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 ~~September 30, 2019~~March 31, 2020

Commission File No. 000-51128

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

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

123 Wright Brothers Drive

Salt Lake City, UT 84116

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code:(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
Preferred Stock Purchase Rights		Nasdaq Capital Market

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	[X]
Non-accelerated filer	[ ]	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 ~~November 8, 2019,~~May 7, 2020, there were ~~26,985,630~~38,463,599 shares of the Registrant’s common stock outstanding.

INDEX

	Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:	43
Condensed Consolidated Balance Sheets as of ~~September 30, 2019 (unaudited)~~March 31, 2020 and December 31, ~~2018~~2019 (unaudited)	43
Condensed Consolidated Statements of Operations for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	54
Condensed Consolidated Statements of Comprehensive Loss for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	65
Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	76
Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2020 and 2019 ~~and 2018~~ (unaudited)	87
Notes to Condensed Consolidated Financial Statements (unaudited)	98
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	2622
Item 3. Quantitative and Qualitative Disclosures about Market Risk	3230
Item 4. Controls and Procedures	3230

PART II - OTHER INFORMATION	31

Item ~~1. Legal Proceedings~~1A. Risk Factors	3431
Item 6. Exhibits	3437

SIGNATURES	3538

~~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 of the Private Securities Litigation Reform Act of 1995 and other federal securities laws. 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 initiation, timing, progress, and results of our research and development programs;~~

	●	~~the timing or success of commercialization of our products;~~

	●	~~the pricing and reimbursement of our products;~~

	●	~~the initiation, timing, progress, and results of our preclinical and clinical studies;~~

	●	~~the scope of protection we can establish and maintain for intellectual property rights covering our product candidates and technology;~~

	●	~~estimates of our expenses, future revenues, and capital requirements;~~

	●	~~our need for, and ability to obtain, additional financing in the future;~~

	●	~~our ability to comply with regulations applicable to the manufacture, marketing, sale and distribution of our products;~~

	●	~~the potential benefits of strategic collaboration agreements and our ability to enter into strategic arrangements;~~

	●	~~our views about our prospects in ongoing litigation and SEC investigation;~~

	●	~~developments relating to our competitors and industry; and~~

	●	~~other risks and uncertainties, including those listed under Part I, Item 1A. Risk Factors of our Transition Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2019.~~

Given the 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 our forward-looking statements, 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.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
		(Unaudited)
ASSETS

Current assets:
Current assets
Cash and cash equivalents	$	27,273		$	55,673		$	38,517		$	10,218
Short-term investments		18,675			6,162			997			19,022
Accounts receivable		1,593			712
Accounts receivable, net								1,186			1,731
Inventory		346			336			233			252
Prepaid expenses and other current assets		1,306			1,432			2,807			1,264
Total current assets		49,193			64,315			43,740			32,487
Property and equipment, net		15,662			13,736			15,022			14,911
Operating lease right-of-use assets		5,028			–			4,142			4,590
Intangible assets, net		778			924			683			731
Goodwill		278			278			278			278
Other assets		353			913			598			602
TOTAL ASSETS	$	71,292		$	80,166		$	64,463		$	53,599

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current liabilities
Accounts payable and accrued expenses	$	10,233		$	6,508		$	8,026		$	7,095
Other current liabilities		2,582			316			3,223			2,338
Current portion of long-term note payable		538			529			536			528
Deferred revenue		134			170			23			98
Total current liabilities		13,487			7,523			11,808			10,059
Long-term note payable, net		247			479
Common stock warrant liability								7,145			–
Operating lease liabilities		3,358			–			2,614			2,994
Other long-term liabilities		1,808			131			1,243			1,630
Total liabilities		18,900			8,133			22,810			14,683

Commitments and Contingencies
Commitments and Contingencies (Note 12)

STOCKHOLDERS’ EQUITY:
Preferred stock - 25,000,000 shares authorized, 0 shares issued and outstanding at September 30, 2019 and December 31, 2018		–			–
Common stock - $.001 par value; 250,000,000 shares authorized; 26,932,764 and 21,447,088 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		27			21
STOCKHOLDERS’ EQUITY
Preferred stock - 25,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2020 and December 31, 2019								–			–
Common stock – $.001 par value; 250,000,000 shares authorized; 38,393,289 and 27,374,653 shares issued and outstanding at March 31, 2020 and December 31, 2019, respectively								38			27
Additional paid-in capital		466,514			414,840			490,009			474,174
Accumulated other comprehensive income		63			36			3			72
Accumulated deficit		(414,212	)		(342,864	)		(448,397	)		(435,357	)
Total stockholders’ equity		52,392			72,033			41,653			38,916
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	71,292		$	80,166		$	64,463		$	53,599

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

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

	For the three months ended						For the nine months ended
	September 30,						September 30,						For the Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Net revenues
Products	$	839		$	197		$	1,640		$	389		$	428		$	297
Services		556			528			2,546			659			505			1,168
Total net revenues		1,395			725			4,186			1,048			933			1,465
Cost of sales
Products		315			267			930			393			340			273
Services		330			400			1,087			441			176			503
Total cost of sales		645			667			2,017			834
Total costs of sales														516			776
Gross profit		750			58			2,169			214			417			689
Operating costs and expenses
Research and development		2,956			4,111			13,072			12,598			3,373			5,352
General and administrative		16,044			15,135			48,299			33,998			11,057			17,195
Sales and marketing		4,988			1,618			12,922			1,618			3,694			3,953
Total operating costs and expenses		23,988			20,864			74,293			48,214			18,124			26,500
Operating loss		(23,238	)		(20,806	)		(72,124	)		(48,000	)		(17,707	)		(25,811	)
Other income (expenses)
Interest income, net		27			227			126			314
Other (expense) income, net		228			–			650			–
Change in fair value of derivatives		–			–			–			1,850
Loss on extinguishment of warrant liability		–			–			–			(520	)
Other income (expense)
Change in fair value of common stock warrant liability														4,532			–
Interest (expense) income, net														(12	)		70
Other income, net														147			168
Net loss		(22,983	)		(20,579	)		(71,348	)		(46,356	)	$	(13,040	)	$	(25,573	)
Deemed dividend – accretion of discount on Series F preferred stock		–			–			–			(698	)
Deemed dividend – exchange of Series F preferred stock		–			–			–			(7,057	)
Cumulative dividends on Series F preferred stock		–			–			–			(191	)
Net loss attributable to common stockholders	$	(22,983	)	$	(20,579	)	$	(71,348	)	$	(54,302	)

Net loss per share, basic and diluted:
Net loss	$	(0.87	)	$	(0.97	)	$	(2.94	)	$	(2.80	)
Deemed dividend – accretion of discount on Series F preferred stock		–			–			–			(0.04	)
Deemed dividend – exchange of Series F preferred stock		–			–			–			(0.43	)
Cumulative dividends on Series F preferred stock		–			–			–			(0.01	)
Net loss attributable to common stockholders	$	(0.87	)	$	(0.97	)	$	(2.94	)	$	(3.28	)
Weighted average shares outstanding, basic and diluted:		26,405,307			21,154,661			24,273,774			16,535,419
Net loss per share, basic and diluted													$	(0.39	)	$	(1.18	)
Weighted average shares outstanding, basic and diluted														33,019,994			21,594,699

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

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

	For the three months ended						For the nine months ended
	September 30,						September 30,						For the Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Net loss	$	(22,983	)	$	(20,579	)	$	(71,348	)	$	(46,356	)	$	(13,040	)	$	(25,573	)
Other comprehensive income:
Unrealized (loss)/gain on available-for-sale securities		(16	)		–			27			–
Unrealized gain on available-for-sale securities														4			152
Reclassification of realized gains included in net loss														(73	)		(135	)
Comprehensive loss	$	(22,999	)	$	(20,579	)	$	(71,321	)	$	(46,356	)	$	(13,109	)	$	(25,556	)

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 nine months ended September 30, 2019																	For the Three Months Ended March 31, 2020
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’			Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Number			Amount		Capital			Income			Deficit			Equity			Number			Amount		Capital			Income			Deficit			Equity
December 31, 2018		21,447,088		$	21	$	414,840		$	36		$	(342,864	)	$	72,033
Balance - December 31, 2019																			27,374,653		$	27	$	474,174		$	72		$	(435,357	)	$	38,916
Issuance of common stock, net of issuance costs of $1.3 million																			10,854,710			11		12,588			–			–			12,599
Stock-based compensation expense		–			–		10,327			–			–			10,327			–			–		3,221			–			–			3,221
Stock option exercises		283,250			1		528			–			–			529			10,000			–		31			–			–			31
Vesting of restricted stock units		100,912			–		–			–			–			–			158,513			–		–			–			–			–
Shares withheld for tax withholding		(82,011	)		–		(740	)		–			–			(740	)		(4,587	)		–		(5	)		–			–			(5	)
Other comprehensive income		–			–		–			17			–			17
Other comprehensive loss																			–			–		–			(69	)		–			(69	)
Net loss		–			–		–			–			(25,573	)		(25,573	)		–			–		–			–			(13,040	)		(13,040	)
March 31, 2019		21,749,239		$	22	$	424,955		$	53		$	(368,437	)	$	56,593
Proceeds received from issuance of common stock, net of issuance costs of $1,146		3,418,918			3		27,945			–			–			27,948
Stock-based compensation expense		–			–		8,618			–			–			8,618
Stock option exercises		9,167			–		–			–			–			–
Shares issued under the ESPP		7,260			–		35			–			–			35
Vesting of restricted stock units		51,440			–		–			–			–			–
Shares withheld for tax withholding		(17,418	)		–		(62	)		–			–			(62	)
Other comprehensive income		–			–		–			26			–			26
Net loss		–			–		–			–			(22,792	)		(22,792	)
June 30, 2019		25,218,606		$	25	$	461,491		$	79		$	(391,229	)	$	70,366
Stock-based compensation expense		–			–		5,025			–			–			5,025
Issuance of restricted stock awards		1,590,710			2		(2	)		–			–			–
Vesting of restricted stock units		123,448			–		–			–			–			–
Other comprehensive income		–			–		–			(16	)		–			(16	)
Net loss		–			–		–			–			(22,983	)		(22,983	)
September 30, 2019		26,932,764		$	27	$	466,514		$	63		$	(414,212	)	$	52,392
Balance - March 31, 2020																			38,393,289		$	38	$	490,009		$	3		$	(448,397	)	$	41,653

For the nine months ended September 30, 2018
Preferred Stock Common Stock Additional Paid-in Accumulated Total Stockholders’
Number Amount Number Amount Capital Deficit Equity
December 31, 2017 1,656,838 $ 109,104 7,082,836 $ 7 $ 157,395 $ (269,920 ) $ (3,414 )
Issuance of common stock in connection with:
Conversion of Series A preferred stock to common stock (1,602,099 ) (391 ) 363,036 – 391 – –
Conversion of Series B preferred stock to common stock (47,689 ) (4,020 ) 794,820 1 4,019 – –
Conversion of Series E preferred stock to common stock (7,050 ) (104,693 ) 7,050,000 7 104,686 – –
Exchange of Series F preferred stock and dividends to common stock – – 1,003,393 1 13,060 – 13,061
Extinguishment of warrant liability – – 151,871 – 3,045 – 3,045
Stock-based compensation expense – – – – 7,445 – 7,445
Deemed dividend – accretion of discount on Series F preferred stock – – – – (698 ) – (698 )
Cumulative dividends on Series F preferred stock – – – – (191 ) – (191 )
Series F preferred stock dividends paid in common stock – – 11,708 – 306 – 306
Net loss – – – – – (11,777 ) (11,777 )
March 31, 2018 – $ – 16,457,664 $ 16 $ 289,458 $ (281,697 ) $ 7,777
Proceeds received from issuance of common stock, net of issuance costs of $2,782 – – 4,791,819 4 92,672 – 92,676
Stock-based compensation expense – – – – 8,344 – 8,344
Issuance of restricted stock awards – – 175,887 – – – –
Stock option exercises – – 20,000 – 64 – 64
Net loss – – – – – (14,000 ) (14,000 )
June 30, 2018 – $ – 21,445,370 $ 20 $ 390,538 $ (295,697 ) $ 94,861
Stock-based compensation expense – – – – 10,453 – 10,453
Issuance of restricted stock awards – – 7,613 – – – –
Stock option exercises – – 43,516 1 157 – 158
Net loss – – – – – (20,579 ) (20,579 )
September 30, 2018 – $ – 21,496,499 $ 21 $ 401,148 $ (316,276 ) $ 84,893

	For the Three Months Ended March 31, 2019
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive		Accumulated			Total Stockholders’
	Number			Amount		Capital			Income		Deficit			Equity
Balance - December 31, 2018		21,447,088		$	21	$	414,840		$	36	$	(342,864	)	$	72,033
Stock-based compensation expense		–			–		10,327			–		–			10,327
Stock option exercises		283,250			1		528			–		–			529
Vesting of restricted stock units		100,912			–		–			–		–			–
Shares withheld for tax withholding		(82,011	)		–		(740	)		–		–			(740	)
Other comprehensive income		–			–		–			17		–			17
Net loss		–			–		–			–		(25,573	)		(25,573	)
Balance - March 31, 2019		21,749,239		$	22	$	424,955		$	53	$	(368,437	)	$	56,593

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 nine months ended September 30,						For the Three Months ended March 31,
	2019			2018			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(71,348	)	$	(46,356	)	$	(13,040	)	$	(25,573	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation expense		23,932			26,242			3,221			10,289
Change in fair value of derivatives		–			(1,850	)
Depreciation and amortization		2,243			1,088			752			676
Loss on extinguishment of warrant liability		–			520
Amortization of intangible assets		146			83			48			51
Amortization of debt discount		40			30			8			15
Change in fair value of common stock warrant liability								(4,532	)		–
Change in fair value of contingent consideration		(48	)		20			–			20
Loss on disposal of property and equipment		265			–
Other non-cash adjustments		3			–			(16	)		(7	)
Changes in operating assets and liabilities:
Accounts receivable		(881	)		(788	)		545			(76	)
Inventory		(10	)		(238	)		19			27
Prepaid expenses and other current assets		126			(561	)		(1,543	)		(412	)
Operating lease right-of-use assets		1,214			–			448			355
Other assets		25			(210	)		4			–
Accounts payable and accrued expenses		4,095			2,484			818			(1,331	)
Other current liabilities		155			–			(61	)		425
Deferred revenue		(36	)		116			(75	)		(80	)
Operating lease liabilities		(1,142	)		–			(450	)		(343	)
Other long-term liabilities		571			–			–			(4	)
Net cash used in operating activities		(40,650	)		(19,420	)		(13,854	)		(15,968	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(2,386	)		(6,640	)		(999	)		(1,539	)
Purchase of available-for-sale securities		(29,002	)		–			(14,144	)		(5,220	)
Proceeds from maturities of available-for-sale securities		14,636			–			15,945			1,700
Proceeds from sale of available-for-sale securities		1,877			–			16,171			–
Acquisition of IBEX		–			(2,258	)
Net cash used in investing activities		(14,875	)		(8,898	)
Net cash provided by (used in) investing activities								16,973			(5,059	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from the sale of common stock		27,948			92,676
Net proceeds from the sale of common stock and warrants								24,276			–
Proceeds from stock options exercised		529			222			31			529
Proceeds from ESPP purchase		35			–
Cash paid for tax withholdings related to net share settlement		(679	)		–			(2	)		–
Payment of contingent consideration liability		(109	)		(30	)		–			(109	)
Principal payments on financing leases		(336	)		(39	)		(123	)		(118	)
Principal payments on term note payable		(263	)		–
Proceeds from financing arrangements								1,053			–
Principal payments on financing arrangements								(55	)		–
Net cash provided by financing activities		27,125			92,829			25,180			302

Net (decrease) increase in cash and cash equivalents		(28,400	)		64,511
Net increase (decrease) in cash and cash equivalents								28,299			(20,725	)
Cash and cash equivalents - beginning of period		55,673			12,517			10,218			55,673
Cash and cash equivalents - end of period	$	27,273		$	77,028		$	38,517		$	34,948

Supplemental schedule of non-cash investing and financing activities:
Conversion of Series A, B, E preferred stock to common stock	$	–		$	109,104
Exchange of Series F preferred stock for common stock		–			13,061
Extinguishment of warrant liability		–			2,525
Non-cash investing and financing activities:
Unpaid liability for acquisition of property and equipment		249			699		$	137		$	170
Deemed dividend – accretion of discount on Series F preferred stock		–			698
Cumulative dividends on Series F preferred stock		–			191
Series F preferred stock dividends paid in common stock		–			306
Reclassification of stock-based compensation expense that was previously classified as a liability to paid-in capital		38			–		$	–		$	38
Contingent consideration for IBEX acquisition		–			278
Contingent consideration earned and recorded in accounts payable		–			33
Note payable issued as partial consideration for IBEX acquisition		–			1,220
Property and equipment acquired through finance lease		2,341			141
Property and equipment acquired through financing arrangement		58			–
Unrealized gain on short-term investments		27			–
Unpaid tax liability related to net share settlement							$	3		$	617
Allocation of proceeds from sale of common stock and warrants to warrant liability							$	11,677		$	–

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

POLARITYTE, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

PolarityTE, Inc. and subsidiaries (the “Company”) is a ~~commercial-stage~~ biotechnology company developing and ~~regenerative biomaterials company focused on transforming the lives of patients by discovering, designing and developing a range of~~commercializing regenerative tissue products and ~~biomaterials for the fields of medicine, biomedical engineering and material sciences.~~

~~Change in Fiscal Year end.~~On January 11, 2019, the Board approved an amendment to the Restated Bylaws of the Company changing the Company’s fiscal year end from October 31 to December 31. As such, the end of the quarters in the new fiscal year do not coincide with the end of the quarters in the Company’s previous fiscal years. The Company made this change to align its fiscal year end with other companies within its industry.biomaterials.

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. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. 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 December 31, ~~2018~~2019 has been derived from the audited 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 audited consolidated financial statements and notes thereto for the ~~two-month period~~year ended December 31, ~~2018 included in the Company’s Transition Report on Form 10-KT~~2019 filed with the Securities and Exchange Commission on Form 10-K on March ~~18, 2019.~~12, 2020.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation.The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.

Use of estimates.The preparation of financial statements in conformity with ~~accounting principles generally accepted in the United States of America (“~~U.S. ~~GAAP”)~~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 is the extent of progress toward completion of contracts, stock-based compensation, valuation of common stock warrant liability, and the valuation allowances for deferred tax ~~benefits, and the valuation of tangible and intangible assets included in acquisitions.~~benefits. Actual results could differ from those estimates.

Segments.The Company’s operations are based in the United States and involve products and services which are managed separately. Accordingly, it operates in two segments: 1) regenerative medicine products and 2) contract services. ~~The~~In April 2020, the Company designated its Chief Executive Officer (CEO) to be its Chief Operating Decision Maker (CODM) ~~is our~~and dissolved the function of the Office of the Chief Executive consisting of the President, Chief Operating Officer, ~~the~~and Chief Financial Officer ~~and the President of Corporate Development.~~which previously acted as its CODM. The CODM allocates resources to and assesses the performance of each operating segment using information about its revenue and operating income (loss). ~~Prior to the acquisition of IBEX, the Company operated in one segment.~~

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase.

~~Investments~~. Investments in debt securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported as a component of accumulated other comprehensive income. Realized gains and losses are included in other income (expenses), net. The cost of securities sold is based on the specific-identification method. Interest on marketable securities is included in interest income, net. Investments with original maturities of greater than three months but less than one year from the date of purchase are classified as current. Investments with original maturities of greater than one year from the date of purchase are classified as non-current.

~~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. Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive.

Leases. The 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 ~~our~~the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The short-term portion of operating lease obligations are included in other current liabilities. The classification of the Company’s leases as operating or finance 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 present value of 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 based on the 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 exercise any such options. Rent expense for the Company’s operating leases is recognized on 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 and interest expense associated with its finance leases is 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 ~~Topic~~ASC 842, the Company has elected not to separate lease and non-lease components for 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 ~~Topic~~ASC 842 to leases with a term of 12 months or less for all classes of assets.

~~Stock- Based Compensation.~~Revenue Recognition. Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which 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.

In the regenerative medicine products segment, the Company records product revenues primarily from the sale of its regenerative tissue products. The Company ~~measures all stock-based compensation~~sells its products to ~~employees using~~healthcare providers (customers), primarily through direct sales representatives. Product revenues consist of a ~~fair value method and records such expense~~single performance obligation that the Company satisfies at a point in time. In general, ~~and administrative, research and development, and sales and marketing expenses. For stock options with graded vesting,~~ the Company recognizes ~~compensation expense~~product revenue upon delivery to the customer.

In the contract services segment, the Company records service revenues from the sale of its contract 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 ~~service period for each separately vesting tranche~~term of the ~~award as though the award were in substance, multiple awards~~performance obligation based on the ~~fair value~~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 ~~date~~payment is due upfront and the remainder upon completion of ~~grant.~~the contract, with most contracts completing in less than a year. As of March 31, 2020 and December 31, 2019, the Company had unbilled receivables of $0.1 million and $0.1 million, and deferred revenue of $23,000 and $98,000, respectively. The unbilled receivables balance is included in accounts receivable. Revenue of $0.1 million was recognized during the three months ended March 31, 2020 that was included in the deferred revenue balance as of December 31, 2019.

~~The fair value~~Costs to obtain the contract are incurred 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. Forfeitures are recognizedproducts revenues as they ~~occur.~~

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

The accounting for non-employee options and restricted stock is similar to that of employees. Stock-based compensation expense for nonemployee services has historically been subject to remeasurement at each reporting dateare expensed as the underlying equity instruments vest and was recognized as an expense over the period during which services are received. Upon the adoption of ASU 2018-07, Compensation – Stock Compensation on January 1, 2019, the valuation was fixed at the implementation date and will be recognized as an expense on a straight-line basis over the remaining service period.incurred.

Research and Development Expenses. Costs incurred for research and development are expensed as incurred.

Nonrefundable advance payments for goods or services ~~that have the characteristics~~ 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 Research and Development Expenses and 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.

~~Revenue Recognition.~~

Common Stock Warrant Liability. ~~Revenue is recognized when a customer obtains~~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 agreement. The Company’s warrants under certain change of control ~~of promised goods~~situations, could require settlement in cash, which require the warrants to be recorded as liabilities. Warrants classified as liabilities are remeasured each period until settled or services, in an amount that reflects the consideration which the entity 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.until classified as equity.

~~In the regenerative medicine products segment,~~Stock-Based Compensation. The Company measures all stock-based compensation to employees and non-employees using a 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 ~~records products revenues primarily~~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 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 ~~sale~~U.S. Treasury yield curve in effect at the time of ~~its regenerative tissue products.~~the grant. The volatility factor is determined based on the Company’s 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 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.Since the Company was in a loss position for all periods presented, basic net loss per share is the same as diluted net loss per share since the effects of potentially dilutive securities are antidilutive.

Impairment of Long-Lived Assets. The Company ~~sells its products to healthcare providers, primarily through direct sales representatives. Products revenues consists~~reviews long-lived assets, including property and equipment, intangible assets and goodwill for impairment whenever events or changes in business circumstances indicate that the carrying amount of ~~a single performance obligation~~the assets may not be fully recoverable. Factors that the Company ~~satisfies at~~considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a ~~point in time. In general,~~long-lived asset for recoverability, the Company ~~recognizes products revenues upon delivery~~compares forecasts of undiscounted cash flows expected to ~~the customer.~~

~~In the contract services segment, the Company records services revenues~~result from the ~~sale~~use and eventual disposition of the long-lived asset to its contract research services, which includes delivery of preclinical studies and other research services to unrelated third parties. Services 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 costscarrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to ~~be required to satisfy~~result from the ~~performance obligation.~~use of an asset are less than its carrying amount. The ~~Company believes that this method provides a faithful depiction of the transfer of services over the term of the performance obligation~~impairment loss would be based on the ~~remaining services needed to satisfy the obligation. This requires the Company to make reasonable estimates~~excess of the ~~extent of progress toward completion~~carrying value of the ~~contract. As a result, unbilled receivables and deferred revenue are recognized~~impaired asset over its fair value, determined based on ~~payment timing and work completed. Generally, a portion~~discounted cash flows. There were no impairments of long-lived assets for any of the payment is due upfront and the remainder upon completion of the study, with most studies completing in less than a year. As of September 30, 2019 and December 31, 2018, the Company had unbilled receivables of $222,000 and $157,000 and deferred revenue of $134,000 and $170,000, respectively. The unbilled receivables balance is included in consolidated accounts receivable. Revenues of $170,000 were recognized during the nine months ended September 30, 2019 that were included in the deferred revenue balance at the beginning of the period.

~~Costs to obtain the contract are incurred for products revenues as they are shipped and are expensed as incurred.~~periods presented

Recent Accounting Pronouncements

~~In August 2018, the FASB issued ASU 2018-13,~~~~Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement~~. The ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. The Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

In June 2016, the FASB issued ASU No. 2016-13,Financial Instruments-Credit Losses (Topic 326), which requires entities to measure all expected credit losses for financial assets held at the reporting date based on historical experience, current conditions, and reasonable and supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost. This standard is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal 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 currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.

Recently Adopted Accounting Pronouncements

~~On January 1, 2019 the Company adopted ASU 2016-02,~~~~Leases (ASC 842)~~ and related amendments, which require lease assets and liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. The standard was adopted using the modified retrospective transition approach by applying the new standard to all leases existing at the date of the initial application and not restating comparative periods.

We elected the package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract was or contains a lease, and our initial direct costs for any leases that existed prior to January 1, 2019. The impact of the adoption of ASC 842 on the accompanying Condensed Consolidated Balance Sheet as of January 1, 2019 was as follows (in thousands):

December 31, 2018
Adjustments Due to the
Adoption of ASC 842
January 1, 2019
Operating lease right-of-use assets $ – $ 5,305 $ 5,305
Liabilities:
Accounts payable and accrued expenses $ 6,508 $ (75 ) $ 6,433
Other current liabilities 316 1,432 1,748
Operating lease liabilities – 3,948 3,948

The adjustments due to the adoption of ASC 842 related to the recognition of operating lease right-of-use assets and operating lease liabilities for the existing operating leases. A cumulative-effect adjustment to beginning accumulated deficit was not required.

In ~~June~~August 2018, the FASB issued ASU ~~2018-07,~~2018-13,~~Compensation – Stock Compensation~~Fair Value Measurement (Topic ~~718): Improvements~~820), Disclosure Framework-Changes to ~~Nonemployee Share-based Payment Accounting~~the Disclosure Requirements for Fair Value Measurement. The ~~standard expands~~ASU modifies the ~~scope of Topic 718 to include share-based payments issued to nonemployees~~disclosure requirements for ~~goods~~fair value measurements by removing, modifying or ~~services, simplifying the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with~~adding certain ~~exceptions.~~disclosures. The standard is effective for fiscal years beginning after December 15, ~~2018,~~2019, including interim periods within those fiscal years with early adoption ~~permitted, including adoption in an interim period.~~permitted. The Company adopted this ~~ASU~~standard on January 1, ~~2019.~~2020. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.

3. LIQUIDITY AND NEED FOR ADDITIONAL CAPITAL

The Company has experienced recurring losses and cash outflows from operating activities. ~~Since inception through September 30, 2019,~~As of March 31, 2020, the Company ~~has~~had an accumulated deficit of ~~$414.2~~$448.4 million. As of ~~September 30, 2019,~~March 31, 2020, the Company had cash and cash equivalents and short-term investments of ~~$45.9~~$39.5 million.

On April 10, 2019, the Company completed an underwritten offering providing for the issuance and sale of 3,418,918 shares of the Company’s common stock, par value $0.001 per share, at an offering price of $8.51 per share, for net proceeds of approximately $27.9 million, after deducting offering expenses payable by the Company.

On December 5, 2019, the Company entered into an Equity Purchase Agreement (the “Purchase Agreement”), with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone has agreed to purchase from the Company up to $25.0 million of shares of its common stock, subject to certain limitations including a minimum stock price of $2.00, at the direction of the Company from time to time during the 36-month term of the Purchase Agreement. Concurrently, the Company entered into a Registration Rights Agreement with Keystone, pursuant to which it agreed to register the sales of its common stock pursuant to the Purchase Agreement under the Company’s existing shelf registration statement on Form S-3 or a new registration statement. On December 19, 2019, the Company sold 54,090 shares under the Purchase Agreement at a purchase price of $2.31 per share, for total proceeds of $0.1 million. During the three months ended March 31, 2020, the Company completed four additional sales of common stock to Keystone under the Purchase Agreement for a total of 216,412 shares generating total gross proceeds of $0.6 million.

Based upon the current status of ~~the Company’s~~our product development and commercialization plans, the Company believes that its existing cash and cash equivalents, with planned operating cost reductions, and ~~short-term investments~~proceeds from the Loan, will be adequate to satisfy its capital and operating needs for at least the next 12 months from the date of filing. As noted in our April 21, 2020 press release, we have already taken action to reduce future cash burn by reducing payroll expense, adopting a salary and wage reduction, and reducing discretionary spending across the organization to minimal levels. As discussed in our April 30, 2020 press release updating corporate strategy and regulatory pathway for SkinTE, we are substantially reducing commercial operations and other functions to further significantly decrease cash burn. The Company ~~anticipates needing substantial~~believes it may need additional financing to continue clinical deployment and commercialization of ~~its lead product~~ SkinTE and development of its other product ~~candidates, and scaling the manufacturing capacity for its products and product candidates and prepare for commercial readiness. However, the~~candidates. The Company will continue to pursue fundraising opportunities when available, but such financing may not be available in the future on ~~terms~~ favorable ~~to the Company,~~terms, if at all. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its product development ~~programs. The Company may also implement additional spending reductions.~~programs, or be unable to continue operations over a longer term. The Company plans to meet its capital requirements primarily through issuances of equity securities, debt financing, revenue from product and services sales ~~and future collaborations.~~or strategic partnership arrangements. Failure to generate ~~revenue~~cash from revenues, or raise additional capital, would adversely affect the Company’s ability to achieve its intended business objectives.

4. FAIR VALUE

In accordance withASC 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. ~~This methodology applies to our Level 1 investments, which are composed of money market funds.~~

	●	Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market. ~~This methodology applies to our Level 2 investments, which are composed of corporate debt securities, commercial paper, and U.S. government debt securities.~~

	●	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. ~~This methodology applies to our Level 3 financial instruments, which are composed of contingent consideration.~~

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.

In connection with the offering of Units in September 2017 (see Note 10), the Company issued Series F Preferred Shares and warrants to purchase an aggregate of 322,727 shares of common stock. The Series F Preferred Shares contained an embedded conversion feature that was not clearly and closely related to the identified host instrument and, as such, was recognized as a derivative liability measured at fair value. The Company classified these derivatives on the consolidated balance sheet as a current liability. The warrants were exercisable at $30.00 per share and had a two year expiration. The warrants were liabilities pursuant to ASC 815. The warrant agreement provided for an adjustment to the number of common shares issuable under the warrant 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); or (c) the Company issues new securities for consideration less than the exercise price. Under ASC 815, warrants that provide for down-round exercise price protection are recognized as derivative liabilities.

~~As discussed in Note 10, both the warrants and the Series F Preferred Shares were exchanged for common stock on March 6, 2018.~~

The fair value of the bifurcated embedded conversion feature was estimated to be approximately $7.2 million at March 5, 2018, as calculated using the Monte Carlo simulation with the following assumptions:

Series F
Conversion
Feature
March 5, 2018
Stock price $ 20.05
Exercise price $ 27.50
Risk-free rate 2.2 %
Volatility 88.2 %
Term 1.5

~~The fair value of the warrant liability was estimated to be approximately $2.5 million at March 5, 2018 as calculated using the Monte Carlo simulation with the following assumptions:~~

Warrant Liability
March 5, 2018
Stock price $ 20.05
Exercise price $ 30.00
Risk-free rate 2.2 %
Volatility 88.2 %
Term 1.5

~~The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative liabilities (in thousands):~~

2017 Series F Preferred Stock – Warrant Liability 2017 Series F Preferred Stock – Embedded Derivative Total Warrant and Derivative Liability
Fair value – December 31, 2017 $ 3,388 $ 8,150 $ 11,538
Change in fair value (863 ) (987 ) (1,850 )
Exchange / conversion to common shares (2,525 ) (7,163 ) (9,688 )
Fair value – September 30, 2018 $ – $ – $ –

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy ~~as of September 30, 2019 and December 31, 2018~~ (in thousands):

	Fair Value Measurement as of September 30, 2019								March 31, 2020
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	7	$	–	$	–	$	7	$	19,065	$	–	$	–	$	19,065
Commercial paper		–		12,053		–		12,053		–		747		–		747
Corporate debt securities		–		13,995		–		13,995		–		997		–		997
U.S. government debt securities		–		4,632		–		4,632
Total	$	7	$	30,680	$	–	$	30,687	$	19,065	$	1,744	$	–	$	20,809
Liabilities:
Contingent consideration	$	–	$	–	$	135	$	135
Common stock warrant liability									$	–	$	–	$	7,145	$	7,145
Total	$	–	$	–	$	135	$	135	$	–	$	–	$	7,145	$	7,145

	Fair Value Measurement as of December 31, 2018								December 31, 2019
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	7	$	–	$	–	$	7	$	2,019	$	–	$	–	$	2,019
Commercial paper		–		21,392		–		21,392		–		11,064		–		11,064
Corporate debt securities		–		5,448		–		5,448		–		8,982		–		8,982
U.S. government debt securities		–		3,226		–		3,226		–		3,770		–		3,770
Total	$	7	$	30,066	$	–	$	30,073	$	2,019	$	23,816	$	–	$	25,835
Liabilities:
Contingent consideration	$	–	$	–	$	261	$	261	$	–	$	–	$	31	$	31
Total	$	–	$	–	$	261	$	261	$	–	$	–	$	31	$	31

In May 2018, the Company purchased the assets of a preclinical research sciences business and related real estate from Ibex Group, L.L.C., a Utah limited liability company, and Ibex Preclinical Research, Inc., a Utah corporation (collectively, “IBEX”). The ~~aggregate purchase price was $3.8 million, of which $2.3 million was paid at closing and the balance satisfied by a promissory note payable to IBEX with an initial~~ fair value of ~~$1.2 million~~the common stock warrant liability is estimated using a Monte Carlo simulation model, which uses certain assumptions related to risk-free interest rates, expected volatility, and ~~contingent consideration with an initial~~expected term. The fair value of ~~$0.3 million.~~the warrant liability was $11.7 million upon the issuance date of February 14, 2020 and $7.1 million as of March 31, 2020.

The following assumptions were used in estimating the fair value of the warrant liability as of March 31, 2020 and upon the issuance date of February 14, 2020:

	March 31, 2020			February 14, 2020
Stock price	$	1.08		$	1.69
Exercise price	$	2.80		$	2.80
Risk-free rate		0.54	%		1.51	%
Volatility		94.21	%		93.40	%
Term		6.87			6.99

The contingent consideration ~~represents the estimated fair value of future payments due~~related to the ~~Seller~~IBEX acquisition of ~~IBEX based on IBEX’s revenue generated from studies quoted prior~~$31,000 outstanding at December 31, 2019, was paid during the three months ended March 31, 2020. As of March 31, 2020, the obligation related to but completed after the transaction. Contingent consideration was initially recognized at fair value as purchase consideration and is subsequently remeasured at fair value through earnings. The initial fair value of the contingent consideration was based on the present value of estimated future cash flows using a 20% discount rate. The contingent consideration is the payment of 15% of the actual revenues received for work on any study initiated within 18 months following the closing of the purchase on the basis of certain specific customer prospects that received service proposals prior to the closing, provided that the total payments will not exceed $650,000. Adjustments to the fair value of the contingent consideration liability is included in general and administrative expense in the accompanying consolidated statements of operations.

~~The following table sets forth the changes in the estimated fair value of our contingent consideration liability (in thousands) which is included in other current liabilities:~~

Contingent Consideration
Fair value – December 31, 2018 $ 261
Change in fair value (48 )
Earned and paid (78 )
Fair value – September 30, 2019 $ 135

fully satisfied.

5. CASH EQUIVALENTS AND ~~AVAILABLE FOR SALE MARKETABLE SECURITIES~~SHORT-TERM INVESTMENTS

Cash equivalents and ~~available-for-sale marketable securities~~short-term investments consisted of the following ~~as of September 30, 2019 and December 31, 2018~~ (in thousands):

	September 30, 2019								March 31, 2020
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
Cash equivalents:
Money market funds	$	7	$	–	$	–	$	7	$	19,065	$	–	$	–	$	19,065
Commercial paper		10,037		32		–		10,069		747		–		–		747
U.S. government debt securities		1,930		6		–		1,936
Total cash equivalents (1)		11,974		38		–		12,012		19,812		–		–		19,812
Short-term investments:
Commercial paper		1,980		4		–		1,984
U.S. government debt securities		2,686		10		–		2,696
Corporate debt securities		13,984		11		–		13,995		994		3		–		997
Total short-term investments		18,650		25		–		18,675		994		3		–		997
Total	$	30,624	$	63	$	–	$	30,687	$	20,806	$	3	$	–	$	20,809

(1)

Included in cash and cash equivalents in the Company’s consolidated balance sheet as of ~~September 30, 2019~~March 31, 2020 in addition to ~~$15.3~~$18.7 million of cash.

	December 31, 2018									December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses			Market Value		Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
Cash equivalents:
Money market funds	$	7	$	–	$	–		$	7	$	2,019	$	–	$	–	$	2,019
Commercial paper		20,648		30		–			20,678		1,020		4		–		1,024
U.S. government debt securities		3,224		2		–			3,226		3,761		9		–		3,770
Total cash equivalents (1)		23,879		32		–			23,911		6,800		13		–		6,813
Short-term investments:
Commercial paper		714		–		–			714		9,986		54		–		10,040
Corporate debt securities		5,444		5		(1	)		5,448		8,977		5		–		8,982
Total short-term investments		6,158		5		(1	)		6,162		18,963		59		–		19,022
Total	$	30,037	$	37	$	(1	)	$	30,073	$	25,763	$	72	$	–	$	25,835

(1)

Included in cash and cash equivalents in the Company’s consolidated balance sheet as of December 31, ~~2018~~2019 in addition to ~~$31.8~~$3.4 million of cash.

All investments in debt securities held as of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 had maturities of less than one year. For the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, the Company recognized net realized gains on available-for-sale securities ~~and cash equivalents~~ of $0.1 ~~million and $0.4 million, respectively.~~million.

6. PROPERTY AND EQUIPMENT, NET

The following table presents the components of property and equipment, net (in thousands):

	September 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
Machinery and equipment	$	11,814		$	8,276		$	12,089		$	12,083
Land and buildings		2,000			2,000			2,000			2,000
Computers and software		1,173			1,372			1,276			1,189
Leasehold improvements		2,272			1,230			2,335			2,282
Construction in progress		1,903			2,402			2,323			1,606
Furniture and equipment		470			614			470			470
Total property and equipment, gross		19,632			15,894			20,493			19,630
Accumulated depreciation		(3,970	)		(2,158	)
Accumulated depreciation and amortization								(5,471	)		(4,719	)
Total property and equipment, net	$	15,662		$	13,736		$	15,022		$	14,911

Depreciation and amortization expense for property and equipment, including assets acquired under financing leases ~~for the three and nine months ended September 30, 2019 and 2018~~ was as follows (in thousands):

For the three months ended For the nine months ended
September 30, September 30,
2019 2018 2019 2018
General and administrative expense $ 407 $ 80 $ 1,171 $ 89
Research and development expense 390 336 1,072 999
Total depreciation and amortization expense $ 797 $ 416 $ 2,243 $ 1,088

~~For the three and nine months ended September 30, 2019, the Company recognized a loss on disposal of property and equipment of $265,000.~~

	For the Three Months Ended March 31,
	2020		2019
General and administrative expense	$	392	$	357
Research and development expense		360		319
Total depreciation and amortization expense	$	752	$	676

7. LEASES

The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through November 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.

In April 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space. The lease expires April 2024 and requires monthly lease payments subject to annual increases. During the nine months ended September 30, 2019, the Company also increased office space under an existing lease, which requires additional monthly lease payments.

As of ~~September 30, 2019,~~March 31, 2020, the maturities of our operating and finance lease liabilities were as follows (in thousands):

Operating leases Finance leases
2019 (excluding the nine months ended September 30, 2019) $ 551 $ 149
2020 2,114 597
2021 1,730 594
2022 1,345 329
2023 132 253
Thereafter 87 43
Total lease payments 5,959 1,965
Less:
Imputed interest (787 ) (310 )
Total $ 5,172 $ 1,655

	Operating leases			Finance leases
2020 (excluding the three months ended March 31, 2020)	$	1,555		$	494
2021		1,730			656
2022		1,345			405
2023		132			336
2024		87			42
Total lease payments		4,849			1,933
Less imputed interest		(559	)		(281	)
Total lease liabilities	$	4,290		$	1,652

Supplemental balance sheet information related to leases was as follows (in thousands):

Finance leases

	As of September 30, 2019		March 31, 2020		December 31, 2019
Finance lease right-of-use assets included within property and equipment, net	$	2,112	$	2,005	$	2,177

Current finance lease liabilities included within other current liabilities	$	456	$	520	$	508
Non-current finance lease liabilities included within other long-term liabilities		1,199		1,132		1,267
Total	$	1,655
Total finance lease liabilities			$	1,652	$	1,775

Operating leases

	As of September 30, 2019		March 31, 2020		December 31, 2019
Current operating lease liabilities included within other current liabilities	$	1,814	$	1,676	$	1,746
Operating lease liabilities – non current		3,358		2,614		2,994
Total	$	5,172
Total operating lease liabilities			$	4,290	$	4,740

The components of lease expense were as follows (in thousands):

					For the Three Months Ended March 31,
	Three months ended September 30, 2019		Nine months ended September 30, 2019		2020		2019
Operating lease costs included within operating costs and expenses	$	556	$	1,617	$	556	$	482
Finance lease costs:
Amortization of right of use assets	$	171	$	479
Amortization of right-of-use assets					$	175	$	138
Interest on lease liabilities		42		109		43		23
Total	$	213	$	588	$	218	$	161

Supplemental cash flow information related to leases was as follows (in thousands):

				For the Three Months Ended March 31,
	Nine months ended September 30, 2019			2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases	$	1,550		$	558	$	470
Operating cash out flows from finance leases		109			43		23
Financing cash out flows from finance leases		336			123		118
Lease liabilities arising from obtaining right-of-use assets:
Finance leases	$	1,828		$	–	$	1,824
Lease payments made in prior period reclassified to property and equipment		535			–		535
Remeasurement of finance lease liability due to lease modification		(22	)
Operating leases		936			–		9

As of ~~September 30,~~March 31, 2020 and December 31, 2019, the weighted average remaining ~~operating~~ lease term ~~is 3.0~~for operating leases was 2.6 and 2.8 years, respectively, and the weighted average discount rate used ~~to determine~~for operating leases was 9.84% and 9.83%, respectively. As of March 31, 2020 and December 31, 2019, the ~~operating lease liability was 9.82%. The~~ weighted average remaining ~~finance~~ lease term ~~is 3.6~~for finance leases was 3.3 and 3.5 years, respectively, and the weighted average discount rate used ~~to determine the~~for finance ~~lease liability~~leases was ~~9.70%~~9.77%.

8. ACCOUNTS PAYABLE AND ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

The following table presents the major components of accounts payable and accrued expenses (in thousands):

	September 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
Accounts payable	$	3,716	$	2,918	$	2,059	$	1,689
Salaries and other compensation		1,263		1,280		1,437		1,462
Legal and accounting		1,905		640		1,365		1,404
Accrued severance		2,519		–		1,843		1,053
Other accruals		830		1,670
Benefit plan accrual						448		557
Other						874		930
Total accounts payable and accrued expenses	$	10,233	$	6,508	$	8,026	$	7,095

Salaries and other compensation include accrued payroll expense, accrued bonus, and estimated employer 401(k) plan contributions.

Accrued severance includes $2.3 million for accrued compensation due to Dr. Denver Lough, a former officer and director, under a settlement terms agreement dated August 21, 2019. The remaining amount due of $0.6 million is included in other long-term liabilities.

Other current liabilities are comprised of the current portion of operating lease liabilities and finance lease liabilities, ~~contingent consideration,~~ and short-term debt. The short-term debt had a balance of ~~$0.2~~$1.0 million as of ~~September 30, 2019,~~March 31, 2020, while the other components are disclosed in the footnotes above.

~~9. LONG TERM NOTE PAYABLE~~

~~In connection with~~ The short-term debt balance is related to two financing arrangements entered into during the ~~IBEX Acquisition in May 2018,~~three months ended March 31, 2020 to fund an insurance contract. Under the financing arrangements, the Company ~~issued a promissory note payable to the Seller~~borrowed $0.8 million and $0.2 million. The amounts will be repaid in nine equal installments, with an initial fair value of $1.2 million. The promissory note has a principal balance of $1.3 million and bears interest at a rate of 3.5% interest per annum. Principal and interest are payable in five equal installments that began on November 3, 2018 and continuing on each six-month anniversary thereafter (“Payment Date”). The promissory note may be prepaid by the Company at any time and becomes due and payable at the earlier of the maturity date of November 3, 2020 or upon an event of default, which includes failure to pay any installment on each Payment Date, breach of any negative covenants, insolvency or bankruptcy. Upon the occurrence of an event of default, the promissory note will bear an accelerated interest rate of ~~7% per annum from the date of the event of default.~~

The Company initially recognized the promissory note at its fair value, using an estimated market rate of interest for the Company, which was higher than the promissory note’s stated rate. The result of imputing a market rate of interest resulted in an initial discount to the principal balance of approximately $113,000, which is being amortized to interest expense over the term of the promissory note using the effective interest method. The unamortized debt discount was approximately $28,0004.25% and ~~$68,000 at September 30, 2019 and December 31, 2018,~~6.35%, respectively. ~~Amortization of debt discount of $12,000 and $40,000 was included in interest income, net for the three and nine months ended September 30, 2019.~~

~~10. PREFERRED SHARES AND COMMON SHARES~~9. STOCK-BASED COMPENSATION

~~Exchange of 100% of Outstanding Series F Preferred Stock Shares~~2020, 2019 and ~~Warrants~~2017 Equity Incentive Plans

2020 Plan

On ~~September 20, 2017,~~October 25, 2019, the ~~Company sold an aggregate~~Company’s Board of ~~$17,750,000 worth~~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 ~~Company’s securities (the “Units”) to accredited investors at a purchase price of $2,750 per Unit. Each Unit consisted of (i) one share of~~Board will administer the Company’s newly authorized 6% Series F Convertible Preferred Stock, par value $0.001 per share (the “Series F Preferred Shares”), convertible into one hundred (100) shares of the Company’s common stock, and (ii) a two-year warrant to purchase up to 322,727 shares of the Company’s common stock, at an exercise price of $30.00 per share.

The Series F Preferred Shares were 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 Series F Preferred Share was $2,750 and the initial conversion price was $27.50 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events.

On the two-year anniversary of the initial issuance date, any Series F Preferred Shares outstanding and not otherwise already converted, would, 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.

~~The warrants issued in connection with the Series F Preferred Shares were determined to be liabilities pursuant to ASC 815. The warrant agreement provided for an adjustment to~~2020 Plan, including determining which eligible participants will receive awards, the number of ~~common shares issuable under the warrant or adjustment to the exercise price, including but not limited to, if: (a) the Company issued~~ shares of common stock as a dividend or distribution to holders of its common stock; (b) the Company subdivided or combined its common stock (i.e., stock split); or (c) the Company issues new securities for consideration less than the exercise price. Priorsubject to the ~~adoption of ASU 2017-11, warrants that provide for down-round exercise price protection were recognized as derivative liabilities.~~

The conversion feature within the Series F Preferred Shares was determined to not be clearly and closely related to the identified host instrument and, as such, was 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 was 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.

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,awards and the ~~Company’s warrants~~terms and conditions of such awards. Up 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 in the following issuances: (A) all outstanding Series F Preferred Shares were converted into 972,070 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 was terminated in exchange for 31,321 shares of restricted common stock; (C) 322,727 Warrants to purchase common stock were exchanged for 151,871 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 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.

~~The exchange of all outstanding Series F Preferred Shares, and the holders’ right to receive 6% dividends, for common stock of the Company was recognized as follows:~~

Fair market value of 1,003,393 shares of common stock issued at $20.05 (Company’s closing stock price on March 5, 2018) in exchange for Series F Preferred Shares and accrued dividends $ 20,117,990
Carrying value of Series F Preferred Shares at March 5, 2018, including dividends (5,898,274 )
Carrying value of bifurcated conversion option at March 5, 2018 (7,162,587 )
Deemed dividend on Series F Preferred Shares exchange $ 7,057,129

As the Warrants were classified as a liability, the exchange of the Warrants for common shares was recognized as a liability extinguishment. As of March 5, 2018, the fair market value of the 151,871 common shares issued in the Exchange was $3,045,034 and the fair value of the common stock warrant liability was $2,525,567 resulting in a loss on extinguishment of warrant liability of $519,467 during the nine months ended September 30, 2018.

The Company recognized accretion of the discount to the stated value of the Series F Preferred Shares of approximately $698,000 during the nine months ended September 30, 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 Stock Conversion and Elimination~~

~~On February 6, 2018, 15,756 shares of Series B Convertible Preferred Stock (“Series B Preferred Shares��) were converted into 262,606 shares of common stock.~~

On March 6, 2018, the Company received conversion notices (in accordance with original terms) from holders of 100% of the outstanding shares of Series A Convertible Preferred Stock (the “Series A Preferred Shares”), Series B Preferred Shares and Series E Convertible Preferred Stock (the “Series E Preferred Shares”) and issued an aggregate of 7,945,2503,000,000 shares of common stock are issuable pursuant to ~~such holders.~~

~~The shares~~awards under the 2020 Plan. No grants of ~~Series E Preferred Stock were held by Dr. Denver Lough,~~awards may be made under the ~~Company’s former Chief Executive Officer. On~~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. As of March ~~6, 2018,~~31, 2020, the Company ~~entered into a new registration rights agreement (the “Lough Registration Rights Agreement”) with Dr. Lough, pursuant to which~~had 3,000,000 shares available for future issuances under 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. On March 14, 2019, the Company’s registration obligation was waived, and the Lough Registration Rights Agreement amended to provide that Dr. Lough may demand registration by written request to the Company. Dr. Lough demanded registration of his 7,050,000 common shares in August 2019, and pursuant to that demand a registration statement on Form S-3 was filed with the Securities and Exchange Commission in October 2019. Once the registration statement is effective, the Company is obligated to keep it effective until the earlier of the date all the registered shares have been sold pursuant to the registration statement or the date one year from the date the registration statement is first effective.

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 and Series F Preferred Stock. As a result, the Company has 25,000,000 shares of authorized and unissued preferred stock as of September 30, 2019 with no designation as to series.

~~There was no convertible preferred stock outstanding as of September 30, 2019 and December 31, 2018.~~

~~11. STOCK-BASED COMPENSATION~~

For the three and nine months ended September 30, 2019 and 2018, the Company recorded stock-based compensation expense related to stock options, restricted stock awards, and the employee stock purchase plan as follows (in thousands):

For the three months ended For the nine months ended
September 30, September 30,
2019 2018 2019 2018
General and administrative expense $ 4,822 $ 10,118 $ 20,751 $ 22,925
Research and development expense (164 ) 335 2,401 3,317
Sales and marketing expense 367 – 780 –
Total stock-based compensation expense $ 5,025 $ 10,453 $ 23,932 $ 26,242

2020 Plan.

~~Incentive Compensation Plans~~

2019 Plan

On October 5, 2018, the Company’s Board ~~of Directors (the “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 ~~September 30, 2019,~~March 31, 2020, the Company had ~~approximately 290,875~~115,284 shares available for future issuances under the 2019 Plan.

2017 Plan

On December 1, 2016, the Company’s Board ~~of Directors (the “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 ~~(increased from 3,450,000 in October 2017)~~ 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 ~~September 30, 2019,~~March 31, 2020, the Company had ~~approximately 379,641~~2,230,045 shares available for future issuances under the 2017 Plan.

~~Stock Options~~

A summary of the Company’s employee and non-employee stock option activity for the ~~nine~~three months ended ~~September 30, 2019~~March 31, 2020 is presented below:

Number of
shares

Weighted-Average
Exercise Price

Outstanding – December 31, 2018 6,499,885 $ 14.02
Granted 818,403 $ 13.75
Exercised (1) (292,417 ) $ 4.31
Forfeited (668,842 ) $ 20.50
Outstanding – September 30, 2019 6,357,029 $ 13.91
Options exercisable – September 30, 2019 4,815,831 $ 12.69
Weighted-average grant date fair value of options granted during the nine months ended September 30, 2019 $ 9.84

~~(1)~~

~~The number of exercised options includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.~~

~~Restricted Stock~~

~~A summary of the Company’s employee and non-employee restricted-stock activity for the nine months ended September 30, 2019 is presented below:~~

Number of
shares
Weighted-Average
Grant-Date Fair Value
Unvested - December 31, 2018 651,110 $ 23.65
Granted 1,919,675 $ 5.03
Vested (1) (415,290 ) $ 20.84
Forfeited (128,395 ) $ 22.44
Unvested – September 30, 2019 2,027,100 $ 7.64

~~(1)~~

~~The number of vested restricted stock units includes shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.~~

	Number of Shares			Weighted-Average Exercise Price
Outstanding – December 31, 2019		4,529,988		$	15.26
Granted		117,632		$	2.54
Exercised		(10,000	)	$	3.12
Forfeited		(289,061	)	$	17.13
Outstanding – March 31, 2020		4,348,559		$	14.80
Options exercisable, March 31, 2020		3,584,300		$	14.84

Employee Stock 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 a price per share equal to 85% 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. Total stock-based compensation related to the ESPP for the three and nine months ended September 30, 2019 was $14,000 and $33,000, respectively. A total of 7,260 shares of common stock were purchased pursuant to the ESPP during the nine months ended September 30, 2019 for total proceeds of $35,000.

~~12. INCOME TAXES~~Stock-Based Compensation Expense

The ~~Company has evaluated its income tax positions~~stock-based compensation expense related to stock options, restricted stock awards, and ~~determined that no material uncertain tax positions existed at September 30, 2019. The Company does not expect a significant change in its unrecognized tax benefits within~~ the ~~next twelve months.~~employee stock purchase plan was as follows (in thousands):

	For the Three Months Ended March 31
	2020			2019
General and administrative expense	$	3,076		$	9,037
Research and development expense		(36	)		1,084
Sales and marketing expense		181			168
Total stock-based compensation expense	$	3,221		$	10,289

Restricted Stock

A summary of the Company’s employee and non-employee restricted-stock activity is presented below:

	Number of Shares
Unvested - December 31, 2019		1,843,001
Granted		188,944
Vested (1)		(452,067	)
Forfeited		(5,000	)
Unvested – March 31, 2020		1,574,878

(1)

The number of vested restricted stock units includes shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.

10. Common Stock Warrants

On February 14, 2020, the Company completed an underwritten offering of 10,638,298 shares of its common stock and warrants to purchase 10,638,298 shares of common stock. Each common share and warrant were sold together for a combined public purchase price of $2.35 before underwriting discount and commission. The exercise price of each warrant is $2.80 per share, the warrants were exercisable immediately, and they will expire February 12, 2027. As the warrants could require cash settlement in certain scenarios, the warrants were classified as a liability and are recorded at an estimated fair value using a Monte Carlo simulation model. The total proceeds from the offering were allocated first to the warrant liability based on the estimated fair value with the residual allocated to the common shares. Issuance costs including underwriter commissions and fees paid to third parties were allocated between the warrant liability and common shares on a pro rata basis. The amount allocated to the warrant liability was expensed and the amount allocated to the common shares was recorded as a reduction to additional paid-in-capital. As of ~~September 30, 2019 and December~~March 31, ~~2018,~~2020, none of the Company maintained a valuation allowance to fully offset its net deferred tax assets primarily attributable to operations in the United States, as the realization of such assets was not considered more likely than not.warrants had been exercised.

The ~~Company files income tax returns~~change in fair value of the common stock warrant liability is presented in the ~~U.S. Federal~~following table and ~~various state and local jurisdictions.~~is reported as a change in fair value of common stock warrant liability in the statements of operations (in thousands):

	March 31, 2020
Beginning balance	$	–
Initial value of common stock warrant liability		11,677
Change in fair value of common stock warrant liability		(4,532	)
Ending balance	$	7,145

~~13.~~11. LOSS PER SHARE

The following outstanding potentially dilutive ~~shares~~securities have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:

	As of September 30,				As of March 31,
	2019		2018		2020		2019
Stock options		6,357,029		6,125,628		4,348,559		6,576,816
Restricted stock		2,027,100		685,730		1,574,878		516,875
Common stock warrants						10,638,298		–
Shares committed under ESPP		15,235		–		54,632		–

~~14.~~12. COMMITMENTS AND CONTINGENCIES

Contingencies

On June 26, 2018, a class action complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Jose Moreno against the Company and two directors of the Company, Case No. 2:18-cv-00510-JNP (the “Moreno Complaint”). On July 6, 2018, a similar complaint was filed in the same court against the same defendants by Yedid Lawi, Case No. 2:18-cv-00541-PMW (the “Lawi Complaint”). Both the Moreno Complaint and Lawi Complaint allege that the defendants made or were responsible for, disseminating information to the public through reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10 and 20(a) of the Exchange Act and Rule 10b-5 adopted thereunder. Specifically, both complaints allege that the defendants misrepresented the status of one of the Company’s patent applications while touting the unique nature of the Company’s technology and its effectiveness. Plaintiffs are seeking damages suffered by them and the class consisting of the persons who acquired the publicly-traded securities of the Company between March 31, 2017, and June 22, 2018. Plaintiffs have filed motions to consolidate and for appointment as lead plaintiff. On November 28, 2018, the Court consolidated theMoreno andLawi cases under the captionIn re PolarityTE, Inc. Securities Litigation ~~(the~~(the “Consolidated Securities Litigation”), and requested the appointment of the plaintiff inLawi as the lead plaintiff. On January 16, 2019, the Court granted the motion of Yedid Lawi for appointment as lead plaintiff, and on February 1, 2019, the Court granted the lead plaintiff’s motion for approval of lead counsel and liaison counsel. The Court also ordered that the lead plaintiff file and serve a consolidated complaint no later than 60 days after February 1, ~~2019, the defendants shall have 60 days after filing and service of the consolidated complaint to answer or otherwise respond, and the~~2019. The lead plaintiff ~~must file a motion for class certification within 90 days of service of the consolidated complaint. The Lead Plaintiff~~ filed a consolidated complaint on April 2, 2019, and asserted essentially the same violations of Federal securities laws recited in the original complaints. ~~The Company believes the allegations in the consolidated complaint are without merit, and intends to defend the litigation, vigorously.~~ The Company filed a motion to dismiss the consolidated complaint on June 3, 2019. Plaintiffs’ opposition to the Company’s motion to dismiss was filed on August 2, 2019, and the Company filed a reply to the opposition on September 13, 2019. A hearing on the Company’s motion to dismiss ~~is scheduled for~~was held on November 19, ~~2019.~~2019; no order has been issued to date. At this early stage of the proceedings the Company is unable to make any prediction regarding the outcome of the litigation.

In November 2018, a shareholder derivative lawsuit was filed in the United States District Court, District of Utah, with the captionMonther v. Lough, et al., case no. 2:18-cv-00791-TC, alleging violations of the Exchange Act, breach of fiduciary duty, and unjust enrichment on the part of certain officers and directors based on the facts and circumstances recited in the Consolidated Securities Litigation. On November 26, 2018, the court issued an order staying all proceedings until after the disposition of motions to dismiss the Consolidated Securities Litigation.

Other Matters

In the ordinary course of business, wethe 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. Except as noted above, at ~~September 30, 2019, we were~~March 31, 2020, the Company was not party to any legal or arbitration proceedings that may have ~~significant~~material effects on ~~our~~its financial position or results of operations. WeNo governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of ~~ours~~the Company is either a party adverse to usthe Company or ~~our~~its subsidiaries or has a material interest adverse to usthe Company or ~~our~~its subsidiaries.

Commitments

The Company has entered into employment agreements with key executives and adopted a change in control plan that contain severance terms and change of control provisions.

~~15.~~13. 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 provides, in part, that the Company pay to Dr. Lough $1,500,000 in cash on 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. The fair value of the restricted stock units was $0.8 million. The Company expensed the cash portion and equity portion of these awards upon Dr. Lough’s termination. As of March 31, 2020, the Company has recorded a liability of $1.0 million related to future cash payments under the agreement.

In October 2018, the Company entered into an office lease covering approximately 7,250 square feet of rental space in the building located at 40 West 57^th Street in New York City. The lease is for a term of three years. The annual lease rate is $60 per square foot. Initially the Company ~~will occupy~~occupied and ~~pay~~paid 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 we elect 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 (“Cohen LLC”), could sublease a portion of the office space.

During 2019, the Company increased the space leased from 3,275 square feet to 6,232 square feet. The Company is using 1,648 square feet, and Cohen LLC is using approximately 4,584 square feet as of ~~September 30, 2019.~~March 31, 2020. The monthly lease payment for 6,232 square feet is $31,160. Of this amount $22,920 is ~~allocated~~charged pro rata to Cohen LLC based on square footage occupied. Additional lease charges for operating expenses and taxes are ~~allocated~~also charged under the sublease based on the ratio of rent paid by the Company and Cohen LLC to 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. The Company recognized $69,000 and ~~$195,000~~$51,000 of sublease income related to this agreement for the three ~~and nine~~ months ended ~~September 30,~~March 31, 2020 and 2019, respectively. The sublease income is included in other income, net in the statement of operations. As of ~~September 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, there ~~was $17,000 and $0~~were no amounts due from the related party under this agreement.

~~16.~~14. SEGMENT REPORTING

The Company’s ~~current~~ operations involve products and services which are managed separately. Accordingly, it operates in two segments: 1) regenerative medicine and 2) contract services.

During the three months ended September 30, 2019, the Company’s CODM changed the reporting of segment net income and loss to allocate additional noncash expenses from the regenerative medicine segment to the contract services segment. For the three months ended September 30, 2019 and 2018, this resulted in reallocation of noncash expense of $0.4 million and $0.2 million, respectively. For the nine months ended September 30, 2019 and 2018, this resulted in reallocation of noncash expense of $1.4 million and $0.3 million, respectively. The change is reflected in the three and nine months ended September 30, 2019 and 2018 net loss amounts presented below.

Certain information concerning ~~our~~the Company’s segments ~~for the three and nine months ended September 30, 2019 and 2018~~ is presented in the following ~~table~~tables (in thousands):

	For the three months ended						For the nine months ended
	September 30,						September 30,						For the Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
Net revenues:
Reportable segments:
Regenerative medicine	$	839		$	197		$	1,640		$	389		$	428		$	297
Contract services		556			528			2,546			659			505			1,168
Total net revenues	$	1,395		$	725		$	4,186		$	1,048		$	933		$	1,465

Net (loss) income:
Net loss:
Reportable segments:
Regenerative medicine	$	(22,466	)	$	(20,332	)	$	(70,247	)	$	(45,845	)	$	(12,703	)	$	(25,209	)
Contract services		(517	)		(247	)		(1,101	)		(511	)		(337	)		(364	)
Total net loss	$	(22,983	)	$	(20,579	)	$	(71,348	)	$	(46,356	)	$	(13,040	)	$	(25,573	)

~~17.~~15. SUBSEQUENT EVENTS

~~Pursuant~~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 ~~demand~~Borrower was made ~~by Dr. Denver Lough~~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 ~~his Registration Rights Agreement~~the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. No assurance is provided that the Borrower will obtain forgiveness of the Loan in August 2019, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission on October 21, 2019 to register 7,050,000 shares of common stock held by Dr. Lough, which was declared effective November 1, 2019.whole or in part.

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The ~~following information~~discussion and analysis below includes certain forward-looking statements that are subject to risks, uncertainties and other factors, as described in “Risk Factors” in our Annual Report on Form 10-K and this report, that could cause our actual growth, results of operations, performance, financial position and business prospects and opportunities for this fiscal year and periods that follow to differ materially from those expressed in or implied by those forward-looking statements. Readers are cautioned that forward-looking statements contained in this Quarterly Report on Form 10-Q should be read in conjunction with our disclosure under the ~~consolidated financial statements and related notes thereto included in this Quarterly Report on Form 10-Q.~~

In addition to historical information, this report contains forward-looking statements that involve risks and uncertainties that may cause our actual results to differ materially from plans and results discussed in forward-looking statements. We encourage you to review the risks and uncertainties discussed in the section entitled “Forward-Lookingheading “Disclosure Regarding Forward-Looking Statements” included at the beginning of this Quarterly Report on Form 10-Q and under Part I, Item 1A. Risk Factors of our Transition Report on Form 10-K filed with the Securities and Exchange Commission on March 18, 2019. The risks and uncertainties can cause actual results to differ significantly from those in our forward-looking statements or implied in historical results and trends. We caution readers not to place undue reliance on any forward-looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to publicly update or revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based, or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.below.

Overview

We are a commercial-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 the fields of medicine, biomedical engineering and material sciences. ~~We operate~~Historically, we have operated two ~~segments;~~segments: the regenerative medicine business segment and the contract ~~services~~research segment.

Segment Reporting

The regenerative medicine business segment ~~over~~is engaged in the ~~last year has established and advanced our core “TE” program, which includes~~commercialization of SkinTE, our first commercial product, ~~SkinTE. The commercial launch~~via a sales team, the pursuit of clinical studies of SkinTE, ~~has included~~and working on the ~~build out~~development of ~~commercial, manufacturing, and corporate structure to support the growth~~Skin TE Cryo (cryopreservation of SkinTE ~~revenue~~for multiple deployments on a single patient), SkinTE POC (point-of-care device for on-site SkinTE processing and ~~deployments~~deployment), and PTE 11000 (allogenic, biologically active dressing for use in ~~2019 and beyond. This includes equipment, personnel, systems, and leased properties. Research~~wound care). Our commercial and development ~~continue to expand to advance~~activity in the ~~product development pipeline.~~regenerative medicine business segment includes the maintenance and operation of manufacturing facilities, sales and marketing, and research and development.

~~In May 2018 we acquired assets of~~The contract services segment operates a preclinical research and veterinary sciences business ~~and related real estate, which we now operate~~ through our subsidiary, Ibex Preclinical Research, Inc. The aggregate purchase price was $3.8 million, of which $2.3 million was paid at closing and the balance satisfied by a promissory note payable to the Seller with an initial fair value of $1.2 million and contingent consideration with an initial fair value of approximately $0.3 million. As a result, we have significant research facilities and a well-educated and skilled team of scientists and researchers that comprise the contract research segment of our business. These resources are highly beneficial to the work we are doing on our TE products and other research initiatives. We also offer research services to unrelated third parties on a contract basis through our subsidiary, Arches Research, Inc.

Change in Corporate Strategy

We recently announced a change in our strategic focus and a planned change in the regulatory pathway for SkinTE. The change in strategy is the result of a combination of the following unexpected events.

FDA Developments

Following informal, voluntary discussions between us and the United States Food and Drug Administration (FDA), and preliminary views expressed by FDA received on April 21, 2020 regarding the regulatory pathway for SkinTE, the Company believes that it is prudent to submit an investigational new drug application (IND) and thereafter a biologics license application (BLA) for SkinTE. We are in the process of arranging meetings with FDA to determine the most appropriate development plan for a BLA submission. Since 2018 we have been actively engaged in a clinical development program, which includes a completed SkinTE study in burn wounds, ongoing randomized controlled trials (RCTs) in repairing diabetic foot ulcers (DFUs) and venous leg ulcers (VLUs), and outcomes data from many of the approximately 700 SkinTE clinical cases. We intend to submit these data to FDA as potential candidates for inclusion in a clinical data package to support a BLA.

FDA has not asked us to stop marketing SkinTE pending submission or approval of a BLA. We plan to discuss with FDA the possibility of continued marketing of SkinTE as a 361 HCT/P on a limited basis at a future meeting, both until November 2020, which marks the end of a 36-month period of enforcement discretion that the Agency announced in final Guidance issued in November 2017 that it would generally observe unless there are reported or potential significant safety concerns, and beyond November 2020. It is not customary for the FDA to allow wide-spread commercial sales of a product subject to a pending BLA.

COVID-19 Pandemic

In December 2019, there was an outbreak of a new strain of coronavirus (“COVID-19”). In March 2020, the World Health Organization declared COVID-19 a pandemic. Rapid growth of the pandemic soon followed in the United States. Throughout the country, healthcare assets in terms of facilities and providers have been marshalled and dedicated to the care and treatment of COVID-19 patients while still trying to meet the acute and traumatic care needs of the general population. Consequently, medical care and procedures that are considered “elective” have been put on hold in many regions across the country. Many of the initial economic effects in the healthcare industry of the early stages of the COVID-19 outbreak in the United States and the shift in healthcare resources occurred during the last three weeks of the quarter ended March 31, 2020. The number of paid SkinTE cases in the first quarter of 2020 was 81 compared to 89 paid cases in the fourth quarter of 2019. The number of paid cases were impacted during the last three weeks of March, and we ~~offer under~~observed that some SkinTE procedures planned for April were postponed, cancelled, or not scheduled as a direct result of the ~~trademark POLARITYRD. Contract~~COVID-19 pandemic. The impact is most evident in chronic wounds without amputation risk. The Company anticipates continued postponement of elective procedures through the second quarter and it is not possible to predict the impact of a second wave of COVID-19 that might occur in the fall or winter.

Moving Forward

Given the Company’s recent decision to change the regulatory pathway for SkinTE with the FDA, and the headwinds associated with the COVID-19 pandemic, management has determined the best use of the Company’s capital resources going forward is to focus on the preparation and prosecution of an IND and then a BLA with the FDA. We believe a BLA will enhance the value of SkinTE as a product and increase the likelihood of achieving widespread commercial adoption. We believe this pathway will align more clearly with our goal of delivering to healthcare providers additional data to establish SkinTE as the standard of care for chronic and traumatic wounds. In connection with pursuing this strategy, over the next several months we will substantially decrease commercial operations and other functions to reduce historical monthly cash burn and redirect our capital resources to advancing our IND and BLA submissions.

Revenue Recognition

In the regenerative medicine products segment, we record product revenues primarily from the sale of its regenerative tissue products. We sell our products to healthcare providers, primarily through direct sales representatives. Product revenues consist of a single performance obligation that we satisfy at a point in time. In general, we recognize product revenue upon delivery to the customer. In the contract services segment, we earn service revenues from the provision of contract research services, ~~help us defray~~which includes delivery of preclinical studies and other research services to unrelated third parties. Service revenues generally consist of a single performance obligation that we satisfy over time using an input method based on costs incurred to date relative to the total costs ~~of maintaining a first-rate research facility and allow us~~expected to ~~meet companies pursuing new technologies that may~~ be ~~opportunities for collaborative or strategic relationships going forward.~~required to satisfy the performance obligation.

Research and Development ~~Expenses.~~Expenses

Research and development expenses primarily represent employee related costs, including stock compensation for research and development executives and staff, lab and office expenses, clinical trial costs, and other overhead charges.

General and Administrative ~~Expenses.~~Expenses

General and administrative expenses primarily represent employee related costs, including stock compensation for corporate ~~executive~~executives and support staff, general office expenses, professional fees and various other overhead charges. Professional fees, including legal and accounting expenses, typically represent one of the largest components of our general and administrative expenses. These fees are partially attributable to our required activities as a publicly traded company, such as SEC filings, ~~with the Securities~~ and ~~Exchange Commission (SEC),~~corporate and ~~corporate- and business-development~~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 limitation due to the “change in ownership” provisions of the Internal Revenue Code. The annual limitation may result in the expiration of NOL carryforwards before utilization. Due to our history of losses, a valuation allowance sufficient to fully offset our NOLSales and other deferred tax assets has been established under current accounting pronouncements, and this valuation allowance will be maintained unless sufficient positive evidence develops to support its reversal.

~~Critical Accounting Estimates~~Marketing Expenses

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 andmarketing expenses ~~during the reporting periods. Among the more significant estimates included in these financial statements are the valuation of warrant liability, valuation of derivative liability, stock-based~~primarily represent employee related costs, including stock compensation ~~the valuation allowances~~ for ~~deferred tax benefits, and the valuation of tangible and intangible assets included in acquisitions. Actual results could differ from those estimates.~~

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.

~~Goodwill and Intangible Assets.~~Goodwill represents the excess acquisition cost over the fair value of net tangible and intangible assets acquired. Goodwill is not amortized and is subject to annual impairment testing or between annual tests if an event or change in circumstance occurs that would more likely than not reduce the fair value of a reporting unit below its carrying value. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances lead to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test is not required. If the Company concludes otherwise, the first step of the two-step process must be performed. The goodwill impairment test is performed at the reporting unit level by comparing the estimated fair value of a reporting unit with its respective carrying value. If the estimated fair value exceeds the carrying value, goodwill at the reporting unit level is not impaired and the second step of the impairment test in unnecessary. If the estimated fair value is less than carrying value, the second step of the impairment test must be performed. The second step of the goodwill impairment test would be to record an impairment charge, if any, based on the excess of a reporting unit’s carrying amount over its fair value.

The fair value of reporting units is based on widely accepted valuation techniques that the Company believes market participants would use, although the valuation process requires significant judgment and often involves the use of significant estimates and assumptions. The Company utilizes a market cap approach in estimating the fair value of reporting units. The estimates and assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge. Adverse market or economic events could result in impairment charges in future periods.

Intangible assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, which generally range from one to eleven years. The useful life is the period over which the asset is expected to contribute directly, or indirectly, to its future cash flows. Intangible assets are reviewed for impairment when certain events or circumstances exist. For amortizable intangible assets, impairment exists when the undiscounted cash flows exceed its carrying value. At least annually, the remaining useful life is evaluated.

~~Impairment of Long-Lived Assets.~~The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the 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 excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. No impairment loss has been recognized.

~~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 using a fair value method and records such expense in research and development, general and administrative and~~ sales and marketing expenses. Compensation Expense for stock options with graded vesting is recognized over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.

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. Forfeitures are recognized as they occur.

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

~~Revenue Recognition~~. In the regenerative medicine products segment, the Company records product revenues primarily from the sale of its regenerative tissue products. The Company sells its products to healthcare providers, 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 earns service revenues from the provision of contract research services, which includes delivery of preclinical studiesstaff, marketing and advertising expenses, trade shows 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~~promotional costs, ~~incurred to date relative to the total costs expected to be required to satisfy the performance obligation.~~

~~Leases.~~~~On January 1, 2019 the Company adopted ASU 2016-02,~~~~Leases (ASC 842)~~and other related amendments, which require lease assets and liabilities to be recorded on the balance sheet for leases with terms greater than twelve months. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. The standard was adopted using the modified retrospective transition approach by applying the new standard to all leases existing at the date of the initial application and not restating comparative periods. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases, while our accounting for finance leases remained substantially unchanged. See Note 2 – Summary of Significant Accounting Policies and Note 7 – Leases in the notes to the condensed consolidated financial statements included in Part I, Item 1, of this Quarterly Report on Form 10-Q for additional information regarding the adoption.charges.

Results of Operations

~~Three months ended September 30, 2019 versus~~Comparison of the three months ended ~~September 30, 2018~~March 31, 2020 compared to the three months ended March 31, 2019.

For the Three Months Ended Increase
(Decrease)
(in thousands) March 31, 2020 March 31, 2019 Amount %
(Unaudited)
Net revenues
Products $ 428 $ 297 $ 131 44 %
Services 505 1,168 (663 ) (57 )%
Total net revenues 933 1,465 (532 ) (36 )%
Cost of sales
Products 340 273 67 25 %
Services 176 503 (327 ) (65 )%
Total cost of sales 516 776 (260 ) (34 )%
Gross profit 417 689 (272 ) (39 )%

Operating costs and expenses
Research and development 3,373 5,352 (1,979 ) (37 )%
General and administrative 11,057 17,195 (6,138 ) (36 )%
Sales and marketing 3,694 3,953 (259 ) (7 )%
Total operating costs and expenses 18,124 26,500 (8,376 ) (32 )%
Operating loss (17,707 ) (25,811 ) 8,104 31 %
Other income (expense)
Change in fair value of common stock warrant liability 4,532 – 4,532 *
Interest income, net (12 ) 70 (82 ) (117 )%
Other income, net 147 168 (21 ) (13 )%
Net loss $ (13,040 ) $ (25,573 ) $ 12,533 49 %
Net Revenues

~~Net Revenues~~. For the three-month period ended ~~September 30, 2019, total~~March 31, 2020, we recorded net revenues ~~were $1.4 million. Products revenues~~of $0.93 million, which represents a decrease of $0.53 million or 36% from the ~~sale~~$1.47 million of ~~SkinTE were $0.8 million~~net revenues recorded for the three months ended ~~September 30, 2019 compared~~March, 31, 2019. The $0.53 million decrease in net revenues was due to ~~$0.2 million for~~decreased revenue in our contract services operating segment from lower demand in the three months ended September 30, 2018. Net revenues from services for the three months ended September 30, 2019 were $0.6 million compared to $0.5 million for the three months ended September 30, 2018.first quarter of 2020, which was partially offset by an increase in product revenue.
Gross Profit

Cost of ~~Sales. For the three-month period ended September 30, 2019, total cost of~~ sales ~~was approximately $0.6 million and approximately 46% of total net revenues. Products cost of sales were $0.3 million or approximately 38% of products revenues~~ for the ~~three-month period ended September 30, 2019. Products cost of sales consists primarily of direct manufacturing costs (materials, freight and labor) and fixed overhead costs. Products cost of sales~~product segment as a percentage of ~~products~~net revenues ~~has declined quarter over quarter during~~was 19% in the first ~~nine months~~quarter of 2019 ~~primarily~~compared to 36% for the first quarter of 2020. The increase is driven by a higher percentage of variable cost per unit due to ~~a reduction in direct manufacturing costs. Services cost of sales were $0.3 million or approximately 59% of services revenues. Product cost~~smaller case sizes. Cost of sales for the ~~three-month period ended September 30, 2018 were $0.3 million or approximately 136%~~services segment as a percentage of ~~products revenues. Services~~net revenues was 34% in the first quarter of 2019 compared to 19% for the first quarter of 2020, which we attribute to variations in service specific materials requirements for performing services in the first quarter of 2020 compared to the same quarter in 2019. As a result of the changes in net revenues and cost of sales ~~for~~in both segments, the ~~three-month~~combined effect is that gross profit decreased as a percentage in line with net revenues period ~~ended September 30, 2018 were $0.4 million or approximately 76% of services revenues.~~
~~Research and Development Expenses. Research and development expenses decreased $1.1 million, or 28%, in the three-month~~over period ended September 30, 2019, compared to the three-month period ended September 30, 2018. The decrease is primarily driven by a shift in mix between commercial and operational infrastructure build out in the current period as well as research and development costs in the prior period.
~~General and Administrative Expenses~~. General and administrative expenses increased $0.9 million, or 6%, in the three-month period ended September 30, 2019 compared to the three-month period ended September 30, 2018. The Company expanded its infrastructure to support the commercial launch of SkinTE. The resulting increase in expenses is driven primarily by employee-related costs, salaries, and benefits, and increased outside services expense, including legal and accounting fees and consulting expenses.
~~Sales and Marketing Expenses~~. For the three-month period ended September 30, 2019, sales and marketing expenses increased $3.4 million or 208%, in the three-month period ended September 30, 2019 compared to the three-month period ended September 30, 2018. This represents increased sales personnel and marketing costs due to the expansion and commercialization of SkinTE.
~~Other Income (Expenses)~~. For the three-month period ended September 30, 2019, other income (expenses) increased approximately 12% compared to the three-month period ended September 30, 2018. This increase is due to rental income offset by a decrease in interest income.
~~Net loss~~. ~~Net loss for the three-month period ended September 30, 2019 was approximately $23.0 million compared to a net loss of approximately $20.6~~from $0.69 million for the three-month period ended ~~September 30, 2018, primarily reflecting~~March 31, 2019 to $0.42 million for the ~~increase~~three-month period ended March 31, 2020, or a decrease in ~~operating~~gross profit of 39%.
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Research and Development
For the three-month period ended March 31, 2020, we recorded research and development expenses totaling $3.37 million, which represents a decrease of $1.98 million, or 37%, from $5.35 million of research and development expenses for the three months ended March 31, 2019. There was a reduction in staff in research and development that reduced compensation and benefits costs by $.72 million and ~~expenses driven by expanding operations discussed above.~~stock compensation expense decreased $1.12 million.

~~Nine months ended September 30, 2019 versus nine months ended September 30, 2018~~General and Administrative Expenses

~~Net Revenues~~. For the nine-month period ended September 30, 2019, total net revenues were $4.2 million. Products revenues from the sale of SkinTE were $1.6 million for the nine months ended September 30, 2019 compared to $0.4 million for the nine months ended September 30, 2018. Net revenues from services were $2.5 million for the nine months ended September 30, 2019 compared to $0.7 million for the nine months ended September 30, 2018. The IBEX business was acquired in May 2018 and contributed $0.7 million to revenues in the nine months ending September 30, 2018.
~~Cost of Sales~~. For the nine-month period ended September 30, 2019, total cost of sales was approximately $2.0 million and approximately 48% of total net revenues. Products cost of sales were $0.9 million or approximately 57% of products revenues primarily due to fixed overhead costs. Services cost of sales were $1.1 million or approximately 43% of services revenues. Products cost of sales for the nine-month period ended September 30, 2018 were $0.4 million and approximately 101% of products revenues. Services cost of sales for the nine-month period ended September 30, 2018 were $0.4 million or approximately 67% of services revenues.
~~Research and Development Expenses~~. Research and development expenses increased $0.5 million, or approximately 4%, in the nine-month period ended September 30, 2019, compared to the nine-month period ended September 30, 2018. The increase is primarily driven by an increase in research and clinical support personnel with associated wage and benefits cost, offset by a shift in mix between commercial and operational infrastructure build out in the current period as well as research and development costs in the prior period.
~~General and Administrative Expenses~~. General and administrative expenses ~~increased $14.3~~totaled $11.06 million ~~or approximately 42%,~~for the three-month period ended March 31, 2020, which represents a decrease of $6.14 million as compared to $17.20 million of general and administrative expenses incurred during the three months ended March 31, 2019. The primary driver for this decrease is a $5.96 million reduction in stock compensation expense in the ~~nine-month period ended September 30, 2019~~first quarter of 2020 compared to the ~~nine-month period ended September 30, 2018. The Company expanded its infrastructure to support the commercial launch~~first quarter of ~~SkinTE. The resulting increase in expenses is driven primarily by employee-related costs, salaries,~~2019.
Sales and ~~benefits, and increased outside services expense, including legal and accounting fees and consulting expenses.~~Marketing

Sales and ~~Marketing Expenses. For~~marketing expenses totaled $3.69 million for the ~~nine-month~~three-month period ended ~~September 30, 2019,~~March 31, 2020, compared to $3.95 million of sales and marketing expenses ~~increased $11.3 million or 699%,~~incurred during the three months ended March 31, 2019, which is roughly equivalent and consistent with the Company’s focus on commercialization of SkinTE in ~~the nine-month period ended September 30, 2019 compared to the nine-month period ended September 30, 2018. This represents increased~~both periods. The service segment does not have a meaningful sales ~~personnel~~ and marketing ~~costs due~~component to ~~the expansion and commercialization of SkinTE.~~its business.

~~Other Income (Expenses)~~. For the nine-month period ended September 30, 2019, other income (expenses) decreased $0.9 million or approximately 53% compared to the nine-month period ended September 30, 2018. This decrease is due to a change in the fair value of derivatives of $1.9 million and a reduction of interest income of $0.2 million offset by loss on extinguishment of warrant liability of $0.5 million, realized investment gains of $0.4 million and rental income of $0.3 million. There were no warrants outstanding for the nine-month period ended September 30, 2019.
~~Net loss~~. Net loss for the nine-month period ended September 30, 2019 was approximately $71.3 million compared to a net loss of approximately $46.4 million for the nine-month period ended September 30, 2018, primarily reflecting the increase in operating costs and expenses driven by expanding operations discussed above.
Liquidity and Capital Resources

As of ~~September 30, 2019,~~March 31, 2020, our cash and cash equivalents and short-term investments ~~balance was approximately $45.9~~totaled $39.51 million and our working capital was approximately ~~$35.7~~$31.93 million, compared to cash and cash equivalents and short-term investments of ~~$61.8~~$29.24 million and our working capital of ~~$56.8~~approximately $22.43 million at December 31, ~~2018.~~
~~As reflected in the condensed consolidated financial statements, we had an~~2019. Our accumulated deficit ofat March 31, 2020, was approximately $414.2 million at September 30, 2019, and approximately $40.7 million net cash used in operating activities for the nine-month period then ended. At December 31, 2018, we had an accumulated deficit of approximately $342.9 million and approximately $19.4 million net cash used in operating activities for the nine-months ended September 30, 2018.$448.40 million.

On April 1012, 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 us under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and ~~May 6, 2019,~~Economic Security Act (the “CARES Act”) and is administered by the ~~Company~~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. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. No assurance is provided that the Borrower will obtain forgiveness of the Loan in whole or in part.
On February 14, 2020, we completed an underwritten offering ~~providing for the issuance and sale~~ of ~~3,418,918~~10,638,298 shares of ~~the Company’s~~our common stock ~~par value $0.001~~and warrants to purchase 10,638,298 shares of common stock. Each common share and warrant were sold together for a combined public purchase price of $2.35 before underwriting discount and commission. Each warrant has an exercise price of $2.80 per share, ~~at an offering price of $8.51 per share, for~~was exercisable immediately, and will expire February 12, 2027. The net proceeds ~~of approximately $27.9~~to the Company from the offering were $22.5 million, after ~~deducting~~ offering expenses payable by the Company. In connection with this offering, the Company agreed not to sell any additional shares under the Keystone Purchase Agreement described below for a period of 90 days after the closing date of the offering.

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~~The Company~~
We are party to an Equity Purchase Agreement dated as of December 5, 2019 (the “Purchase Agreement”), with Keystone Capital Partners, LLC (“Keystone”), pursuant to which Keystone has ~~taken numerous steps~~agreed to ~~further reduce its cash burn~~purchase from us up to $25.0 million of shares of our common stock, subject to certain limitations including a minimum purchase price of $2.00 per share, at our direction from time to time during the ~~three months ended September 30, 2019, including outsourcing various aspects~~36-month term of the Purchase Agreement. Concurrently, we entered into a Registration Rights Agreement with Keystone, pursuant to which we agreed to register the sales of our ~~business, conducting~~common stock pursuant to the Purchase Agreement under our existing shelf registration statement on Form S-3 or a ~~thorough budget review by department, enhancing fiscal discipline and prioritizing resource allocation to those areas~~new registration statement. During the period from the date of the ~~business that are most likely~~Purchase Agreement to ~~generate revenue~~the date of this filing, we have sold 270,502 shares of our common stock under the Purchase Agreement generating total gross proceeds of $725,000 and have up to $24,275,000 available for future sale under the Purchase Agreement. In connection with the underwritten offering described in the ~~near term. We expect these efforts will continue in~~preceding paragraph, we agreed not to sell any additional shares under the ~~fourth quarter~~Purchase Agreement for a period of ~~2019, but~~90 days after the ~~results~~closing date of ~~these efforts will be offset by~~ the agreement on settlement terms we signed on August 21, 2019, with Dr. Denver Lough, a principal shareholder and former officer and director, that provides, in part, that the Company pay to Dr. Lough $1,500,000 in cash on October 1, 2019, pay an additional $1,500,000 in cash in equal monthly installments beginning November 1, 2019 and ending April 1, 2021, and award to Dr. Lough 200,000 restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. Approximately $2.3 million is included in accounts payable and accrued expenses at September 30, 2019, for the payment obligations to Dr. Lough. The remaining amount due is included in other long-term liabilities.offering.
Based upon the current status of our product development ~~and commercialization~~ plans, we believe that our existing cash and cash equivalents, ~~and short-term investments~~with planned operating cost reductions, will be adequate to satisfy our capital and operating needs for at least the next 12 months from the date of filing. ~~Nevertheless, it~~This conclusion is ~~likely in the future~~based on our current capital resources and plans for implementing operating cost reductions. We believe we may need additional financing to continue clinical ~~deployment~~trials for SkinTE and ~~commercialization of our TE products,~~ development of our other product ~~candidates, and scaling the manufacturing capacity for our products and product~~ candidates. ~~Accordingly, we~~We will continue to pursue fundraising opportunities when available, however, such financing may not be available on terms favorable to us, if at all. If adequate funds are not available, ~~in the future,~~ we may be required to delay, reduce the scope of, or eliminate one or more of our ~~operational~~product development programs or ~~development programs. The Company may also implement additional spending reductions.~~be unable to continue operations over a longer term. We plan to meet our future capital requirements primarily through issuances of equity securities, debt financing, ~~revenue from product sales and future collaborations.~~or strategic partnership arrangements. Failure to generate revenue or raise additional capital ~~as needed in the future~~ would adversely affect our ability to achieve our intended business ~~objectives.~~objectives

Our actual capital requirements will depend on many factors, including ~~among other things: our ability~~the cost and timing of pursuing a biologics license application for SkinTE we intend to ~~scale the manufacturing for and to commercialize successfully our lead product, SkinTE;~~file with FDA; the progress and success of clinical evaluation and acceptance of SkinTE; our ability to develop our other product candidates; and the costs and timing of obtaining any required regulatory registrations or ~~approvals.~~approvals for our product candidates. Our ~~statements regarding~~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 ~~I, Item 1A. Risk Factors~~II of ~~our Transition~~this Report on Form ~~10-K filed with the SEC on March 18, 2019~~10-Q will impact our future capital requirements and the adequacy of our available funds. If we are required to raise additional funds, any additional equity financing may be highly dilutive, or otherwise disadvantageous, to existing stockholders, and debt financing, if available, may involve restrictive covenants. If we elect to pursue collaborative arrangements, 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.

~~Off-Balance Sheet Arrangements~~The following table sets forth the primary sources and uses of cash for each period indicated:

~~As of September 30, 2019, we had no off-balance sheet arrangements.~~
Three Months Ended
(in thousands) March 31, 2020 March 31, 2019
Net cash provided by (used in)
Operating activities $ (13,854 ) $ (15,968 )
Investing activities 16,973 (5,059 )
Financing activities 25,180 302
Net increase/(decrease) in cash and cash equivalents $ 28,299 $ (20,725 )

~~Inflation~~
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~~Our management currently believes that inflation has not had, and does not currently have, a material impact on continuing operations.~~
~~Cash Flows~~
Cash, cash equivalents and short-term investments were approximately $45.9 million as of September 30, 2019, compared to cash and cash equivalents and short-term investments of approximately $61.8 million as of December 31, 2018. Working capital was approximately $35.7 million as of September 30, 2019, compared to working capital of approximately $56.8 million as of December 31, 2018.
~~Operating Cash Flows~~
Cash used in operating activities ~~for~~
During the ~~nine-month~~three-month period ended ~~September 30, 2019, was approximately $40.7 million. Approximately $19.4 million of cash was used in operating activities for the nine-month period ended September 30, 2018. The increase in~~March 31, 2020, net cash used in operating activities ~~mostly relates to the expansion~~was $13.85 million, which included $1.16 million of ~~infrastructure and sales and marketing expenses~~issuance fees related to the ~~commercial expansion~~February raise. The cash used in operating activities was due to a net loss of ~~SkinTE.~~$13.04 million adjusted by $4.53 million due to remeasurement of the warrant liability arising from the underwritten offering of common stock and warrants in February 2020, which was offset by the non-cash expenses of $3.22 million for stock compensation expense.
During the three-month period ended March 31, 2019, net cash used in operating activities was $15.97 million, which was due to a net loss of $25.57 million offset primarily by the non-cash expenses of $10.29 million for stock compensation expense
~~Investing~~ Cash ~~Flows~~provided by (used in) investing activities

~~Cash~~During the three-month period ended March 31, 2020, net cash provided by investing activities was $16.97 million, which was due primarily to proceeds from the sale and maturities of available for sale securities.
During the three-month period ended March 31, 2019, net cash used in investing activities was $5.06 million, which was due primarily due to purchases of available for the nine-month period ended September 30, 2019, was approximately $14.9 million. Cash used in investing activities for the nine-month period ended September 30, 2018 amounted to approximately $8.9 million. For the nine-month period ended September 30, 2019, the activity relates to the net purchase of available-for-sale securities and the purchase of property and equipment. For the nine-month period ended September 30, 2018, the activity relates to the purchase of property and equipment and the acquisition of IBEX.sale securities.

~~Financing~~ Cash ~~Flows~~provided by financing activities

~~Net~~During the three-month period ended March 31, 2020, net cash provided by financing activities ~~for~~was $25.18 million due to proceeds from financing arrangements and net proceeds received from sale of common stock and warrants.
During the ~~nine-month~~three-month period ended ~~September 30,~~March 31, 2019, ~~was approximately $27.1 million. $92.8 million of~~net cash ~~was~~ provided by financing activities ~~for the nine-month period ended September 30, 2018. For the nine-month period ended September 30, 2019, the activity relates to~~was $0.30 million primarily from proceeds received from stock ~~options exercised~~option exercises of $0.53 million offset by payment of contingent liabilities of $0.11 million and principal payments on financing leases of $0.12 million.
Critical Accounting Policies and Estimates
For a description of our significant accounting policies, see note 2 to our condensed consolidated financial statements.
Our discussion and analysis of the financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America 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 is the extent of progress toward completion of contracts, stock-based compensation, the valuation allowances for deferred tax benefits, and the valuation of tangible and intangible assets included in acquisitions. Actual results could differ from those estimates.
Revenue Recognition
Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity 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 ~~completed an underwritten offering providing for~~performs the ~~issuance~~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.
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In the regenerative medicine products segment, the Company records product revenues primarily from the sale of ~~3,418,918 shares~~its regenerative tissue products. The Company sells its products to healthcare providers, primarily through direct sales representatives. Product revenues consists 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 contract 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 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 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.
Costs to obtain the contract are incurred for products revenues as they are shipped and are expensed as incurred.
Stock Based Compensation
The Company measures all stock-based compensation using a fair value method and records such expense in research and development, general and administrative, and sales and marketing expenses. Compensation expense for stock options with graded vesting is recognized over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.
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. 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 ~~par value $0.001 per share, at an offering price~~on the date of ~~$8.51 per share, for net proceeds~~grant and amortized over the vesting period of, approximately $27.9 million, after deducting offering expenses payable by the Company, offset by principal payments on finance leases and contingent consideration liability payments. For the nine-month period ended September 30, 2018, the activity relatesgenerally, six months to a public offering of 2,335,937 shares of our common stock at an offering price of $16.00 per share, resulting in net proceeds of $34.6 million, after deducting offering expenses and another underwritten offering of 2,455,882 shares of our common stock at an offering price of $23.65 per share, resulting in net proceeds of approximately $58.0 million, after deducting offering expenses.three years.

~~Recent Accounting Pronouncements~~Accruals for Research and Development Expenses and Clinical Trials

~~Refer~~As part of the process of preparing its financial statements, the Company is required to ~~our discussion~~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 ~~recent accounting pronouncements~~these contracts are subject to negotiations, which vary from contract to contract and may result in ~~Note 2 - Summary of Significant Accounting Policies~~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 ~~accompanying condensed consolidated financial statements included elsewhere~~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.
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Impairment of Long-Lived Assets
The Company reviews long-lived assets, including property and equipment, intangible assets and goodwill for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the 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 excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows. There were no impairments of long-lived assets for any of the periods presented.
Common Stock and Warrant Transactions
The Company issued units consisting of common stock and warrants and subsequently remeasured those warrants at fair value. 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.
Disclosure Regarding Forward-Looking Statements
Statements that are not historical facts contained in or incorporated by reference into this Quarterly Report on Form 10-Q are “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking statements involve risks and uncertainties that could cause actual results to differ from projected results. The words “anticipate,” “goal,” “seek,” “project,” “strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,” “estimate,” “expect,” “plan,” “intend” and similar expressions and references to future periods, as they relate to us, are intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot assure you that any of our expectations will be realized. Forward-looking statements include, among others, statements we make regarding:
● the timing or success of obtaining regulatory licenses or approvals for marketing our products;
● the initiation, timing, progress, and results of our research and development programs;
● the initiation, timing, progress, and results of our clinical trials;
● the timing for the healthcare industry to resume performing elective procedures that may impact the timing and cost of clinical trials;
● the impact of new accounting pronouncements;
● size and growth of our target markets;
● sufficiency of our working capital to fund our operations for 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; and
● our plans to remediate material weaknesses in our internal control over financial reporting.
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 manufacture, marketing, sale and distribution of our products;
● the ability to gain adoption by healthcare providers of our products for patient care;
● the ability to manufacture product to meet demand;
● the acceptance and level of reimbursement to healthcare providers for application of our products by public and private payors;
29
● 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;
● the development of new therapies or new discoveries that render our products obsolete;
● 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;
● decisions made by healthcare providers regarding elective procedures and use of facilities and resources when there is a major outbreak of life-threatening infectious disease, such as COVID-19;
● the ability to pursue sales activity in the healthcare industry when there is a major outbreak of life-threatening infectious disease, such as COVID-19;
● the ability to manufacture and deliver our products if employees are quarantined due to the impact of the COVID-19;
● 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
● factors described under “Risk Factors” in our 2019 Annual Report on Form 10-K and under Item 1A of this Quarterly Report on Form 10-Q.
We undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise. All forward-looking statements are expressly qualified by these cautionary statements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

Item 4. Controls and Procedures
~~Evaluation of Disclosure Controls and Procedures.~~
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer, as appropriate, to allow timely decisions regarding required disclosure.

Our management, with the participation of our principal executive and financial officers, evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on the evaluation of the effectiveness of our disclosure controls and procedures as of ~~September 30, 2019,~~March 31, 2020, our principal executive and financial officers concluded that, as of such date, our disclosure controls and procedures were not effective due to the material ~~weaknesses~~weakness in our internal control over financial reporting identified below. To address the material ~~weaknesses,~~weakness, management performed additional analyses and other procedures to determine whether the financial statements included herein fairly present our financial results. Subject to the limitations above, management believes that the 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.
~~Internal Control Over Financial Reporting.~~
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles in the United States of America, or GAAP. Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. 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 because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control.
~~Two~~The material ~~weaknesses~~weakness previously identified as of December 31, ~~2018,~~2019, continued to exist as of ~~September 30,~~March 31, 2020. In 2019, ~~which include (1) insufficient internal~~we failed to execute controls relating to reconciliation procedures. In addition, we did not have a sufficient level of precision in our review procedures to detect potentially material errors in accrual and related accounts.
In the first quarter of 2020 management implemented a systemic tool to ~~information technology general controls~~enhance the reconciliation and review procedures identified in the ~~areas~~material weakness above. The tool has not been in operation for a sufficient period of user access and user provisioning, over certain systems that support the financial reporting process; and (2) ineffective controls related to the documentation and completeness of the Company’s stock-based compensation expense.
~~Changes to Internal Control over Financial Reporting~~
time required for remediation. There were no other significant changes in the Company’s internal control over financial reporting during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

~~We have taken several steps to remediate the material weaknesses identified above. These steps include the following:~~
● ~~Stock-Based Compensation System~~ – The Company is in the process of implementing a systemic solution to our stock-based compensation accounting, including internal processes and an external compensation account management tool. The tool was launched during the first quarter of 2019 and we continue to run parallel tests, including data reconciliations. The system implementation and additional procedures enable the Company to properly document the stock-based compensation expense. The Company expects this issue to be remediated during 2019 after adequate test sampling to evaluate operating effectiveness.
● ~~IT Systems & Controls~~ – The Company has hired additional IT personnel and adopted access restrictions and protocols to prevent unauthorized access and unauthorized changes to data and records. We are evaluating these changes and whether they address the system control issues.
As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address the material ~~weaknesses or determine to modify the remediation plan described above.~~weakness. Until the remediation steps set forth above are fully implemented and operating for a sufficient period of time, the material weakness described above will continue to exist.
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PART II. OTHER INFORMATION

Item ~~1. Legal Proceedings~~1A. Risk Factors

~~On June 26, 2018,~~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, 2019, which could materially affect our business, financial position, or future results of operations. The risks described in that Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial position, or future results of operations. The risk factors set forth below update, and should be read together with, the risk factors described in our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.
Risks Related to Our Business
Public health crises, or the perception of their effects, have had and could continue to have a ~~class action complaint alleging violations~~material adverse effect on our business and results of operations.
We could be negatively impacted by the widespread outbreak of an illness or any other communicable disease, such as the COVID-19 pandemic, or any other public health crisis that results in economic and healthcare industry disruptions. The COVID-19 pandemic has negatively impacted the global economy, disrupted supply chains and workforce participation due to “shelter-in-place” restrictions by various governments, and created significant volatility and disruption of financial markets. To date, COVID-19 has had, and may continue to have, an adverse impact on our product sales and commercial operations. We have experienced and may continue to experience significant and unpredictable reductions in the demand for our product as healthcare customers devote medical resources and priorities to the treatment of COVID-19. Our customers may delay their customary purchasing and contracting practices during the healthcare crisis, which could contribute to the reduction in demand for our product. In addition, the American College of Surgeons, U.S. surgeon general, and other public health bodies have recommended delaying elective surgeries during the COVID-19 pandemic, and surgeons and medical societies are evaluating the risks of minimally invasive surgeries in the presence of infectious diseases, which we expect will continue to negatively impact the sale of our product.
The extent of the ~~Federal securities laws was filed~~impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business strategies and initiatives in the expected time frame, will depend on future developments, including the duration and spread of the pandemic and the effect on healthcare providers and the healthcare industry; our ability to travel, distribute, and deploy SkinTE, as well as reduction in access to our customers due to stay-at-home orders, quarantine policies and restrictions on travel, trade, and business operations. These unprecedented measures to slow the spread of the virus taken by local governments and health care authorities, including the deferral of elective medical procedures and social distancing measures, will adversely affect our operations and financial results.
In addition, the COVID-19 pandemic has adversely affected, and may continue to adversely affect, the economies and financial markets of many countries, which may result in a period of regional, national, and global economic slowdown or regional, national, or global recessions that could affect decisions on healthcare spending, adversely affect the healthcare industry, and adversely affect access to capital. COVID-19 and the current financial, economic, and capital markets environment, and future developments in these and other areas present material uncertainty and risk with respect to our performance, financial condition, volume of business, results of operations, and cash flows. Due to the uncertain scope and duration of the pandemic and uncertain timing of national recovery and economic normalization, we are unable to estimate the impact on our operations and financial condition.
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Our wholly owned subsidiary accepted a loan under the CARES Act pursuant to the Paycheck Protection Program, or the PPP, and the loan may not be forgiven or may subject us to challenges, audits, or investigations regarding qualification for the loan, any of which could reduce our liquidity and have a material adverse effect on our business, financial condition and results of operations.
On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note offered by a bank (the “Lender”) evidencing an unsecured loan in the amount of $3,576,145 made to the Borrower under the PPP (the “Loan”). The 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 “SBA”). 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. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities.
No assurance is provided that the Borrower will elect to pursue forgiveness of all or a portion of the Loan or be eligible for and obtain forgiveness of all or a portion of the Loan. If the Borrower elects not to pursue or is unable to qualify for or obtain forgiveness of all or a portion of the Loan, our liquidity could be reduced and our business, financial condition and results of operations may be adversely affected.
Pursuant to the requirements under the CARES Act, in connection with the Loan, the Borrower certified that current economic uncertainty makes the Loan request necessary to support the ongoing operations of the Borrower. We believe that the Borrower made such certification in a manner consistent with SBA guidance that borrowers must make the certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental to the business. While we believe the Borrower’s prior and future certifications were and will be well supported on the dates certified, in light of the understandings of the requirements and the assessment made on the certification date, we cannot be certain that SBA or any other governmental entity or third party will concur with the Borrower, especially in light of the press scrutiny and SBA’s evolving guidance and views, our change in strategy triggered, in part, on regulatory developments occurring after the Loan was made, and the eventual extent of the impact of current economic uncertainties on Borrower’s operations. Further, we cannot be certain that, as a subsidiary of a public company, the Borrower might not be deemed to have improperly made the required certifications, including that current economic uncertainty makes the loan request necessary to support the ongoing operations of the Borrower, taking into account the Borrower’s current business activity and ability to access other sources of liquidity sufficient to support its ongoing operations in a manner that is not significantly detrimental to the business.
Subsequent to the Borrower’s application for the loan, SBA issued various interpretive guidelines in connection with the PPP, including guidance on how SBA interprets certain of the certification requirements. One of the interpretations appears to be in response to various press reports that well-established or well capitalized private and public companies were able to secure PPP loans that were meant for smaller companies. SBA’s interpretive guidelines published on April 23, 2020 set forth that public companies with substantial market value and access to capital markets would likely not qualify to participate in the PPP and SBA advised any such public company to be prepared to provide the basis for the certifications upon SBA request. Subsequently, on April 28, 2020 the Secretary of the Treasury and SBA announced that the government will conduct a full audit of all PPP loans of more than $2 million for which the borrower applies for forgiveness. As the Borrower expects it will be audited or reviewed by SBA or the U.S. Department of the Treasury if it files an application for forgiveness, and, whether or not it elects to seek forgiveness of all or part of the loan, it could be subject to investigation, audit or other review by governmental agencies or claims by third parties, with respect to whether it qualified for an SBA loan, or whether the certifications it made to obtain the Loan are accurate, or other matters. There is a risk that any such audit, review, investigation or claim could result in the diversion of our management’s time and attention, the need to incur significant legal expenses and the possibility that we will sustain reputational injury. If the Borrower were to be audited, investigated, reviewed or subject to suit and if there is any adverse finding in such audit, investigation, review or suit or if the Borrower were alleged, or determined, not to qualify for the Loan or alleged, or found, to have made false certifications in connection with the Loan, the Borrower could be required to return the full amount of the Loan, which would reduce its liquidity, and would subject it to fines and penalties, and exclusion from government contracts. In particular, the Borrower may become subject to actions under the federal False Claims Act, or the FCA, including its qui tam provisions, which, among other things, prohibits persons from knowingly filing, or knowingly causing to be filed, a false statement, or knowingly using a false statement, to obtain payment from the federal government. Violations of the FCA are subject to treble damages and penalties. In the case of an SBA loan, the government could allege that single damages are the amount of the loan and interest thereon (or more), which under the FCA could then be trebled. Substantial penalties must also be imposed for each submitted false statement when a defendant loses an FCA trial. FCA cases may be initiated by the U.S. Department of Justice or by private persons or entities, often called “whistleblowers,” who bring the action on behalf of the United ~~States District Court, District~~States. The Borrower may also face enforcement arising under other federal statutes, including criminal laws, and administrative actions and investigations initiated by SBA or other governmental entities. Furthermore, if the Borrower is identified as an entity that the media, government officials or others seek to portray as a business that should not have availed itself of ~~Utah,~~PPP funding, the Borrower may face negative publicity, which could have a materially adverse impact on its business and operations and on our business and operations as its parent.
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Risks Related to Registration or Regulatory Approval of Our Product Candidates and Other Government Regulations
Our business is subject to continuing regulatory oversight by ~~Jose Moreno against~~the FDA and other authorities, whose requirements are costly to comply with, 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” or “cGTP”), labeling, record keeping, adverse-reaction reporting, inspection, and enforcement.
When SkinTE was registered and listed with the FDA, we believed SkinTE was appropriately 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 still believe that SkinTE is appropriately regulated as a 361 HCT/P. However, following informal, voluntary discussions between FDA and the Company, and ~~two directors~~preliminary views expressed by FDA received on April 21, 2020, we believe that the FDA may disagree with our interpretation if we sought a formal designation of SkinTE’s regulatory classification, and that it therefore is prudent to pursue a strategy to file an investigational new drug application (“IND”) and thereafter a biologics license application (“BLA”) for SkinTE. While we could pursue a formal designation, and we could potentially challenge FDA’s formal designation administratively or in court if we disagreed with their interpretation of the ~~Company, Case No. 2:18-cv-00510-JNP (the “Moreno Complaint”)~~regulations, that would be a lengthy and costly process that would put us in a highly adversarial position vis-à-vis the FDA. Moreover, courts give deference to administrative agencies’ interpretations of governing regulations, and an adverse formal decision from either FDA or a federal court, or both, could have significant negative consequences on our ability to continue our collaborative relationship with the FDA.
FDA has not asked us to stop marketing SkinTE at this time, but we could be required to withdraw SkinTE from the market until the required clinical trials are complete and the applicable premarket regulatory clearances or approvals are obtained. Manufacturers of new drugs, biologics, and some medical devices must complete extensive clinical trials, which must be conducted pursuant to an effective IND or investigational device exemption (IDE). ~~On July 6, 2018,~~In addition, the FDA must review and approve a ~~similar complaint was filed~~BLA or new drug application before a new drug or biologic may be marketed and must approve or clear most medical devices prior to marketing.
The preliminary assessment by the FDA that SkinTE appears to be a biological product that would be regulated under Section 351 of the Public Health Service Act will negatively impact our commercialization of the product and substantially increase the cost to us of regulatory compliance, all of which could adversely affect our results of operations and financial condition. This same risk applies to any other product we may develop that we believe should be regulated as a 361 HCT/P but where the FDA may disagree with our interpretation of the applicable regulations.
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Some of the future new products and enhancements of existing products that we expect to develop and market may not be 361 HCT/Ps, and may require premarket approval or clearance from the FDA. As a result, those product candidates would be subject to additional regulatory requirements, including premarket approval or clearance. There can be no assurance, however, that approval or clearance will be granted with respect to SkinTE, any such products, or enhancements of existing products. Such products or enhancements may encounter significant delays during FDA’s premarket review process that would adversely affect our ability to market such products or enhancements.
Even if premarket approval or clearance are obtained from the FDA, the approvals or clearances may contain substantial limitations on the indicated uses of such products and other uses may be prohibited. Product approvals by the FDA can also be withdrawn due to failure to comply with regulatory standards or the occurrence of unforeseen problems following initial approval. Furthermore, the FDA could limit or prevent the distribution of products, and the FDA has the power to require the recall of such products. FDA regulations depend heavily on administrative interpretation, and there can be no assurance that future interpretations made by the FDA or other regulatory bodies will not adversely affect our operations. In addition, regulatory clearance or 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, and additional clearance, approval, or regulatory reporting may be needed for changes made to products following their initial clearance or approval.
If we fail to comply with the FDA regulations regarding our products and manufacturing processes, the FDA could initiate or take formal enforcement action or other actions, including, without limitation, any of the following:
● Untitled letters, warning letters, fines, injunctions, consent decrees, product seizures, or civil penalties;
● Operating restrictions, partial suspension or total shutdown of clinical studies, manufacturing, marketing, or distribution;
● Orders to recall or destroy products.
● 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, or biologics) will continue to evolve in the ~~same court against~~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 ~~same defendants~~FDA may issue new or revised guidance or regulations for 361 HCT/Ps, drugs, devices, or biologics, 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, the FDA could in the future adopt more restrictive interpretations of existing regulations or increase its enforcement activity, which may adversely affect our business.
Our failure to comply with the regulatory guidelines set forth by ~~Yedid Lawi, Case No. 2:18-cv-00541-PMW (the “Lawi Complaint”).~~the FDA with respect to our product candidates could delay or prevent the completion of market entry, clinical trials, the approval or registration of any product candidates, or the commercialization of our product candidates.
We are subject to regulation and inspection by the FDA for cGTP compliance with respect to our 361 HCT/P products, and we will need to transition to cGMP manufacturing for SkinTE as we pursue a BLA. To the extent that products we develop are not regulated as 361 HCT/Ps, in addition to cGTP, we will be subject to regulation under cGMP as well as to FDA premarket approval or clearance requirements. Complying with cGTP and cGMP requires 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 premarket approval, we must also pass a pre-approval inspection prior to FDA approval or clearance. 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.
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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.
Additionally, we have limited experience in manufacturing products for commercial purposes and could experience difficulties in the continued manufacturing of our product candidates, either ourselves or through third-party contractors with whom we may enter strategic relationships. 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 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 necessary to achieve profitability. Our failure to develop these manufacturing processes and capabilities in a timely manner could prevent us from achieving positive results of operations and cash flows.
Even if the FDA regulates any of our products as 361 HCT/P, 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.
Even if we are permitted to continue marketing SkinTE for some period of time before making a submission to the FDA for premarket approval, we still must generate adequate substantiation for claims we make in our marketing materials. Both the ~~Moreno Complaint~~Federal Trade Commission (“FTC”) and ~~Lawi Complaint allege~~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, and FDA has similar requirements for the labeling and promotion of HCT/Ps that are also considered drugs, biologics, or medical devices. Through clinical use, case studies, clinical studies, as well as other endeavors, we intend to generate such adequate substantiation for any claims we make about our products. If, however, after we commence marketing of any of our products, including SkinTE, the ~~defendants made~~FTC, FDA or one or more states conclude that we lack adequate substantiation for our claims, we may be subject to significant penalties, or may be forced to alter our marketing approach in one or more jurisdictions. Any of this could materially harm our business.
Even if any of our products meet the criteria for a 361 HCT/P, they will be subject to ongoing regulation. We could be subject to significant penalties if we fail to comply with these requirements, which would adversely affect our results of operations.
If one or more of our products meets the criteria for a 361 HCT/P or we are able to continue marketing SkinTE before receiving BLA approval, we would still be subject to numerous post-market requirements, including those related to registration and listing, record keeping, labeling, cGTP, donor eligibility, deviation and adverse event reporting, and other activities. HCT/Ps that do not meet the definition of a 361 HCT/P are also subject to these 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 have established our own processing facility, which we believe is cGTP compliant. Any failure by us to maintain cGTP compliance would require remedial actions, which could potentially include actions such as delays in distribution and sales of our product, as well as enforcement actions.
35
Clinical trials can be long and expensive, and results are ultimately uncertain, which could jeopardize PolarityTE’s ability to obtain regulatory approval for its SkinTE product.
PolarityTE will likely be required to perform one or more clinical trials for SkinTE under FDA’s statutory requirements to obtain approval of a BLA for the product. Clinical trials can be expensive, can take several years to execute, and are subject to factors within and outside of PolarityTE’s control. The outcomes of clinical trials are uncertain. PolarityTE has not yet submitted an IND to FDA to conduct clinical trials to support a BLA for SkinTE. PolarityTE has two ongoing randomized controlled clinical trials—one in diabetic foot ulcers (DFUs) and one in venous leg ulcers (VLUs)—that were ~~responsible~~being conducted with SkinTE as a 361 HCT/P. While those trials are being conducted pursuant to protocols approved by an institutional review board (IRB), we do not know whether data from those trials or other clinical investigations previously conducted with SkinTE will be able to be used as part of a clinical data package for ~~disseminating information~~a SkinTE BLA submission.
PolarityTE will likely need to ~~the public through reports filed~~ensure compliance with applicable regulations for a BLA submission by transitioning its quality system to 21 CFR Parts 210/211 and 600-610 regulations with the ~~Securities~~FDA. Final determination of regulatory compliance with 21 CFR Parts 210/211 and ~~Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10 and 20(a)~~600-610 would be made during FDA’s pre-license inspection as part of the ~~Exchange Act and Rule 10b-5 adopted thereunder. Specifically, both complaints allege that~~BLA review. If the defendants misrepresented the status of one of the Company’s patent applications while touting the unique nature of the Company’s technology and its effectiveness. Plaintiffs are seeking damages suffered by them and the class consisting of the persons who acquired the publicly-traded securities of the Company between March 31, 2017, and June 22, 2018. Plaintiffs have filed motions to consolidate and for appointment as lead plaintiff. On November 28, 2018, the Court consolidated the Moreno and Lawi cases under the caption In re PolarityTE, Inc. Securities Litigation (the “Consolidated Securities Litigation”), and requested the appointment of the plaintiff in Lawi as the lead plaintiff. On January 16, 2019, the Court granted the motion of Yedid Lawi for appointment as lead plaintiff, and on February 1, 2019, the Court granted the lead plaintiff’s motion for approval of lead counsel and liaison counsel. The Court ordered that the lead plaintiff file and serve a consolidated complaint no later than 60 days after February 1, 2019, the defendants shall have 60 days after filing and service of the consolidated complaint to answer or otherwise respond, and the lead plaintiff must file a motion for class certification within 90 days of service of the consolidated complaint. The Lead Plaintiff filed a consolidated complaint on April 2, 2019 and asserted essentially the same violations of Federal securities laws recited in the original complaints. The Company believes the allegations in the consolidated complaint are without merit, and intends to defend the litigation, vigorously. The Company filed a motion to dismiss the consolidated complaint on June 3, 2019. Plaintiffs’ opposition to the Company’s motion to dismiss was filed on August 2, 2019, and the Company filed a reply to the opposition on September 13, 2019. A hearing on the Company’s motion to dismiss is scheduled for November 19, 2019. At this early stage of the proceedings the CompanyFDA is unable to ~~make~~agree with PolarityTE, or PolarityTE is unable to meet the standards required of it by the FDA, regarding preclinical studies, clinical studies and chemistry, manufacturing and controls, the approval of any ~~prediction regarding~~BLA would not occur or would be delayed.
The results of non-clinical studies do not necessarily predict future clinical trial results and predecessor clinical trial results may not be repeated in subsequent clinical trials. Additionally, the ~~outcome~~FDA may disagree with PolarityTE’s interpretation of the ~~litigation.~~data from its non-clinical studies and clinical trials, and may require the company to pursue additional non-clinical studies or clinical trials, or not approve any BLA that PolarityTE may submit. If PolarityTE is unable to demonstrate the safety and efficacy of its product through its clinical trials, it will be unable to obtain regulatory approval to market SkinTE as a licensed biologic.

PolarityTE will rely on third parties to conduct its clinical trial and they may not perform as contractually required or expected.
PolarityTE may rely on third parties, such as contract research organizations (“CROs”), medical institutions, clinical investigators and contract laboratories to conduct its clinical trials and potentially certain nonclinical studies to support a BLA for SkinTE. PolarityTE and its CROs are also required to comply with all applicable regulations governing nonclinical and clinical research, including good laboratory practice (“GLP”) and good clinical practice (“GCP”). The FDA enforces these regulations through periodic inspections of trial sponsors, principal investigators, CROs and trial sites. If PolarityTE or its CROs fail to comply with applicable FDA regulations, the data generated in clinical trials may be deemed unreliable and the FDA may require PolarityTE to perform additional clinical trials before approving its applications. PolarityTE cannot be certain that, upon inspection, the FDA and similar foreign regulatory authorities will determine that PolarityTE’s clinical trials comply or complied with clinical trial regulations, including GCP. In addition, PolarityTE’s clinical trials in support of a BLA may need to be conducted with product produced under applicable cGMP regulations. Failure to comply with the ~~ordinary course~~clinical trial regulations may require PolarityTE to repeat clinical trials, which would delay the regulatory approval process. If these third parties do not successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need to be replaced, or if the quality or accuracy of ~~business, we~~the data they obtain is compromised due to the failure to adhere to PolarityTE’s clinical protocols or regulatory requirements or for other reasons, PolarityTE’s non-clinical development activities or clinical trials may ~~become involved in lawsuits, claims, investigations, proceedings,~~be extended, delayed, suspended or terminated, and ~~threats of litigation relating~~it would not be able to ~~intellectual property, commercial arrangements,~~obtain regulatory ~~compliance,~~approval for its products on a timely basis, if at all, and ~~other matters. Except as noted above, at September 30, 2019, we were not party to any legal or arbitration proceedings that may have significant effects on our financial position or~~its business, results of ~~operations. We are not a~~operations, financial condition and growth prospects would be adversely affected. Furthermore, PolarityTE’s third party ~~to any material proceedings~~clinical trial investigators may be delayed in ~~which any director, member~~conducting its clinical trials for reasons outside of ~~senior management or affiliate of ours is either a party adverse to us or our subsidiaries or has a material interest adverse to us or our subsidiaries.~~their control.
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Item 6. Exhibits

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

4.1 Form of Common Stock Warrant Certificate (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on February 14, 2020)
4.2 Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on February 14, 2020)
10.1 ~~Settlement Terms~~Form of Indemnification Agreement ~~dated August 21, 2019 between Denver Lough and PolarityTE, Inc.~~(incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on March 25, 2020)
10.2 ~~Change in Control Compensation Plan~~Separation, Transition and Release of Claims Agreement dated March 31, 2020 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 1, 2020)
10.3 Note and Loan Agreement dated April 12, 2020, between PolarityTE MD, Inc., and KeyBank National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 15, 2020)
31.1 Certification Pursuant to Rule 13a-14(a)
31.2 Certification Pursuant to Rule 13a-14(a).
~~31.3~~ ~~Certification Pursuant to Rule 13a-14(a)~~
32.1 Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code
101.INS XBRL Instance Document.
101.SCH XBRL Schema Document.
101.CAL XBRL Calculation Linkbase Document.
101.DEF XBRL Definition Linkbase Document.
101.LAB XBRL Label Linkbase Document.
101.PRE XBRL Presentation Linkbase Document.

34 37

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.

~~/s/ Paul Mann~~
~~Paul Mann~~
~~Chief Financial Officer~~
~~Duly Authorized Officer~~

Date: ~~November 12, 2019~~ May 11, 2020 /s/ David Seaburg
David Seaburg
Chief Executive Officer
Duly Authorized Officer
Date: May 11, 2020 /s/ Jacob Patterson
Jacob Patterson
Interim Chief Financial Officer
Chief Accounting Officer

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	For the nine months ended September 30, 2018
	Preferred Stock						Common Stock				Additional Paid-in			Accumulated			Total Stockholders’
	Number			Amount			Number		Amount		Capital			Deficit			Equity
December 31, 2017		1,656,838		$	109,104			7,082,836	$	7	$	157,395		$	(269,920	)	$	(3,414	)
Issuance of common stock in connection with:
Conversion of Series A preferred stock to common stock		(1,602,099	)		(391	)		363,036		–		391			–			–
Conversion of Series B preferred stock to common stock		(47,689	)		(4,020	)		794,820		1		4,019			–			–
Conversion of Series E preferred stock to common stock		(7,050	)		(104,693	)		7,050,000		7		104,686			–			–
Exchange of Series F preferred stock and dividends to common stock		–			–			1,003,393		1		13,060			–			13,061
Extinguishment of warrant liability		–			–			151,871		–		3,045			–			3,045
Stock-based compensation expense		–			–			–		–		7,445			–			7,445
Deemed dividend – accretion of discount on Series F preferred stock		–			–			–		–		(698	)		–			(698	)
Cumulative dividends on Series F preferred stock		–			–			–		–		(191	)		–			(191	)
Series F preferred stock dividends paid in common stock		–			–			11,708		–		306			–			306
Net loss		–			–			–		–		–			(11,777	)		(11,777	)
March 31, 2018		–		$	–			16,457,664	$	16	$	289,458		$	(281,697	)	$	7,777
Proceeds received from issuance of common stock, net of issuance costs of $2,782		–			–			4,791,819		4		92,672			–			92,676
Stock-based compensation expense		–			–			–		–		8,344			–			8,344
Issuance of restricted stock awards		–			–			175,887		–		–			–			–
Stock option exercises		–			–			20,000		–		64			–			64
Net loss		–			–			–		–		–			(14,000	)		(14,000	)
June 30, 2018		–		$	–			21,445,370	$	20	$	390,538		$	(295,697	)	$	94,861
Stock-based compensation expense		–			–			–		–		10,453			–			10,453
Issuance of restricted stock awards		–			–			7,613		–		–			–			–
Stock option exercises		–			–			43,516		1		157			–			158
Net loss		–			–			–		–		–			(20,579	)		(20,579	)
September 30, 2018		–		$	–			21,496,499	$	21	$	401,148		$	(316,276	)	$	84,893

	December 31, 2018		Adjustments Due to the Adoption of ASC 842			January 1, 2019
Operating lease right-of-use assets	$	–	$	5,305		$	5,305
Liabilities:
Accounts payable and accrued expenses	$	6,508	$	(75	)	$	6,433
Other current liabilities		316		1,432			1,748
Operating lease liabilities		–		3,948			3,948

	Series F Conversion Feature
	March 5, 2018
Stock price	$	20.05
Exercise price	$	27.50
Risk-free rate		2.2	%
Volatility		88.2	%
Term		1.5

	Warrant Liability
	March 5, 2018
Stock price	$	20.05
Exercise price	$	30.00
Risk-free rate		2.2	%
Volatility		88.2	%
Term		1.5

	2017 Series F Preferred Stock – Warrant Liability			2017 Series F Preferred Stock – Embedded Derivative			Total Warrant and Derivative Liability
Fair value – December 31, 2017	$	3,388		$	8,150		$	11,538
Change in fair value		(863	)		(987	)		(1,850	)
Exchange / conversion to common shares		(2,525	)		(7,163	)		(9,688	)
Fair value – September 30, 2018	$	–		$	–		$	–

	Contingent Consideration
Fair value – December 31, 2018	$	261
Change in fair value		(48	)
Earned and paid		(78	)
Fair value – September 30, 2019	$	135

	Operating leases			Finance leases
2019 (excluding the nine months ended September 30, 2019)	$	551		$	149
2020		2,114			597
2021		1,730			594
2022		1,345			329
2023		132			253
Thereafter		87			43
Total lease payments		5,959			1,965
Less:
Imputed interest		(787	)		(310	)
Total	$	5,172		$	1,655

Fair market value of 1,003,393 shares of common stock issued at $20.05 (Company’s closing stock price on March 5, 2018) in exchange for Series F Preferred Shares and accrued dividends	$	20,117,990
Carrying value of Series F Preferred Shares at March 5, 2018, including dividends		(5,898,274	)
Carrying value of bifurcated conversion option at March 5, 2018		(7,162,587	)
Deemed dividend on Series F Preferred Shares exchange	$	7,057,129

	Number of shares			Weighted-Average Exercise Price
Outstanding – December 31, 2018		6,499,885		$	14.02
Granted		818,403		$	13.75
Exercised (1)		(292,417	)	$	4.31
Forfeited		(668,842	)	$	20.50
Outstanding – September 30, 2019		6,357,029		$	13.91
Options exercisable – September 30, 2019		4,815,831		$	12.69
Weighted-average grant date fair value of options granted during the nine months ended September 30, 2019				$	9.84

	Number of shares			Weighted-Average Grant-Date Fair Value
Unvested - December 31, 2018		651,110		$	23.65
Granted		1,919,675		$	5.03
Vested (1)		(415,290	)	$	20.84
Forfeited		(128,395	)	$	22.44
Unvested – September 30, 2019		2,027,100		$	7.64

	For the Three Months Ended						Increase (Decrease)
(in thousands)	March 31, 2020			March 31, 2019			Amount			%
	(Unaudited)
Net revenues
Products	$	428		$	297		$	131			44	%
Services		505			1,168			(663	)		(57	)%
Total net revenues		933			1,465			(532	)		(36	)%
Cost of sales
Products		340			273			67			25	%
Services		176			503			(327	)		(65	)%
Total cost of sales		516			776			(260	)		(34	)%
Gross profit		417			689			(272	)		(39	)%

Operating costs and expenses
Research and development		3,373			5,352			(1,979	)		(37	)%
General and administrative		11,057			17,195			(6,138	)		(36	)%
Sales and marketing		3,694			3,953			(259	)		(7	)%
Total operating costs and expenses		18,124			26,500			(8,376	)		(32	)%
Operating loss		(17,707	)		(25,811	)		8,104			31	%
Other income (expense)
Change in fair value of common stock warrant liability		4,532			–			4,532			*
Interest income, net		(12	)		70			(82	)		(117	)%
Other income, net		147			168			(21	)		(13	)%
Net loss	$	(13,040	)	$	(25,573	)	$	12,533			49	%

	Three Months Ended
(in thousands)	March 31, 2020			March 31, 2019
Net cash provided by (used in)
Operating activities	$	(13,854	)	$	(15,968	)
Investing activities		16,973			(5,059	)
Financing activities		25,180			302
Net increase/(decrease) in cash and cash equivalents	$	28,299		$	(20,725	)

	●	the timing or success of obtaining regulatory licenses or approvals for marketing our products;
	●	the initiation, timing, progress, and results of our research and development programs;
	●	the initiation, timing, progress, and results of our clinical trials;
	●	the timing for the healthcare industry to resume performing elective procedures that may impact the timing and cost of clinical trials;
	●	the impact of new accounting pronouncements;
	●	size and growth of our target markets;
	●	sufficiency of our working capital to fund our operations for 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; and
	●	our plans to remediate material weaknesses in our internal control over financial reporting.

	●	the ability to comply with regulations applicable to the manufacture, marketing, sale and distribution of our products;
	●	the ability to gain adoption by healthcare providers of our products for patient care;
	●	the ability to manufacture product to meet demand;
	●	the acceptance and level of reimbursement to healthcare providers for application of our products by public and private payors;

	●	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;
	●	the development of new therapies or new discoveries that render our products obsolete;
	●	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;
	●	decisions made by healthcare providers regarding elective procedures and use of facilities and resources when there is a major outbreak of life-threatening infectious disease, such as COVID-19;
	●	the ability to pursue sales activity in the healthcare industry when there is a major outbreak of life-threatening infectious disease, such as COVID-19;
	●	the ability to manufacture and deliver our products if employees are quarantined due to the impact of the COVID-19;
	●	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
	●	factors described under “Risk Factors” in our 2019 Annual Report on Form 10-K and under Item 1A of this Quarterly Report on Form 10-Q.

	●	~~Stock-Based Compensation System~~ – The Company is in the process of implementing a systemic solution to our stock-based compensation accounting, including internal processes and an external compensation account management tool. The tool was launched during the first quarter of 2019 and we continue to run parallel tests, including data reconciliations. The system implementation and additional procedures enable the Company to properly document the stock-based compensation expense. The Company expects this issue to be remediated during 2019 after adequate test sampling to evaluate operating effectiveness.
	●	~~IT Systems & Controls~~ – The Company has hired additional IT personnel and adopted access restrictions and protocols to prevent unauthorized access and unauthorized changes to data and records. We are evaluating these changes and whether they address the system control issues.

	●	Untitled letters, warning letters, fines, injunctions, consent decrees, product seizures, or civil penalties;
	●	Operating restrictions, partial suspension or total shutdown of clinical studies, manufacturing, marketing, or distribution;
	●	Orders to recall or destroy products.
	●	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.

4.1	Form of Common Stock Warrant Certificate (incorporated by reference to Exhibit 4.1 to our Current Report on Form 8-K filed on February 14, 2020)
4.2	Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on February 14, 2020)
10.1	~~Settlement Terms~~Form of Indemnification Agreement ~~dated August 21, 2019 between Denver Lough and PolarityTE, Inc.~~(incorporated by reference to Exhibit 4.2 to our Current Report on Form 8-K filed on March 25, 2020)
10.2	~~Change in Control Compensation Plan~~Separation, Transition and Release of Claims Agreement dated March 31, 2020 (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 1, 2020)
10.3	Note and Loan Agreement dated April 12, 2020, between PolarityTE MD, Inc., and KeyBank National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 15, 2020)
31.1	Certification Pursuant to Rule 13a-14(a)
31.2	Certification Pursuant to Rule 13a-14(a).
~~31.3~~	~~Certification Pursuant to Rule 13a-14(a)~~
32.1	Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code
101.INS	XBRL Instance Document.
101.SCH	XBRL Schema Document.
101.CAL	XBRL Calculation Linkbase Document.
101.DEF	XBRL Definition Linkbase Document.
101.LAB	XBRL Label Linkbase Document.
101.PRE	XBRL Presentation Linkbase Document.

	POLARITYTE, INC.

	~~/s/ Paul Mann~~
	~~Paul Mann~~
	~~Chief Financial Officer~~
	~~Duly Authorized Officer~~

Date:	~~November 12, 2019~~ May 11, 2020		/s/ David Seaburg
		David Seaburg
		Chief Executive Officer
		Duly Authorized Officer

Date: May 11, 2020		/s/ Jacob Patterson
		Jacob Patterson
		Interim Chief Financial Officer
		Chief Accounting Officer