, or any approvals or clearances already granted; and~~

	●	~~Civil or criminal prosecution.~~

It is likely that the FDA’s regulation of 361 HCT/Ps and other types of products (e.g., drugs, devices, and/or biologics) will continue to evolve in the future. Complying with any such new regulatory requirements, guidance or statutes may entail significant time delays and expense, which could have a material adverse effect on our business. While the FDA may issue new or revised guidance or regulations for 361 HCT/Ps, we do not know whether or when such revised draft or final guidance or regulations (if any) will be issued, the scope of such guidance, any new rules or regulations, whether they will apply to our technologies or products, or whether they will be advantageous or disadvantageous to us. In addition, even if it does not issue new regulations or guidance, FDA could in the future adopt more restrictive interpretations of existing regulations or increase its enforcement activity, which may adversely affect our business.

We believe our current product candidates, including the FDA-registered SkinTE product, satisfy applicable criteria for regulation as a 361 HCT/P and are therefore exempt from FDA requirements for premarket approval or clinical studies. If the FDA disagrees with our interpretation of the relevant laws and regulations as they apply to our product candidates, and requires an Investigational New Drug application (“IND”) or Investigational Device Exemption application (“IDE”) for any of our product candidates, we may need to delay, abandon, or revise our current development plans, discontinue ongoing marketing, and/or recall products. The submission of an IND, Biologics License Applications (“BLA”), New Drug Application (“NDA”), or other medical device clearance or approval application would require us to compile significant amounts of data related to our regulatory process, as well as data from preclinical and/or clinical testing. We cannot guarantee that we will ever be able to secure such approvals if required. Even if such approvals are obtained, regulation as a drug, biologic, or medical device would subject us to additional FDA postmarketing requirements that are complex and involve substantial expense, such as compliance with drug, biologic, or medical device current Good Manufacturing Practice or quality system requirements.

The FDA regulates HCT/Ps under a two-tiered framework. Certain higher risk HCT/Ps are regulated as new drugs, biologics or medical devices. Manufacturers of new drugs, biologics and some medical devices must complete extensive clinical trials, which must be conducted pursuant to an effective IND or IDE. In addition, the FDA must review and approve a BLA or NDA before a new drug or biologic may be marketed. For most medical devices, including novel or high-risk medical devices, FDA must approve a premarket approval application (“PMA”) or grant clearance to a premarket notification (“510(k)”) application prior to marketing of the device.

By contrast, the FDA exempts 361 HCT/Ps from these requirements if they meet certain specified criteria. We believe that our current product candidates, including SkinTE, meet the criteria for regulation as a 361 HCT/P rather than as a new drug or biologic or medical device and, therefore, we do not currently expect that any of our current product candidates will be subject to the requirement for an IND or IDE or FDA premarket review and approval. Thus, our financial and business plans assume that we will not need to seek or obtain premarket FDA approval or clearance for our product candidates. Rather, we will have to comply with the requirements for 361 HCT/Ps set forth in FDA regulations and develop adequate substantiation to support marketing claims we plan to make.

The Tissue Reference Group (“TRG”) is a body within the FDA designed to provide recommendations regarding whether a particular product candidate will be regulated as a 361 HCT/P. The Office of Combination Products (“OCP”) at FDA provides informal and formal opinions regarding the classification of products as 361 HCT/Ps or drugs, biologics, or medical devices. Product manufacturers are not required to consult with the TRG or OCP and instead can market their products based on their own conclusion that the product meets the 361 HCT/P criteria.

~~We have not consulted the OCP or TRG. We continue to believe that our product candidates qualify as 361 HCT/Ps; however, the FDA could disagree with our conclusion.~~

The regulatory pathway for cell and tissue-based products is subject to significant uncertainty. The FDA’s criteria for regulation as a 361 HCT/P are complex, and the FDA has not provided comprehensive guidance on the meaning of certain terms used in the criteria, such as “minimal manipulation,” “homologous,” or “combination of the cells and tissues with another article.” In addition, our product candidates, including SkinTE, use new technology that may present a matter of first impression for the FDA in determining whether to require premarket authorization. Further, our product candidates may receive a high degree of scrutiny from the FDA. The FDA or Congress could change the relevant criteria or interpretations for determining which products qualify as 361 HCT/Ps or the regulatory requirements for HCT/Ps.

Additionally, it may be difficult to convince the courts to overturn any adverse decisions made against us by the FDA. Courts have recognized the longstanding principle that the FDA’s decisions on scientific matters, including the agency’s conclusion that a tissue processing procedure involves more than minimal manipulation, are entitled to substantial deference. This means that if the FDA disagrees with our conclusion that any of our product candidates should be regulated as a 361 HCT/P, and not as a new biologic, drug, or medical device, it may be very difficult to challenge the agency’s position in court.

Even if the FDA regulates our product candidates, including SkinTE, as 361 HCT/Ps, we must still generate adequate substantiation for any claims we will make in our marketing. Failure to establish such adequate substantiation in the opinion of federal or state authorities could substantially impair our ability to generate revenue.

Although as 361 HCT/Ps, we may not need to submit our product candidates to the FDA for premarket approval or be subject to FDA requirements for labeling or promotion of new drugs, biologics, or medical devices, we still must generate adequate substantiation for claims we make in our marketing materials. Both the Federal Trade Commission (“FTC”) and the states retain jurisdiction over the marketing of 361 HCT/Ps (and other) products in commerce and require a reasonable basis for claims made in marketing materials. Through our planned preclinical and clinical studies, as well as other endeavors, we intend to generate such adequate substantiation for any claims we make about our product candidates. If, however, after we commence marketing of any of our product candidates, including SkinTE, the FTC or one or more states conclude that we lack adequate substantiation for our claims, we may be subject to significant penalties and/or may be forced to alter our marketing of our product candidates in one or more jurisdictions. Any of this could materially harm our business. In addition, if our promotion of any of our product candidates suggests that the HCT/P is not intended for homologous use, the FDA might consider the product to be a new drug, biologic, or medical device. We will therefore be limited in the promotional claims that we can make about our product candidates.

~~Any changes in the governmental regulatory classifications of our product candidates could prevent, limit or delay our ability to market or develop our product candidates.~~

The FDA establishes regulatory requirements based on the classification of a product. An HCT/P is a product containing or consisting of human cells or tissue intended for transplantation into a human patient. 361 HCT/Ps are not subject to any premarket clearance or approval requirements and are subject to less extensive post-market regulatory requirements. Because our product development programs are designed to satisfy the standards applicable to 361 HCT/Ps, any change in the regulatory classification or designation of our products would affect our ability to obtain FDA approval or clearance for and marketing of our product candidates.

If a product candidate is deemed not to be a 361 HCT/P, FDA regulations will require premarket clearance or approval requirements that will involve significant time and cost investments by us. Further, there can be no assurance that the FDA will not, at some future point, change its position on current or future products’ 361 HCT/P status, and any regulatory reclassification could have adverse consequences for us and make it substantially more difficult or expensive for us to conduct our business by requiring extensive clinical trials, premarket clearance or approval and compliance with additional post-market regulatory requirements with respect to those product candidates. Moreover, increased regulatory scrutiny within the industry in which we operate could lead to increased regulation of HCT/Ps, including 361 HCT/Ps. We also cannot assure you that the FDA will not impose more stringent interpretations, restrictions, or requirements with respect to products that qualify as 361 HCT/Ps.

Even if we successfully launch any product candidate, it will be subject to ongoing regulation. We could be subject to significant penalties if we fail to comply with these requirements, and we may be unable to commercialize our product candidates.

Even if the FDA does not object to the marketing of any of our product candidates as a 361 HCT/P and, therefore, without an NDA, BLA, PMA, or 510(k), we will still be subject to numerous post-market requirements, including those related to registration and listing, record keeping, labeling, current good tissue practices, or cGTPs, donor eligibility, deviation and adverse event reporting, and other activities. HCT/Ps that do not meet the definition of a 361 HCT/P and, therefore, are required to be approved or cleared via an NDA, BLA, PMA, or 510(k) are also subject to these and/or additional obligations. If we fail to comply with these requirements, we could be subject to, without limitation, warning letters, product seizures, injunctions or civil and criminal penalties. We are currently relying on a third-party cGTP-compliant facility to conduct the various steps involved in our process. In the future, we plan to establish our own processing facility, which will need to be cGTP compliant. Any failure by us or the third-party facility on which we rely to maintain cGTP compliance would require remedial actions, which could potentially include actions such as product recalls or delays in distribution and sales of our product candidates, including SkinTE, as well as enforcement actions.

Moreover, even if the FDA allows any product candidate of ours to be marketed without premarket authorization, the FDA could still seek to withdraw the product from the market for a variety of reasons, including if the agency develops concerns regarding the safety or efficacy of the product or the product’s manufacturing process.

~~We face significant uncertainty in the industry due to government healthcare reform.~~

There have been and continue to be proposals by the federal government, state governments, regulators and third-party payers to control healthcare costs (including but not limited to capitation – the generalized cap on annual fees for a type of service or procedure such as burn or wound care or rehabilitation), and generally, to reform the healthcare system in the United States. There are many programs and requirements for which the details have not yet been fully established or the consequences are not fully understood. These proposals may affect aspects of our business. We also cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or what impact they may have on us.

~~Risks Related to Our Manufacturing~~

Failure by our third-party manufacturers, including Cell Therapy and Regenerative Medicine, to comply with the regulatory guidelines set forth by the FDA with respect to our product candidates could delay or prevent the completion of market entry, clinical trials, the approval and/or registration of any product candidates, or the commercialization of our product candidates.

Third-party manufacturers, such as Cell Therapy and Regenerative Medicine (“CTRM”) at the University of Utah School of Medicine, are subject to regulation and inspection by the FDA for current Good Tissue Practice, or cGTP, and/or current Good Manufacturing Practice, or cGMP, compliance before they can produce commercial product. We may be in competition with other companies for access to these manufacturers’ facilities and may be subject to delays in manufacture if the manufacturers give other clients higher priority than they give to us. If we are unable to secure and maintain third-party manufacturing capacity, the development and sales of our product candidates and our financial performance may be materially affected.

Manufacturers are obligated to operate in accordance with FDA-mandated requirements. A failure of any of our third-party manufacturers to establish and follow cGTP and/or cGMP requirements, if applicable, and to document their adherence to such practices may lead to significant delays in the availability of material for clinical trials, may delay or prevent filing or approval of marketing applications for our product candidates, if applicable, and may cause delays or interruptions in the availability of our product candidates for commercial distribution. This could result in higher costs to us or deprive us of potential product revenues.

Complying with cGTP and/or cGMP and non-U.S. regulatory requirements will require that we expend time, money, and effort in production, recordkeeping, and quality control to assure that the product meets applicable specifications and other requirements. For any products for which we are required to obtain FDA pre-market approval, we, or our contracted manufacturing facility, must also pass a pre-approval inspection prior to FDA approval. Failure to pass a pre-approval inspection may significantly delay FDA approval of our product candidates. If we fail to comply with these requirements, we would be subject to possible regulatory action and may be limited in the jurisdictions in which we are permitted to sell our product candidates. As a result, our business, financial condition, and results of operations may be materially harmed.

The manufacture of cell and tissue-based therapy products is characterized by inherent risks and challenges and has proven to be a costly endeavor relative to manufacturing other therapeutics products. We have limited experience in manufacturing products for commercial purposes and we cannot assure you that we will be able to successfully and efficiently manage the manufacturing of our product candidates, either ourselves or through third-party contractors with whom we may enter into strategic relationships.

The manufacture of cell and tissue-based therapy products, such as our product candidates, is highly complex and is characterized by inherent risks and challenges such as autologous raw material inconsistencies, logistical challenges, significant quality control and assurance requirements, manufacturing complexity, and significant manual processing. Unlike products that rely on chemicals for efficacy, such as most pharmaceuticals, cell and tissue-based therapy products are difficult to characterize due to the inherent variability of biological input materials. Difficulty in characterizing biological materials or their interactions creates greater risk in the manufacturing process. However, there can be no assurance that we will be able to maintain adequate sources of biological materials or that biological materials that we maintain in inventory will yield finished products that satisfy applicable product release criteria. Our inability to obtain necessary biological materials or to successfully manufacture cell and tissue-based therapy products that incorporate such materials could have a material adverse effect on our results of operations.

Additionally, we have limited experience in manufacturing products for commercial purposes and could experience difficulties in the continued manufacturing of our product candidates. Because our experience in manufacturing, sales, marketing and distribution is limited, we may encounter unforeseen difficulties in our efforts to efficiently manage the manufacturing, sale and distribution of our product candidates or have to rely on third-party contractors over which we may not have sole control to manufacture our product candidates. Moreover, there can be no assurance that we or any third-party contractors with whom we enter into strategic relationships will be successful in streamlining manufacturing operations and implementing efficient, low-cost manufacturing capabilities and processes that will enable us to meet the quality, price and production standards or production volumes to achieve profitability. Our failure to develop these manufacturing processes and capabilities in a timely manner could prevent us from achieving our growth and profitability objectives as projected or at all.

We intend to obtain assistance to market our product candidates and some of our future products through collaborative relationships with companies with established sales, marketing and distribution capabilities. Our inability to develop and maintain those relationships would limit our ability to market, sell and distribute our product candidates. Our inability to enter into successful, long-term relationships could require us to develop alternate arrangements at a time when we need sales, marketing or distribution capabilities to meet existing demand. We may market one or more of our product candidates through our own sales force. Our inability to develop and retain a qualified sales force could limit our ability to market, sell and distribute our cell products.

~~We are subject to significant regulation with respect to the manufacturing of our product candidates.~~

All of those involved in the preparation of a cellular therapy for clinical trials or commercial sale, including our existing supply contract manufacturers and clinical trial investigators, are subject to extensive and continuing government regulations by the FDA and comparable agencies in other jurisdictions. Components of a finished therapeutic product approved for commercial sale or used in late-stage clinical trials must be manufactured in accordance with cGTP and/or cGMP. These regulations govern manufacturing processes and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products and products approved for sale. Our facilities and quality systems and the facilities and quality systems of some or all of our third-party contractors and suppliers must pass inspection for compliance with the applicable regulations as a condition of FDA approval of our product candidates (if approval of any such candidates is required). The FDA also may, at any time following approval of a product for sale (if applicable), audit our manufacturing facilities or those of our third-party contractors. In addition, the FDA may, at any time, audit or inspect a manufacturing facility involved with the preparation of our current products or our other potential products or the associated quality systems for compliance with the regulations applicable to the activities being conducted.

Any manufacturing facility we maintain and that of our third-party contract manufacturer(s) is subject to inspections by the FDA. If any such inspection or audit identifies a failure to comply with applicable regulations or if a violation of our product specifications or applicable regulation occurs independent of such an inspection or audit, we or the FDA may require remedial measures that may be costly and/or time consuming for us or a third party to implement and that may include the temporary or permanent suspension of clinical trials, product manufacture, commercial sales or exports, recalls, warning letters, market withdrawals, seizures or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties with whom we contract could materially harm our business.

We have limited manufacturing capacity and our manufacturing operations in the U.S. depend primarily on one facility. If this facility is destroyed or we experience any manufacturing difficulties, disruptions or delays, this could limit supply of our product candidates or adversely affect our ability to conduct our clinical trials and our business would be adversely impacted.

We have entered into a manufacturing agreement with CTRM, an accredited, FDA-inspected facility at the University of Utah School of Medicine that maintains procedures for cGMP and cGTP compliance, and conduct all of our manufacturing operations at the CTRM facility located in Salt Lake City, Utah. As a result, all of the manufacturing of our product candidates takes place at a single U.S. facility. We will require additional and/or expanded manufacturing facilities to support our growth plans. If regulatory, manufacturing or other problems require us to discontinue production at this facility, we will not be able to supply our product candidates to patients or have supplies for any clinical trials, which would adversely impact our business. If this facility or the equipment in it is significantly damaged or destroyed by fire, flood, power loss or similar events, we may not be able to quickly or inexpensively replace our manufacturing capacity or replace the facility at all. In the event of a temporary or protracted loss of this facility or equipment, we might not be able to transfer manufacturing to another third party. Even if we could transfer manufacturing from one facility to another, the shift would likely be expensive and time-consuming, particularly since an alternative facility would need to comply with the cGTP and/or cGMP (if applicable) regulatory and quality standard requirements and, if applicable, FDA approval would be required before any products manufactured at that facility could be made commercially available.

~~Risks Related to Liquidity and Capital Resources~~

~~Our financial resources are limited and we will need to raise additional capital in the future to continue our business.~~

As a result of the reorganization transactions, our business focus has changed from a gaming business to regenerative medicine. We do not expect to generate any revenues going forward that we have achieved in prior years, and no longer expect to generate any revenues from other segments of our business which have been terminated or disposed of. We will need additional capital to continue to fund our operations and plans to commercialize and develop our tissue products and product candidates. We cannot ensure that additional funding will be available or, if it is available, that it can be obtained on terms and conditions we will deem acceptable. Any additional funding derived from the sale of equity securities is likely to result in significant dilution to our existing stockholders. These matters involve risks and uncertainties that may prevent us from raising additional capital or may cause the terms upon which we raise additional capital, if additional capital is available, to be less favorable to us than would otherwise be the case. If we reach a point where we are unable to raise needed additional funds to continue as a going concern, we will be forced to cease our business activities and dissolve. In such an event, we will need to satisfy various severances, contract termination, and other dissolution-related obligations.

~~Our financial statements have been prepared on a going concern basis; we must raise additional capital to fund our operations in order to continue as a going concern.~~

In its report dated January 29, 2018, EisnerAmper LLP, our independent registered public accounting firm, expressed substantial doubt about our ability to continue as a going concern as we have suffered recurring losses from operations and have insufficient liquidity to fund our future operations. If we are unable to improve our liquidity position we may not be able to continue as a going concern. The accompanying consolidated financial statements do not include any adjustments that might result if we are unable to continue as a going concern and, therefore, be required to realize our assets and discharge our liabilities other than in the normal course of business which could cause investors to suffer the loss of all or a substantial portion of their investment.

As of January 31, 2018, we had $10.0 million of cash. We anticipate that our principal sources of liquidity will only be sufficient to fund our activities through approximately October 2018. In order to have sufficient cash to fund our operations, we will need to raise additional equity or debt capital and we cannot provide any assurance that we will be successful in doing so.

~~We may not be able to raise the required capital to conduct our operations and develop and commercialize our product candidates.~~

We incurred net losses of $130.8 million in fiscal 2017, and additional net losses of $14.1 for the quarter ended January 31, 2018. We will require substantial additional capital resources in order to complete our product development programs, complete clinical trials, and market and commercialize our product candidates. In order to grow and expand our business, and to introduce our new product candidates into the marketplace, we will need to raise a significant amount of additional funds. We will also need significant additional funds or a collaborative partner, or both, to finance the research and development activities. Accordingly, we are continuing to pursue additional sources of financing.

~~Our future capital requirements will depend on numerous factors, including:~~

	●	~~our ability to generate future revenues;~~

	●	~~costs and timing of our product development activities;~~

	●	~~timing of conducting pre-clinical and clinical trials and seeking regulatory approvals and/or registrations;~~

●	~~our ability to commercialize our product candidates;~~

●	~~our ability to avoid infringement and misappropriation of third-party intellectual property;~~

●	~~our ability to obtain valid and enforceable patents;~~

●	~~competing technological and market developments;~~

●	~~our ability to establish collaborative relationships;~~

●	~~market acceptance of our product candidates;~~

●	~~the development of an infrastructure to support or business;~~

	●	our need to remediate material weaknesses and implement and maintain additional internal systems, processes and infrastructure, to have an effective system of internal control over financial reporting;

●	~~our ability to scale up our production capabilities for larger quantities of our products; and~~

●	~~our ability to control costs.~~

We expect to devote substantial capital resources to, among other things, fund operations, continue development programs, and to build out and increase our portfolio of product candidates. If we are unable to secure such additional financing, it will have a material adverse effect on our business and we may have to limit operations in a manner inconsistent with our development and commercialization plans. If additional funds are raised through the issuance of equity securities or convertible debt securities, it will be dilutive to our stockholders and could result in a decrease in our stock price.

We have funded our operations primarily with proceeds from public and private offerings of our common stock. Our history of operating losses and cash uses, our projections of the level of cash that will be required for our operations to reach profitability, the terms of the private placement transactions that we completed in the past, and the restricted availability of credit for emerging industries, may impair our ability to raise capital on terms that we consider reasonable and at the levels that we will require over the coming months. We cannot provide any assurances that we will be able to secure additional funding from public or private offerings on terms acceptable to us, if at all. If we are unable to obtain the requisite amount of financing needed to fund our planned operations, it would have a material adverse effect on our business and ability to continue as a going concern.

If adequate funds are not available in the future, we may not be able to develop or enhance our product candidates, take advantage of future opportunities, or respond to competitive pressures or unanticipated requirements and we may be required to delay or terminate research and development programs, curtail capital expenditures, and reduce business development and other operating activities. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could have a material adverse effect on our business, operating results, financial condition and prospects.

~~Our financial condition may impair our ability to obtain credit terms with our suppliers~~.

Our revenues may be dependent and our reimbursement arrangement may provide us with extended payment terms. However, our financial condition may make it difficult for us to continue to receive payment terms from our suppliers or vendors making demand for adequate assurance, which could include a demand for payment-in-advance. If we are unable to obtain reasonable payment terms or if any of our material vendors or suppliers were to successfully demand payment-in-advance, it could have a material adverse effect on our liquidity.

~~Risks Related to Our Common Stock~~

~~Our Restated Certificate of Incorporation, our Restated Bylaws and Delaware law could deter a change of our management which could discourage or delay offers to acquire us.~~

Certain provisions of Delaware law and of our Restated Certificate of Incorporation, as amended, and by-laws, could discourage or make it more difficult to accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. It is possible that these provisions could make it more difficult to accomplish, or could deter, transactions that stockholders may otherwise consider to be in their best interests or in our best interests. These provisions include:

	●	establishing a classified Board requiring that members of the Board be elected in different years, which lengthens the time needed to elect a new majority of the Board; we currently have established and intend to continue to maintain a staggered Board;

	●	authorizing the issuance of “blank check” preferred stock that could be issued by our Board to increase the number of outstanding shares or change the balance of voting control and thwart a takeover attempt; our Board is authorized to issue up to 25,000,000 shares of preferred stock without stockholder approval;

	●	~~prohibiting cumulative voting in the election of directors, which would otherwise allow for less than a majority of stockholders to elect director candidates; and~~

	●	~~prohibiting stockholder action by written consent and requiring all stockholder actions to be taken at a meeting of our stockholders.~~

~~Our executive officers and directors have the ability to control matters submitted to stockholders for approval.~~

On March 6, 2018, Dr. Denver Lough converted 7,050 shares of our Series E Preferred Stock into 7,050,000 shares of our common stock and received a proxy to vote an additional 797,296 shares of common stock held by certain of our other shareholders. Dr. Lough holds additional shares and/or vested options to purchase shares of our common stock. As of March 14, 2018, there were 16,457,664 shares of common stock issued and outstanding eligible to vote and, accordingly, Dr. Lough currently holds or has the right to vote approximately 53% of the outstanding voting capital of the Company. As a result, Dr. Lough, together with our other executive officers and directors, would be able to control matters submitted to our stockholders for approval, as well as our management and affairs.

~~Substantial future sales of our common stock by us or by our existing stockholders could cause our stock price to fall.~~

Additional equity financings or other share issuances by us, including shares issued in connection with strategic alliances and corporate partnering transactions, could adversely affect the market price of our common stock. Sales by existing stockholders of a large number of shares of our common stock in the public market or the perception that additional sales could occur could cause the market price of our common stock to drop.

~~The market price of our common stock may be affected by factors different from those affecting the market price for our common stock in recent history.~~

On June 23, 2017, we entered into a purchase agreement with Majesco Entertainment Company, a Nevada corporation and our wholly-owned subsidiary, and Zift Interactive LLC, a Nevada limited liability company. Pursuant to the terms of the purchase agreement, we sold to Zift Interactive LLC 100% of the issued and outstanding shares of common stock of Majesco Entertainment Company, including all of the right, title and interest in and to Majesco Entertainment Company’s business of developing, publishing and distributing video game products through both retail distribution and mobile and online digital downloading. As a result of the transactions, we disposed entirely of our gaming business assets and intend to devote its resources and attention to our regenerative medicine efforts.

As result, our business in recent history differs from that of our current business, and accordingly, the results of operations for our company may be affected by factors different from those affecting our results of operation in recent history. As such, the market price for our stock may be impacted differently in the future by those factors than it is currently.

~~We have experienced volatility in the price of our stock and are subject to volatility in the future .~~

The price of our common stock has experienced significant volatility, and to date, a significant percentage of our common stock has been held by affiliates and insiders. The high and low bid quotations for our common stock, as reported by NASDAQ, ranged between a high of $31.68 and a low of $3.86 during the past 12 months. The historic market price of our common stock may be higher or lower than the price paid for our shares and may not be indicative of future market prices, depending on many factors, some of which are beyond our control. In addition, our Chief Executive Officer controls approximately 53% of our voting capital stock and maintains effective majority control over decisions affecting our Company and business. As a result investors may be unwilling to purchase our common stock and our market price may be affected. The price of our stock may change dramatically in response to our success or failure and based upon our relationship and the decisions of our chief executive officer.

~~We may not be able to maintain our listing on NASDAQ.~~

Our common stock currently trades on NASDAQ. This market has continued listing requirements that we must continue to maintain to avoid delisting. The standards include, among others, a minimum bid price requirement of $1.00 per share and any of: (i) a minimum stockholders’ equity of $2.5 million; (ii) a market value of listed securities of $35 million; or (iii) net income from continuing operations of $500,000 in the most recently completed fiscal year or in two of the last three fiscal years. Our results of operations and our fluctuating stock price directly impact our ability to satisfy these listing standards. In the event we are unable to maintain these listing standards, we may be subject to delisting.

On January 6, 2017, we were notified by NASDAQ of failure to comply with NASDAQ Listing Rule 5605(b)(1) which requires that a majority of the directors comprising our Board of Directors be considered “independent”, as defined under Rule 5605(b). The notice had no immediate effect on the listing or trading of our common stock on NASDAQ. On February 22, 2017, we regained compliance with Listing Rule 5605(b)(1) with the appointment of Mr. Steve Gorlin and Dr. Jon Mogford.

On November 1, 2017, we were notified by NASDAQ of failure to comply with Nasdaq Listing Rule 5605(b)(1) which requires that a majority of the directors comprising our Board of Directors be considered “independent” and Listing Rule 5605(c)(2)(a) requiring an audit committee to be comprised of at least three independent directors. The Company plans to regain compliance upon appointment of one or more additional independent directors prior to the deadline provided by NASDAQ.

A delisting from NASDAQ would result in our common stock being eligible for quotation on the Over-The-Counter market which is generally considered to be a less efficient system than listing on markets such as NASDAQ or other national exchanges because of lower trading volumes, transaction delays and reduced security analyst and news media coverage. These factors could contribute to lower prices and larger spreads in the bid and ask prices for our common stock. Additionally, trading of our common stock on the OTCBB may make us less desirable to institutional investors and may, therefore, limit our future equity funding options and could negatively affect the liquidity of our stock.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

~~None.~~During the three-month period ended June 30, 2021, we withheld or acquired from employees shares of common stock to satisfy statutory withholding tax liability upon the vesting of share-based awards. The following table sets forth information on our acquisition of these shares for each month during the period in which an acquisition occurred.

~~Item 3. Defaults Upon Senior~~Issuer Purchases of Equity Securities

(a)

(b)

(c)

(d)

Period

Total number of shares (or units) purchased

Average price paid per share (or unit)

Total number of shares (or units) purchased as part of publicly announced plans or programs

Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs

April 2021

47,238

0.90

N/A

May 2021

–

N/A

June 2021

10,020

1.12

N/A

Total

57,258

1.01

~~None.~~

~~Item 4. Mine Safety Disclosures~~

~~Not applicable.~~

Item 5. Other Information

~~None.~~We began a multicenter, randomized controlled trial evaluating SkinTE plus standard of care (SOC) versus SOC alone in treatment of diabetic foot ulcers (the “DFU RCT”). In July 2021, we announced final data from the DFU RCT. The size of the study is 100 patients who were evaluated across 13 sites, with 50 participants receiving SkinTE plus SOC and 50 receiving SOC alone. The trial met the primary endpoint of wound closure at 12 weeks and secondary endpoint of Percent Area Reduction (PAR) assessed at 4, 6, 8, 10, and 12 weeks. Final analysis of the DFU RCT shows the following:

	●	Primary Endpoint: 70% (35/50) of participants receiving SkinTE plus SOC had wound closure at 12 weeks versus 34% (17/50) of participants receiving SOC alone (p=0.00032)
	●	Secondary Endpoint: Percent Area Reduction (PAR) assessed at 4, 6, 8, 10, and 12 weeks was significantly greater for the SkinTE plus SOC treatment group vs SOC alone (p=0.009)
	●	90% (45/50) of SkinTE plus SOC treated participants received a single application of SkinTE
	●	Treatment with SkinTE plus SOC increased the odds of wound closure by 5.37 times versus SOC (p=0.001)

Mean (SD) values for PAR at weeks 4, 6, 8, 10, and 12 by treatment group

Week	SkinTE	SOC
4	74.0 (27.63)	22.0 (149.92)
6	82.9 (26.35)	21.2 (160.60)
8	80.7 (35.16)	26.8 (147.42)
10	79.7 (54.07)	45.6 (114.18)
12	84.3 (39.46)	50.5 (92.24)

4537

●

148 Adverse Events (AEs) were allocated to 49 subjects. The SkinTE plus SOC treatment group had 66 AEs allocated to 21 subjects while the SOC treatment group had 82 AEs allocated to 28 subjects. There were 26 Serious Adverse Events (SAEs), 12 in the SkinTE plus SOC treatment group (7 subjects) and 14 in the SOC treatment group (9 subjects).

●

Wound size for the SkinTE plus SOC treatment group was 3.5 cm² versus 3.2 cm² for the SOC treatment group (p=0.46). A comparison by treatment group for wound-related variables showed that variables were well balanced between groups with the exception of sharp debridement count, which was marginally statistically significantly higher in the SOC group compared to the SkinTE group, due to shorter wound closure times in the SkinTE group.

We incorporated data from the trial as part of the IND we submitted to the FDA on July 23, 2021, but the DFU RCT will not be considered to be a registrational trial as part of a BLA submission.

Item 6. Exhibits

Except as otherwise noted, the following exhibits are included in this filing:

31.1*31.1		Certification ~~of Principal Executive Officer pursuant~~Pursuant to ~~Section 302 of the Sarbanes-Oxley Act of 2002.~~Rule 13a-14(a)
31.2*31.2		Certification ~~of Principal Financial Officer pursuant~~Pursuant to ~~Section 302 of the Sarbanes-Oxley Act of 2002.~~Rule 13a-14(a)
32*32.1		Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of ~~Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.~~Title 18, United States Code
101.INS*101.INS		XBRL Instance ~~Document.~~Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document
101.SCH*101.SCH		XBRL Schema ~~Document.~~Document
101.CAL*101.CAL		XBRL Calculation Linkbase ~~Document.~~Document
101.DEF*101.DEF		XBRL Definition Linkbase ~~Document.~~Document
101.LAB*101.LAB		XBRL Label Linkbase ~~Document.~~Document
101.PRE*101.PRE		XBRL Presentation Linkbase ~~Document.~~Document
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

* Filed herewith

4638

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

~~POLARITYTE, INC.~~

	POLARITYTE, INC.

Date: August 12, 2021	/s/ ~~Denver Lough~~David Seaburg
	~~Denver Lough~~	David Seaburg
	Chief Executive Officer
	~~(Principal Executive Officer)~~	Duly Authorized Officer
~~Date:~~	~~March 19, 2018~~
Date: August 12, 2021		/s/ Jacob Patterson
	~~/s/ John Stetson~~	Jacob Patterson
	~~John Stetson~~
	Interim Chief Financial Officer
	~~(Principal Financial and~~Chief Accounting ~~Officer)~~

~~Date:~~	~~March 19, 2018~~	Officer

4739

	January 31, 2018			October 31, 2017
		(Unaudited)
ASSETS

Current assets:
Cash and cash equivalents	$	9,990		$	17,667
Prepaid expenses and other current assets		626			237
Receivable from Zift		60			60
Total current assets		10,676			17,964
Non-current assets:
Property and equipment, net		4,452			2,173
Security desposits – non-current		111			-
Receivable from Zift, non-current		-			15
Total non-current assets		4,563			2,188
TOTAL ASSETS	$	15,239		$	20,152

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

Current liabilities:
Accounts payable and accrued expenses	$	3,312		$	1,939
Warrant liability and embedded derivative		10,128			13,502
Total current liabilities		13,440			15,441
Total liabilities		13,440			15,441

Commitments and Contingencies

Redeemable convertible preferred stock - Series F - 6,455 shares authorized, issued and outstanding at January 31, 2018 and October 31, 2017; liquidation preference - $17,750.		5,414			4,541

STOCKHOLDERS’ EQUITY (DEFICIT):
Convertible preferred stock - 9,993,545 shares authorized, 1,656,838 and 3,230,655 shares issued and outstanding at January 31, 2018 and October 31, 2017, aggregate liquidation preference $1,089 and $2,140, respectively		109,104			109,995
Common stock - $.001 par value; 250,000,000 shares authorized; 7,094,544 and 6,515,524 shares issued and outstanding at January 31, 2018 and October 31, 2017, respectively		7			7
Additional paid-in capital		160,368			149,173
Accumulated deficit		(273,094	)		(259,005	)
Total stockholders’ equity (deficit)		(3,615	)		170
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)	$	15,239		$	20,152

	For the three months ended
	January 31,
	2018			2017
Net revenues	$	13		$	-
Cost of sales		1			-
Gross profit		12			-

Operating costs and expenses
Research and development		6,602			-
General and administrative		10,898			5,225
		17,500			5,225
Operating loss		(17,488	)		(5,225	)
Other (expenses) income
Interest income		25			4
Change in fair value of derivative liabilities		3,374			(8	)
Net loss from continuing operations		(14,089	)		(5,229	)
Loss from discontinued operations		-			(432	)
Net loss		(14,089	)		(5,661	)
Deemed dividend – accretion of discount on Series F preferred stock		(904	)		-
Cumulative dividends on Series F preferred stock		(275	)		-
Net loss attributable to common shareholders	$	(15,268	)	$	(5,661	)

Net loss per share, basic and diluted:
Loss from continuing operations	$	(2.13	)	$	(1.56	)
Loss from discontinued operations		-			(0.13	)
Deemed dividend – accretion of discount on preferred stock		(0.14	)		-
Cumulative dividends on Series F preferred stock		(0.04	)		-
Net loss attributable to common shareholders	$	(2.31	)	$	(1.69	)

Weighted average shares outstanding, basic and diluted		6,615,350			3,346,788

	Preferred Stock						Common Stock				Additional Paid-in			Accumulated			Total Stockholders’
	Number			Amount			Number		Amount		Capital			Deficit			Equity (Deficit)
Balance as of October 31, 2017		3,230,655		$	109,995			6,515,524	$	7	$	149,173		$	(259,005	)	$	170
Issuance of common stock in connection with:
Conversion of Series A preferred stock to common stock		(1,544,572	)		(378	)		350,000		-		378			-			-
Conversion of Series C preferred stock to common stock		(2,578	)		(201	)		59,950		-		201			-			-
Conversion of Series D preferred stock to common stock		(26,667	)		(312	)		44,445		-		312			-			-
Proceeds from option exercises		-			-			10,417		-		45			-			45
Stock-based compensation expense		-			-			102,500		-		11,132			-			11,132
Deemed dividend – accretion of discount on Series F preferred stock		-			-			-		-		(904	)		-			(904	)
Cumulative dividends on Series F preferred stock		-			-			-		-		(275	)		-			(275	)
Series F preferred stock dividends paid in common stock		-			-			11,708		-		306			-			306
Net loss		-			-			-		-		-			(14,089	)		(14,089	)
Balance as of January 31, 2018		1,656,838		$	109,104			7,094,544	$	7	$	160,368		$	(273,094	)	$	(3,615	)

	For the three months ended January 31,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(14,089	)	$	(5,661	)
Loss from discontinued operations		-			432
Loss from continuing operations		(14,089	)		(5,229	)
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Depreciation and amortization		256			-
Stock based compensation expense		11,132			3,975
Change in fair value of warrant liability and embedded derivative		(3,374	)		8
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		46			(204	)
Security deposits – non-current		(111	)		-
Accounts payable and accrued expenses		1,067			694
Net cash used in continuing operating activities		(5,073	)		(756	)
Net cash provided by discontinued operating activities		-			395
Net cash used in operating activities		(5,073	)		(361	)

CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(2,664	)		(1,538	)
Net cash used in continuing investing activities		(2,664	)		(1,538	)
Net cash provided by discontinued investing activities		15			-
Net cash used in investing activities		(2,649	)		(1,538	)

CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock options exercised		45			-
Proceeds from the sale of common stock		-			2,278
Net cash provided by financing activities		45			2,278

Net decrease in cash and cash equivalents		(7,677	)		379
Cash and cash equivalents - beginning of period		17,667			6,523
Cash and cash equivalents - end of period	$	9,990		$	6,902

Supplemental schedule of non-cash investing and financing activities:
Conversion of Series A preferred stock to common stock	$	378		$	297
Conversion of Series B preferred stock to common stock	$	-		$	513
Conversion of Series C preferred stock to common stock	$	201		$	90
Conversion of Series D preferred stock to common stock	$	312		$	721
Unpaid liability for acquisition of property and equipment	$	360		$	54
Warrant exchange for common stock shares	$	-		$	78
Deemed dividend – accretion of discount on preferred stock	$	904		$	-
Cumulative dividends on Series F preferred stock	$	275		$	-
Series F preferred stock dividends paid in common stock	$	306		$	-

	January 31, 2018		October 31, 2017
Legal retainer	$	-	$	15
Prepaid insurance		64		69
Other prepaids		88		126
Advances on equipment purchases		435		-
Other assets		39		27
Total prepaid expenses and other current assets	$	626	$	237

	January 31, 2018			October 31, 2017
Medical equipment	$	4,911		$	2,418
Computers and software		238			211
Furniture and equipment		45			30
Total property and equipment, gross		5,194			2,659
Accumulated depreciation		(742	)		(486	)
Total property and equipment, net	$	4,452		$	2,173

	January 31, 2018		October 31, 2017
Accounts payable	$	25	$	25
Due to Zift		-		36
Medical study and supplies		511		362
Medical equipment purchase		360		54
Salaries and other compensation		1,312		574
Legal and accounting		737		555
Other accruals		367		333
Total accounts payable and accrued expenses	$	3,312	$	1,939

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		1,602,099	$	391	$	1,089		363,142
Series B		54,250		47,689		4,020		-		794,816
Series C		26,000		-		-		-		-
Series D		170,000		-		-		-		-
Series E		7,050		7,050		104,693		-		7,050,000
Series F		6,455		6,455		5,414		17,750		645,455
Other authorized, unissued		906,245		-		-		-		-
Total		10,000,000		1,663,293	$	114,518	$	18,839		8,853,413

●	●	Level 1: Observable inputs such as quoted prices in active markets for identical ~~instruments~~instruments.

●	●	Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the ~~market~~market.

●	●	Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.

	Series F Conversion Feature
	January 31, 2018			October 31, 2017
Stock price	$	21.30		$	25.87
Exercise price	$	27.50		$	27.50
Risk-free rate		2.053	%		1.581	%
Volatility		86.4	%		96.0	%
Term		1.64			1.89

	Warrant Liability
	January 31, 2018			October 31, 2017
Stock price	$	21.30		$	25.87
Exercise price	$	30.00		$	30.00
Risk-free rate		2.053	%		1.581	%
Volatility		86.4	%		96.0	%
Term		1.64			1.89

	Fair Value Measurement as of January 31, 2018
	Level 1		Level 2		Level 3		Total
Liabilities
Warrant liability	$	-	$	-	$	2,765	$	2,765
Derivative liability		-		-		7,363		7,363
Total	$	-	$	-	$	10,128	$	10,128

	Fair Value Measurement as of October 31, 2017
	Level 1		Level 2		Level 3		Total
Liabilities
Warrant liability	$	-	$	-	$	4,256	$	4,256
Derivative liability		-		-		9,246		9,246
Total	$	-	$	-	$	13,502	$	13,502

	Fair Value at December 31, 2020		Initial Fair Value at Issuance		(Gain) Loss Upon Change in Fair Value			Liability Reduction Due to Exercises			Fair Value on June 30, 2021
Warrant liabilities
February 14, 2020 issuance	$	328	$	–	$	168		$	–		$	496
December 23, 2020 issuance		5,647		–		3,802			(8,964	)		485
January 14, 2021 issuance		–		8,629		(1,700	)		–			6,929
January 25, 2021 issuance		–		6,199		(50	)		–			6,149
Inducement loss on initial fair value (1)		–		–		5,197			–			–
Total	$	5,975	$	14,828	$	7,417		$	(8,964	)	$	14,059

	Fair Value at December 31, 2019		Initial Fair Value at Issuance		(Gain) Loss Upon Change in Fair Value			Liability Reduction Due to Exercises		Fair Value on June 30, 2020
Warrant liabilities
February 14, 2020 issuance	$	–	$	11,677	$	(2,941	)	$	–	$	8,736

	For the Six Months ended June 30,
	2021
Stock price	$	1.02 – 1.21
Exercise price	$	0.10 – 1.38
Risk-free rate		0.42 – 1.13	%
Volatility		99.0 – 102.8	%
Remaining term (years)		4.48 – 5.87

	June 30, 2021			December 31, 2020
Machinery and equipment	$	11,139		$	12,232
Land and buildings		2,000			2,000
Computers and software		1,129			1,240
Leasehold improvements		2,107			2,107
Construction in progress		7			87
Furniture and equipment		144			148
Total property and equipment, gross		16,526			17,814
Accumulated depreciation and amortization		(7,842	)		(7,264	)
Total property and equipment, net	$	8,684		$	10,550

	2017 Series F Preferred Stock - Warrant Liability			2017 Series F Preferred Stock - Embedded Derivative			Total Warrant and Derivative Liability
Fair value - October 31, 2017	$	4,256		$	9,246		$	13,502
Change in fair value		(1,491	)		(1,883	)		(3,374	)
Fair value - January 31, 2018	$	2,765		$	7,363		$	10,128

		Operating leases			Finance leases
2021 (excluding the six months ended June 30, 2021)		$	744		$	327
2022			1,219			405
2023			3			336
2024			2			43
Total lease payments			1,968			1,111
Less:	��
Imputed interest			(122	)		(116	)
Total		$	1,846		$	995

	June 30, 2021		December 31, 2020
Finance lease right-of-use assets included within property and equipment, net	$	961	$	1,301

Current finance lease liabilities included within other current liabilities	$	483	$	556
Non-current finance lease liabilities included within other long-term liabilities		512		711
Total finance lease liabilities	$	995	$	1,267

	June 30, 2021		December 31, 2020
Current operating lease liabilities included within other current liabilities	$	1,296	$	1,485
Operating lease liabilities – non current		550		1,476
Total operating lease liabilities	$	1,846	$	2,961

	For the Six Months Ended June 30,
	2021		2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases	$	849	$	1,108
Operating cash out flows from finance leases	$	56	$	82
Financing cash out flows from finance leases	$	272	$	243
Lease liabilities arising from obtaining right-of-use assets:
Remeasurement of operating lease liability due to lease modification/termination	$	386	$	131

	June 30, 2021		December 31, 2020
Current finance lease liabilities	$	483	$	556
Current operating lease liabilities		1,296		1,485
Short-term financing arrangement		709		20
Other		21		45
Total other current liabilities	$	2,509	$	2,106

	Number of shares			Weighted-Average Exercise Price
Outstanding - October 31, 2017		3,525,530		$	6.34
Granted		1,030,500		$	24.47
Exercised		(10,794	)	$	5.10
Forfeited		(34,167	)	$	18.90
Outstanding - January 31, 2018		4,511,069		$	10.39
Options exercisable - January 31, 2018		1,930,500		$	5.79
Weighted-average fair value of options granted during the period				$	16.57

	Number of Shares			Weighted- Average Exercise Price
Outstanding – December 31, 2020		4,794,567		$	10.03
Granted		1,410,231		$	1.29
Exercised (1)		(2,500	)	$	1.10
Forfeited		(262,082	)	$	12.38
Outstanding – June 30, 2021		5,940,216		$	7.85
Options exercisable, June 30, 2021		4,370,581		$	10.18

	Number of Shares
Unvested - December 31, 2020		3,468,969
Granted		3,363,997
Vested (1)		(1,233,371	)
Forfeited		(165,870	)
Unvested – June 30, 2021		5,433,725

	January 14, 2021			June 30, 2021
Stock price	$	1.21		$	1.02
Exercise price	$	1.20		$	1.20
Risk-free rate		0.49	%		0.78	%
Volatility		100.1	%		102.0	%
Remaining term (years)		5.0			4.5

	January 22, 2021
Stock price	$	1.05
Exercise price	$	0.62
Risk-free rate		0.43	%
Volatility		99.4	%
Remaining term (years)		4.9

	January 25, 2021			June 30, 2021
Stock price	$	1.02		$	1.02
Exercise price	$	1.20		$	1.20
Risk-free rate		0.42	%		0.78	%
Volatility		99.0	%		102.0	%
Remaining term (years)		5.0			4.6

	Outstanding December 31, 2020		Warrants Issued		Warrants Exercised			Outstanding June 30, 2021
Transaction
February 14, 2020 common warrants		565,000		–		(25,500	)		539,500
December 23, 2020 common warrants		10,688,043		–		(10,688,043	)		–
December 23, 2020 placement agent warrants		641,283		–		–			641,283
December 23, 2020 pre-funded warrants		5,238,043		–		(5,238,043	)		–
January 14, 2021 common warrants		–		9,090,910		–			9,090,910
January 14, 2021 placement agent warrants		–		545,455		–			545,455
January 14, 2021 pre-funded warrants		–		2,420,910		(2,420,910	)		–
January 25, 2021 common warrants		–		8,016,033		–			8,016,033
January 22, 2021 placement agent warrants		–		480,962		–			480,962
Total		17,132,369		20,554,270		(18,372,496	)		19,314,143