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~~June 30, ~~2019~~2020

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

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

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

~~123 Wright Brothers Drive~~

1960 S. 4250 West, Salt Lake City, UT ~~84116~~84104

(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,~~August 3, 2020, there were ~~26,985,630~~ 38,740,704 shares of the Registrant’s common stock outstanding.

~~INDEX~~

INDEX

		Page
PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:	4	3
Condensed Consolidated Balance Sheets as of ~~September~~June 30, ~~2019 (unaudited)~~2020 and December 31, ~~2018~~2019 (unaudited)	4	3
Condensed Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	5	4
Condensed Consolidated Statements of Comprehensive Loss for the three and ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	6	5
Condensed Consolidated Statements of Stockholders’ Equity for the ~~nine~~three and six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	7	6
Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, 2020 and 2019 ~~and 2018~~ (unaudited)	8	7
Notes to Condensed Consolidated Financial Statements (unaudited)	9	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26	21
Item 3. Quantitative and Qualitative Disclosures about Market Risk	32	31
Item 4. Controls and Procedures	32	31

PART II - OTHER INFORMATION

Item ~~1. Legal Proceedings~~1A. Risk Factors	34	32
Item 6. Exhibits	34	33

SIGNATURES	35	34

~~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
		(Unaudited)					June 30, 2020			December 31, 2019
ASSETS

Current assets:
Current assets
Cash and cash equivalents	$	27,273		$	55,673		$	30,504		$	10,218
Short-term investments		18,675			6,162			–			19,022
Accounts receivable		1,593			712
Accounts receivable, net								2,115			1,731
Inventory		346			336			281			252
Prepaid expenses and other current assets		1,306			1,432			2,453			1,264
Total current assets		49,193			64,315			35,353			32,487
Property and equipment, net		15,662			13,736			12,729			14,911
Operating lease right-of-use assets		5,028			–			3,559			4,590
Intangible assets, net		778			924			636			731
Goodwill		278			278			278			278
Other assets		353			913			599			602
TOTAL ASSETS	$	71,292		$	80,166		$	53,154		$	53,599

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:
Current liabilities
Accounts payable and accrued expenses	$	10,233		$	6,508		$	5,050		$	7,095
Other current liabilities		2,582			316			2,644			2,338
Current portion of long-term note payable		538			529
Current portion of long-term notes payable								1,436			528
Deferred revenue		134			170			97			98
Total current liabilities		13,487			7,523			9,227			10,059
Long-term note payable, net		247			479
Common stock warrant liability								8,736			–
Operating lease liabilities		3,358			–			2,192			2,994
Other long-term liabilities		1,808			131			1,022			1,630
Long-term notes payable								2,410			–
Total liabilities		18,900			8,133			23,587			14,683

Commitments and Contingencies
Commitments and Contingencies (Note 14)								–			–

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 June 30, 2020 and December 31, 2019								–			–
Common stock – $.001 par value; 250,000,000 shares authorized; 38,496,910 and 27,374,653 shares issued and outstanding at June 30, 2020 and December 31, 2019, respectively								38			27
Additional paid-in capital		466,514			414,840			490,603			474,174
Accumulated other comprehensive income		63			36			–			72
Accumulated deficit		(414,212	)		(342,864	)		(461,074	)		(435,357	)
Total stockholders’ equity		52,392			72,033			29,567			38,916
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	71,292		$	80,166		$	53,154		$	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)

													2020			2019			2020			2019
	For the three months ended						For the nine months ended						For the Three Months Ended						For the Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Net revenues
Products	$	839		$	197		$	1,640		$	389		$	944		$	504		$	1,372		$	801
Services		556			528			2,546			659			1,322			822			1,827			1,990
Total net revenues		1,395			725			4,186			1,048			2,266			1,326			3,199			2,791
Cost of sales
Products		315			267			930			393			275			342			615			615
Services		330			400			1,087			441			607			254			783			757
Total cost of sales		645			667			2,017			834			882			596			1,398			1,372
Gross profit		750			58			2,169			214			1,384			730			1,801			1,419
Operating costs and expenses
Research and development		2,956			4,111			13,072			12,598			3,164			4,764			6,537			10,116
General and administrative		16,044			15,135			48,299			33,998			5,211			15,060			15,816			32,255
Sales and marketing		4,988			1,618			12,922			1,618			2,024			3,981			5,718			7,934
Restructuring and other charges														2,084			–			2,536			–
Total operating costs and expenses		23,988			20,864			74,293			48,214			12,483			23,805			30,607			50,305
Operating loss		(23,238	)		(20,806	)		(72,124	)		(48,000	)		(11,099	)		(23,075	)		(28,806	)		(48,886	)
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	)
Change in fair value of common stock warrant liability														(1,591	)		–			2,941			–
Interest (expense) income, net														(65	)		29			(77	)		99
Other income, net														78			254			225			422
Net loss		(22,983	)		(20,579	)		(71,348	)		(46,356	)	$	(12,677	)	$	(22,792	)	$	(25,717	)	$	(48,365	)
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													$	(0.33	)	$	(0.92	)	$	(0.72	)	$	(2.09	)
Weighted average shares outstanding, basic and diluted														38,428,289			24,768,453			35,724,141			23,190,343

Products [Member]

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

Services [Member]

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(Unaudited, in thousands)

													2020			2019			2020			2019
	For the three months ended						For the nine months ended						For the Three Months Ended						For the Six Months Ended
	September 30,						September 30,						June 30,						June 30,
	2019			2018			2019			2018			2020			2019			2020			2019
Net loss	$	(22,983	)	$	(20,579	)	$	(71,348	)	$	(46,356	)	$	(12,677	)	$	(22,792	)	$	(25,717	)	$	(48,365	)
Other comprehensive income:
Unrealized (loss)/gain on available-for-sale securities		(16	)		–			27			–
Other comprehensive income/(loss):
Unrealized gain on available-for-sale securities														7			160			11			312
Reclassification of realized gains included in net loss														(10	)		(134	)		(83	)		(269	)
Comprehensive loss	$	(22,999	)	$	(20,579	)	$	(71,321	)	$	(46,356	)	$	(12,680	)	$	(22,766	)	$	(25,789	)	$	(48,322	)

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)

	Number			Amount		Capital			Income			Deficit			Equity
	For the Three and Six Months Ended June 30, 2020
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’
	Number			Amount		Capital			Income			Deficit			Equity
Balance – December 31, 2019		27,374,653		$	27	$	474,174		$	72		$	(435,357	)	$	38,916
Issuance of common stock, net of issuance costs of $1.3 million		10,854,710			11		12,588			–			–			12,599
Stock-based compensation expense		–			–		3,221			–			–			3,221
Stock option exercises		10,000			–		31			–			–			31
Vesting of restricted stock units		158,513			–		–			–			–			–
Shares withheld for tax withholding		(4,587	)		–		(5	)		–			–			(5	)
Other comprehensive loss		–			–		–			(69	)		–			(69	)
Proceeds received from issuance of common stock, net of issuance costs of $1,146		-
Purchase of ESPP shares		-
Shares issued under the ESPP		-
Forfeiture of restricted stock awards		-
Net loss		–			–		–			–			(13,040	)		(13,040	)
Balance – March 31, 2020		38,393,289		$	38	$	490,009		$	3		$	(448,397	)	$	41,653
Balance – March 31, 2020		38,393,289		$	38	$	490,009		$	3		$	(448,397	)	$	41,653
Stock-based compensation expense		–			–		563			–			–			563
Purchase of ESPP shares		38,293			–		40			–			–			40
Vesting of restricted stock units		119,132			–		–			–			–			–
Shares withheld for tax withholding		(6,918	)		–		(9	)		–			–			(9	)
Forfeiture of restricted stock awards		(46,886	)		–		–			–			–			–
Other comprehensive loss		–			–		–			(3	)		–			(3	)
Net loss		–			–		–			–			(12,677	)		(12,677	)
Balance – June 30, 2020		38,496,910		$	38	$	490,603		$	–		$	(461,074	)	$	29,567

	For the nine months ended September 30, 2019																	Number			Amount		Capital			Income		Deficit			Equity
	Common Stock					Additional Paid-in			Accumulated Other Comprehensive			Accumulated			Total Stockholders’			For the Three and Six Months Ended June 30, 2019
	Number			Amount		Capital			Income			Deficit			Equity			Common Stock					Additional Paid-in			Accumulated Other Comprehensive		Accumulated			Total Stockholders’
December 31, 2018		21,447,088		$	21	$	414,840		$	36		$	(342,864	)	$	72,033
																		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			–			–		10,327			–		–			10,327
Stock option exercises		283,250			1		528			–			–			529			283,250			1		528			–		–			529
Vesting of restricted stock units		100,912			–		–			–			–			–			100,912			–		–			–		–			–
Shares withheld for tax withholding		(82,011	)		–		(740	)		–			–			(740	)		(82,011	)		–		(740	)		–		–			(740	)
Other comprehensive income		–			–		–			17			–			17			–			–		–			17		–			17
Net loss		–			–		–			–			(25,573	)		(25,573	)		–			–		–			–		(25,573	)		(25,573	)
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
Balance – March 31, 2019																			21,749,239		$	22	$	424,955		$	53	$	(368,437	)	$	56,593
Balance – 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			–			–		8,618			–		–			8,618
Stock option exercises		9,167			–		–			–			–			–			9,167			–		–			–		–			–
Shares issued under the ESPP		7,260			–		35			–			–			35			7,260			–		35			–		–			35
Vesting of restricted stock units		51,440			–		–			–			–			–			51,440			–		–			–		–			–
Shares withheld for tax withholding		(17,418	)		–		(62	)		–			–			(62	)		(17,418	)		–		(62	)		–		–			(62	)
Other comprehensive income		–			–		–			26			–			26			–			–		–			26		–			26
Net loss		–			–		–			–			(22,792	)		(22,792	)		–			–		–			–		(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 – June 30, 2019																			25,218,606		$	25	$	461,491		$	79	$	(391,229	)	$	70,366

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

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)

							2020			2019
	For the nine months ended September 30,						For the Six Months Ended June 30,
	2019			2018			2020			2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(71,348	)	$	(46,356	)	$	(25,717	)	$	(48,365	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation expense		23,932			26,242			3,784			18,907
Change in fair value of derivatives		–			(1,850	)
Depreciation and amortization		2,243			1,088			1,549			1,446
Loss on extinguishment of warrant liability		–			520
Amortization of intangible assets		146			83			95			99
Amortization of debt discount		40			30			13			28
Change in fair value of common stock warrant liability								(2,941	)		–
Change in fair value of contingent consideration		(48	)		20			–			(48	)
Loss on disposal of property and equipment		265			–
Loss on abandonment of property and equipment								1,529
Other non-cash adjustments		3			–			(21	)		30
Changes in operating assets and liabilities:
Accounts receivable		(881	)		(788	)		(384	)		(624	)
Inventory		(10	)		(238	)		(29	)		(26	)
Prepaid expenses and other current assets		126			(561	)		(1,189	)		(486	)
Operating lease right-of-use assets		1,214			–			899			791
Other assets		25			(210	)		3			25
Accounts payable and accrued expenses		4,095			2,484			(2,109	)		(17	)
Other current liabilities		155			–			9			367
Deferred revenue		(36	)		116			(1	)		(126	)
Operating lease liabilities		(1,142	)		–			(903	)		(670	)
Other long-term liabilities		571			–			–			(120	)
Net cash used in operating activities		(40,650	)		(19,420	)		(25,413	)		(28,789	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(2,386	)		(6,640	)		(1,170	)		(2,110	)
Purchase of available-for-sale securities		(29,002	)		–			(14,144	)		(15,445	)
Proceeds from maturities of available-for-sale securities		14,636			–			16,945			9,278
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								17,802			(8,277	)
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			27,948
Proceeds from stock options exercised		529			222			31			529
Proceeds from ESPP purchase		35			–			40			35
Cash paid for tax withholdings related to net share settlement		(679	)		–			(6	)		(636	)
Payment of contingent consideration liability		(109	)		(30	)		–			(109	)
Principal payments on financing leases		(336	)		(39	)		(243	)		(225	)
Principal payments on term note payable		(263	)		–
Proceeds from term note payable and financing arrangements								4,629			–
Principal payments on term note payable and financing arrangements								(830	)		(262	)
Net cash provided by financing activities		27,125			92,829			27,897			27,280

Net (decrease) increase in cash and cash equivalents		(28,400	)		64,511
Net increase (decrease) in cash and cash equivalents								20,286			(9,786	)
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		$	30,504		$	45,887

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		$	–		$	63
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							$	7		$	43
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~~(together with its subsidiaries, ~~(the~~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.~~biomaterials.

~~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.

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. LIQUIDITY AND NEED FOR ADDITIONAL CAPITAL

The Company has experienced recurring losses and cash outflows from operating activities. As of June 30, 2020, the Company had an accumulated deficit of $461.1 million. As of June 30, 2020, the Company had cash and cash equivalents of $30.5 million. The Company has been funded historically through sales of equity and debt.

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.

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. The net proceeds to the Company from the offering were $22.5 million, after offering expenses payable by the Company. In connection with this agreement, the Company agreed not to sell any additional shares under the Keystone Purchase Agreement for a period of 90 days after the closing date of the offering.

The Company entered into a promissory note for $3.6 million under the Paycheck Protection Program on April 12, 2020. Additional details are available in note 12.

The Company does not expect existing cash as of June 30, 2020 to be sufficient to fund the Company’s operations for at least twelve months from the date of filing. These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and settle its liabilities in the normal course of business. The Company has incurred recurring losses and negative cash flows, has not yet generated material revenue from operations, and will require additional funds to maintain its operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern within one year after these condensed consolidated financial statements are issued.

In the second quarter of 2020 the Company took steps to reduce cash burn by reducing payroll expense, adopting a salary and wage reduction, and reducing discretionary spending across the organization to minimal levels. The Company will seek additional capital through equity offerings or debt financing. However, such financing may not be available in the future on favorable 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, or be unable to continue operations over a longer term.

3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Use of ~~estimates.~~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 Chief Operating Decision Maker (CODM) is our Office of the Chief Executive consisting of the Chief Operating Officer, the Chief Financial Officer, and the President of Corporate Development. 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.~~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.

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.

~~Stock- Based Compensation.~~

The Company ~~measures all stock-based compensation~~records product revenues primarily from the sale of its regenerative tissue products. The Company 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.

The Company records service revenues from the sale of its preclinical research services and contract services. Preclinical research services include delivery of preclinical studies and other research services to unrelated third parties. These customer contracts 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 on~~remaining services needed to satisfy the ~~date of grant.~~

~~The fair value for options issued is estimated at~~obligation. This requires 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~~Company to make reasonable estimates of the ~~grant. The volatility factor is determined~~extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue are recognized 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~~payment timing and work completed. Generally, a portion of the ~~Company’s common stock on~~payment is due upfront and the ~~date~~remainder upon completion of ~~grant~~the contract, with most contracts completing in less than a year. Contract services include research and ~~amortized over the vesting period of, generally, six months~~laboratory testing services 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 date 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 expenseunrelated third parties on a ~~straight-line basis over~~contract basis. These customer contracts generally consist of a single performance obligation that the ~~remaining service period.~~Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer.

Research and Development ~~Expenses.~~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.~~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~~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 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 until classified as equity.

Stock-Based Compensation. The Company measures all stock-based compensation to employees and non-employees using a ~~customer obtains control of promised goods or services,~~fair value method and records such expense 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,general and administrative, research and development, and sales and marketing expenses. For stock options with graded vesting, the Company ~~performs~~recognizes compensation expense over the ~~following five steps: (i) identify~~service period for each separately vesting tranche of the ~~contract(s) with~~award as though the award were in substance, multiple awards based on the fair value on the date of grant.

The fair value of options issued is estimated at the date of grant using a ~~customer; (ii) identify~~Black-Scholes option-pricing model. The risk-free rate is derived from the ~~performance obligations~~U.S. Treasury yield curve in effect at the ~~contract; (iii) determine~~time of the ~~transaction price; (iv) allocate~~grant. The volatility factor is determined based on the ~~transaction price~~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 ~~performance obligations in~~weighted average number of shares of common stock outstanding for the ~~contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.~~

~~In the regenerative medicine products segment,~~period. Since the Company ~~records products revenues primarily from~~was in a loss position for all periods presented, basic net loss per share is the ~~sale~~same as diluted net loss per share since the effects of ~~its regenerative tissue products.~~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 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.discounted cash flows.

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

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~~

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

Based upon the current status of the Company’s product development and commercialization plans, the Company believes that its existing cash, cash equivalents and short-term investments will be adequate to satisfy its capital needs for at least the next 12 months from the date of filing. The Company anticipates needing substantial additional financing to continue clinical deployment and commercialization of its lead product SkinTE, development of its other product candidates, and scaling the manufacturing capacity for its products and product candidates and prepare for commercial readiness. However, 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, 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. The Company plans to meet its capital requirements primarily through issuances of equity securities, debt financing, revenue from product sales and future collaborations. Failure to generate revenue or raise additional capital would adversely affect 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~~During the ~~offering of Units in September 2017 (see Note 10),~~three months ended June 30, 2020, the Company ~~issued Series F Preferred Shares and warrants~~transferred all available-for-sale securities 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.cash accounts.

~~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
Level 1 Level 2 Level 3 Total
Assets:
Money market funds $ 7 $ – $ – $ 7
Commercial paper – 12,053 – 12,053
Corporate debt securities – 13,995 – 13,995
U.S. government debt securities – 4,632 – 4,632
Total $ 7 $ 30,680 $ – $ 30,687
Liabilities:
Contingent consideration $ – $ – $ 135 $ 135
Total $ – $ – $ 135 $ 135

Fair Value Measurement as of December 31, 2018
Level 1 Level 2 Level 3 Total
Assets:
Money market funds $ 7 $ – $ – $ 7
Commercial paper – 21,392 – 21,392
Corporate debt securities – 5,448 – 5,448
U.S. government debt securities – 3,226 – 3,226
Total $ 7 $ 30,066 $ – $ 30,073
Liabilities:
Contingent consideration $ – $ – $ 261 $ 261
Total $ – $ – $ 261 $ 261

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 and contingent consideration with an initial fair value of $0.3 million.

SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED ON RECURRING BASIS

	June 30, 2020
	Level 1		Level 2		Level 3		Total
Liabilities:
Common stock warrant liability	$	–	$	–	$	8,736	$	8,736
Total	$	–	$	–	$	8,736	$	8,736

	December 31, 2019
	Level 1		Level 2		Level 3		Total
Assets:
Money market funds	$	2,019	$	–	$	–	$	2,019
Commercial paper		–		11,064		–		11,064
Corporate debt securities		–		8,982		–		8,982
U.S. government debt securities		–		3,770		–		3,770
Total	$	2,019	$	23,816	$	–	$	25,835
Liabilities:
Contingent consideration	$	–	$	–	$	31	$	31
Total	$	–	$	–	$	31	$	31

The contingent consideration represents the estimated fair value of future payments due to the Seller of IBEX based on IBEX’s revenue generated from studies quoted prior 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~~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 expected term. The fair value of ~~estimated future cash flows using a 20% discount rate.~~ the warrant liability was $11.7 million upon the issuance date of February 14, 2020 and $8.7 million as of June 30, 2020.

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 toassumptions were used in estimating the fair value of the ~~contingent consideration~~warrant liability ~~is included in general~~as of June 30, 2020 and ~~administrative expense in~~upon the ~~accompanying consolidated statements~~issuance date of ~~operations.~~February 14, 2020:

SCHEDULE OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY

	June 30, 2020		February 14, 2020
Stock price	$	1.24	$	1.69
Exercise price	$	2.80	$	2.80
Risk-free rate		0.45%		1.51%
Volatility		97.5%		93.40%
Term		6.62		6.99

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:~~related to the IBEX acquisition of $31,000 outstanding at December 31, 2019, was paid during the six months ended June 30, 2020. As of June 30, 2020, the obligation related to the contingent consideration was fully satisfied.

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

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

During the three months ended June 30, 2020, the Company transferred all available-for-sale securities to cash accounts.

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

September 30, 2019
Amortized
Cost Unrealized
Gains Unrealized
Losses Market Value
Cash equivalents:
Money market funds $ 7 $ – $ – $ 7
Commercial paper 10,037 32 – 10,069
U.S. government debt securities 1,930 6 – 1,936
Total cash equivalents (1) 11,974 38 – 12,012
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
Total short-term investments 18,650 25 – 18,675
Total $ 30,624 $ 63 $ – $ 30,687

SCHEDULE OF CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

	December 31, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
Cash equivalents:
Money market funds	$	2,019	$	–	$	–	$	2,019
Commercial paper		1,020		4		–		1,024
U.S. government debt securities		3,761		9		–		3,770
Total cash equivalents (1)		6,800		13		–		6,813
Short-term investments:
Commercial paper		9,986		54		–		10,040
Corporate debt securities		8,977		5		–		8,982
Total short-term investments		18,963		59		–		19,022
Total	$	25,763	$	72	$	–	$	25,835

(1)

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

December 31, 2018
Amortized Cost Unrealized Gains Unrealized Losses Market Value
Cash equivalents:
Money market funds $ 7 $ – $ – $ 7
Commercial paper 20,648 30 – 20,678
U.S. government debt securities 3,224 2 – 3,226
Total cash equivalents (1) 23,879 32 – 23,911
Short-term investments:
Commercial paper 714 – – 714
Corporate debt securities 5,444 5 (1 ) 5,448
Total short-term investments 6,158 5 (1 ) 6,162
Total $ 30,037 $ 37 $ (1 ) $ 30,073

~~(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 and December 31, 2018 had maturities of less than one year.~~ For the ~~three and nine~~six months ended ~~September~~June 30, 2020 and 2019, the Company recognized net realized gains on available-for-sale securities ~~and cash equivalents~~ of ~~$0.1~~$0.1 million and ~~$0.4~~$0.3 million, respectively.

6. PROPERTY AND EQUIPMENT, NET

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

September 30, 2019 December 31, 2018
Machinery and equipment $ 11,814 $ 8,276
Land and buildings 2,000 2,000
Computers and software 1,173 1,372
Leasehold improvements 2,272 1,230
Construction in progress 1,903 2,402
Furniture and equipment 470 614
Total property and equipment, gross 19,632 15,894
Accumulated depreciation (3,970 ) (2,158 )
Total property and equipment, net $ 15,662 $ 13,736

SCHEDULE OF PROPERTY AND EQUIPMENT, NET

	June 30, 2020			December 31, 2019
Machinery and equipment	$	12,198		$	12,083
Land and buildings		2,000			2,000
Computers and software		1,255			1,189
Leasehold improvements		3,044			2,282
Construction in progress		179			1,606
Furniture and equipment		233			470
Total property and equipment, gross		18,909			19,630
Accumulated depreciation and amortization		(6,180	)		(4,719	)
Total property and equipment, net	$	12,729		$	14,911

The Company abandoned $1.5 million of construction in progress and other equipment during the period ended June 30, 2020. See note 13.

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.~~

SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
General and administrative expense	$	408	$	407	$	800	$	764
Research and development expense		389		363		749		682
Total depreciation and amortization expense	$	797	$	770	$	1,549	$	1,446

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~~June 30, ~~2019,~~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

SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES

	Operating leases			Finance leases
2020 (excluding the six months ended June 30, 2020)	$	948		$	335
2021		1,646			656
2022		1,345			405
2023		132			336
2024		87			42
Total lease payments		4,158			1,774
Less imputed interest		(452	)		(242	)
Total lease liabilities	$	3,706		$	1,532

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

Finance leases

SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO FINANCE AND OPERATING LEASES

	June 30, 2020		December 31, 2019
Finance lease right-of-use assets included within property and equipment, net	$	1,631	$	2,177

Current finance lease liabilities included within other current liabilities	$	532	$	508
Non-current finance lease liabilities included within other long-term liabilities		1,000		1,267
Total finance lease liabilities	$	1,532	$	1,775

Operating leases

	June 30, 2020		December 31, 2019
Current operating lease liabilities included within other current liabilities	$	1,514	$	1,746
Operating lease liabilities – non current		2,192		2,994
Total operating lease liabilities	$	3,706	$	4,740

~~Finance leases~~

As of
September 30, 2019
Finance lease right-of-use assets included within property and equipment, net $ 2,112

Current finance lease liabilities included within other current liabilities $ 456
Non-current finance lease liabilities included within other long-term liabilities 1,199
Total $ 1,655

~~Operating leases~~

As of
September 30, 2019
Current operating lease liabilities included within other current liabilities $ 1,814
Operating lease liabilities – non current 3,358
Total $ 5,172

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

Three months ended September 30, 2019 Nine months ended September 30, 2019
Operating lease costs included within operating costs and expenses $ 556 $ 1,617
Finance lease costs:
Amortization of right of use assets $ 171 $ 479
Interest on lease liabilities 42 109
Total $ 213 $ 588

SUMMARY OF COMPONENTS OF LEASE EXPENSE

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
Operating lease costs included within operating costs and expenses	$	548	$	546	$	1,104	$	1,061
Finance lease costs:
Amortization of right-of-use assets	$	174	$	170	$	349	$	309
Interest on lease liabilities		39		44		82		67
Total	$	213	$	214	$	431	$	376

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

Nine months ended
September 30, 2019

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases $ 1,550
Operating cash out flows from finance leases 109
Financing cash out flows from finance leases 336
Lease liabilities arising from obtaining right-of-use assets:
Finance leases $ 1,828
Lease payments made in prior period reclassified to property and equipment 535
Remeasurement of finance lease liability due to lease modification (22 )
Operating leases 936

SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES

	For the Six Months Ended June 30,
	2020		2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases	$	1,108	$	941
Operating cash out flows from finance leases	$	82	$	67
Financing cash out flows from finance leases	$	243	$	225
Lease liabilities arising from obtaining right-of-use assets:
Finance leases	$	–	$	1,824
Lease payments made in prior period reclassified to property and equipment	$	–	$	535
Remeasurement of finance lease liability due to lease modification	$	–	$	(22	)
Operating leases	$	–	$	939
Remeasurement of operating lease liability due to lease modification	$	131	$	–

As of ~~September~~June 30, 2020 and December 31, 2019, the weighted average remaining ~~operating~~ lease term ~~is 3.0~~ for operating leases was 2.5 and 2.8 years, respectively, and the weighted average discount rate used ~~to determine~~for operating leases was 9.76% and 9.83%, respectively. As of June 30, 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 3.0 and 3.5 years, respectively, and the weighted average discount rate used for finance leases was 9.77% for both periods. In May 2020, the Company reduced office space related to ~~determine the finance~~one of its existing lease ~~liability was 9.70%.~~agreements resulting in lower monthly payments.

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
Accounts payable $ 3,716 $ 2,918
Salaries and other compensation 1,263 1,280
Legal and accounting 1,905 640
Accrued severance 2,519 –
Other accruals 830 1,670
Total accounts payable and accrued expenses $ 10,233 $ 6,508

~~Salaries and other compensation include accrued payroll expense, accrued bonus, and estimated employer 401(k) plan contributions.~~SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES

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.

	June 30, 2020		December 31, 2019
Accounts payable	$	423	$	1,689
Salaries and other compensation		1,815		1,462
Legal and accounting		426		1,404
Accrued severance		1,217		1,053
Benefit plan accrual		560		557
Other		609		930
Total accounts payable and accrued expenses	$	5,050	$	7,095

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~~ $0.6 million as of ~~September~~June 30, ~~2019,~~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,~~six months ended June 30, 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 monthly 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.~~4.25% and 6.35%, respectively.

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 $28,000 and $68,000 at September 30,

9. STOCK-BASED COMPENSATION

2020, 2019 and ~~December 31, 2018, 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.~~2017 Equity Incentive Plans

~~10. PREFERRED SHARES AND COMMON SHARES~~2020 Plan

~~Exchange of 100% of Outstanding Series F Preferred Stock Shares and Warrants~~

On September 20, 2017, the Company sold an aggregate of $17,750,000 worth of units 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 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 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. Prior 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, and the Company’s warrants to purchase shares of the Company’s common stock issued in connection with the Series F Preferred Shares (such “Warrants” and Series F Preferred Shares collectively referred to as the “Exchange Securities”) to exchange the Exchange Securities and unpaid dividends on the Series F Preferred Shares for common stock (the “Exchange”).

The Exchange resulted 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 7,945,250 shares of common stock to such holders.

The shares of Series E Preferred Stock were held by Dr. Denver Lough, the Company’s former Chief Executive Officer. On March 6, 2018, the Company entered into a new registration rights agreement (the “Lough Registration Rights Agreement”) with Dr. Lough, pursuant to which the Company agreed to file a registration statement to register the resale of 7,050,000 shares of common stock issued upon conversion of the Series E Preferred Shares within six months, to cause such registration statement to be declared effective by the Securities and Exchange Commission as promptly as possible following its filing. 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

~~Incentive Compensation Plans~~

~~2019 Plan~~

On October ~~5, 2018,~~25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2020 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 3,000,000 shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. As of June 30, 2020, the Company had 18,000 shares available for future issuances under the 2020 Plan.

2019 Plan

On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2019 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 3,000,000 shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on October 5, ~~2028.~~2028. As of ~~September~~June 30, ~~2019,~~2020, the Company had ~~approximately 290,875~~257,570 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.~~2026. As of ~~September~~June 30, ~~2019,~~2020, the Company had ~~approximately 379,641~~1,177,365 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~~six months ended ~~September~~June 30, ~~2019~~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~~SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY

	Number of Shares			Weighted- Average Exercise Price
Outstanding – December 31, 2019		4,529,988		$	15.26
Granted		1,458,026		$	1.19
Exercised		(10,000	)	$	3.12
Forfeited		(867,432	)	$	11.78
Outstanding – June 30, 2020		5,110,582		$	11.84
Options exercisable, June 30, 2020		3,603,571		$	14.87

~~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.~~

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~~

Restricted Stock

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

SCHEDULE OF SHARE-BASED COMPENSATION, RESTRICTED STOCK ACTIVITY

	Number of Shares
Unvested - December 31, 2019		1,843,001
Granted		3,401,036
Vested (1)		(832,910	)
Forfeited		(79,803	)
Unvested – June 30, 2020		4,331,324

(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.

Stock-Based Compensation Expense

The stock-based compensation expense related to stock options, restricted stock awards, and the ~~ESPP for~~employee stock purchase plan was as follows (in thousands):

SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
	2020		2019		2020		2019
General and administrative expense	$	143	$	6,892	$	3,220	$	15,929
Research and development expense		404		1,481		367		2,565
Sales and marketing expense		16		245		197		413
Total stock-based compensation expense	$	563	$	8,618	$	3,784	$	18,907

10. COMMON STOCK WARRANTS

On February 14, 2020, the ~~three~~Company completed an underwritten offering of 10,638,298 shares of its common stock and ~~nine months ended September 30, 2019 was $14,000 and $33,000, respectively. A total of 7,260~~warrants to purchase 10,638,298 shares of common ~~stock~~stock. Each common share and warrant were ~~purchased pursuant~~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 ~~ESPP during~~warrant liability based on the ~~nine months ended September~~estimated fair value with the residual allocated to the common shares. As of June 30, ~~2019 for total proceeds~~2020, none of ~~$35,000.~~the warrants had been exercised.

~~12. INCOME TAXES~~

The ~~Company has evaluated its income tax positions 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~~fair value of the ~~next twelve months.~~

~~As of September 30, 2019 and December 31, 2018, the Company maintained a valuation allowance to fully offset its net deferred tax assets primarily attributable to operations~~common stock warrant liability is presented in the ~~United States,~~following table and is reported as ~~the realization~~a change in fair value of ~~such assets was not considered more likely than not.~~

~~The Company files income tax returns~~common stock warrant liability in the ~~U.S. Federal and various state and local jurisdictions.~~statements of operations (in thousands):

~~13.~~ SCHEDULE OF FAIR VALUE OF COMMON STOCK WARRANT LIABILITY

	June 30, 2020
Beginning balance	$	–
Initial value of common stock warrant liability		11,677
Change in fair value of common stock warrant liability		(2,941	)
Ending balance	$	8,736

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:

SCHEDULE OF ANTI-DILUTIVE POTENTIAL SHARES OUTSTANDING ACTIVITY

	As of June 30,
	2020		2019
Stock options		5,110,582		6,604,461
Restricted stock		4,331,324		493,447
Common stock warrants		10,638,298		–

12. DEBT

On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loan in the amount of $3,576,145 made to it under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of a loan granted under the PPP. 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 Company will obtain forgiveness of the Loan in whole or in part.

13. RESTRUCTURING

In the first half of 2020, management approved several actions as part of a restructuring plan designed to improve operational efficiency and financial results. Management approved a reduction in force which affected 40 of the 126 employees in the regenerative medicine business segment, or approximately 31.7% of that workforce. The Company did not make any change in the workforce of its contract services segment. The Company recognized $0.6 and $1.0 million of expense related to employee severance and benefit arrangements for the three and six-month periods ended June 30, 2020, respectively. It is expected that the full amount will be paid by the end of 2020. Management also recorded $1.5million of asset abandonments within the Company’s regenerative medicine business segment for both the three and six-month periods ended June 30, 2020.

As of September 30,
2019 2018
Stock options 6,357,029 6,125,628
Restricted stock 2,027,100 685,730
Shares committed under ESPP 15,235 –

14. 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 the Moreno and Lawi cases under the caption In re PolarityTE, Inc. Securities Litigation ~~(the~~(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 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 caption Monther 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~~as of June 30, ~~2019, we were~~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. 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~~$1,500,000 in cash on October 1, 2019 and an additional ~~$1,500,000~~$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 June 30, 2020, the Company has recorded a liability of $0.8 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~~$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 from 3,275 square feet to 6,232 square feet. In May 2020, the Company reduced the space from 6,232 to 4,554. The Company is using ~~1,648~~ 1,099 square feet, and Cohen LLC is using approximately ~~4,584~~ 3,455 square feet as of ~~September~~June 30, ~~2019.~~2020. The monthly lease payment for ~~6,232~~4,554 square feet is ~~$31,160.~~$22,771. Of this amount ~~$22,920~~ $17,277is ~~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~~If the space isbecomes 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 of~~ sublease income related to this agreement of $63,000 and $51,000for the three ~~and nine~~ months ended ~~September~~June 30, 2020 and 2019, respectively, and$132,000 and $126,000 for the six months ended June 30, 2020 and 2019, respectively. The sublease income is included in other income, net in the statement of operations. As of ~~September~~June 30, ~~2019~~2020 and December 31, ~~2018,~~2019, there ~~was $17,000 and $0~~were 0amounts due from the related party under this agreement.

16. SEGMENT REPORTING

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

~~During~~a manner consistent with the ~~three months ended September 30, 2019, the Company’s CODM changed the~~internal reporting ~~of segment net income and loss to allocate additional noncash expenses from the regenerative medicine segment~~provided to the ~~contract services segment. For~~chief operating decision maker (CODM). In April 2020, the ~~three months ended September 30, 2019~~Company designated its Chief Executive Officer (CEO) to be its Chief Operating Decision Maker (CODM) and ~~2018, this resulted in reallocation~~dissolved the function of ~~noncash expense~~the Office of ~~$0.4 million~~the Chief Executive consisting of the President, Chief Operating Officer, and ~~$0.2 million, respectively. For~~Chief Financial Officer which previously acted as its CODM.

The CODM allocates resources to and assesses the ~~nine months ended September 30, 2019~~performance of each segment using information about its revenue 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 segments for the three and nine months ended September 30, 2019 and 2018 is~~operating income (loss). These measures are presented in the following ~~table~~tables (in thousands):. Asset information by segment is not presented, as this measure is not used by the CODM to assess the segment’s performance.

For the three months ended For the nine months ended
September 30, September 30,
2019 2018 2019 2018
Net revenues:
Reportable segments:
Regenerative medicine $ 839 $ 197 $ 1,640 $ 389
Contract services 556 528 2,546 659
Total net revenues $ 1,395 $ 725 $ 4,186 $ 1,048

Net (loss) income:
Reportable segments:
Regenerative medicine $ (22,466 ) $ (20,332 ) $ (70,247 ) $ (45,845 )
Contract services (517 ) (247 ) (1,101 ) (511 )
Total net loss $ (22,983 ) $ (20,579 ) $ (71,348 ) $ (46,356 )

SCHEDULE OF SEGMENT INFORMATION

	For the Three Months Ended						For the Six Months Ended
	June 30,						June 30,
	2020			2019			2020			2019
Net revenues by segment:
Regenerative medicine	$	944		$	504		$	1,372		$	801
Contract services		1,322			822			1,827			1,990
Total net revenues	$	2,266		$	1,326		$	3,199		$	2,791

Net loss by segment:
Regenerative medicine	$	(12,567	)	$	(22,572	)	$	(25,270	)	$	(47,781	)
Contract services		(110	)		(220	)		(447	)		(584	)
Total net loss	$	(12,677	)	$	(22,792	)	$	(25,717	)	$	(48,365	)

~~17. SUBSEQUENT EVENTS~~

Pursuant to the demand made by Dr. Denver Lough under his Registration Rights Agreement 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.

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.~~heading “Disclosure Regarding Forward-Looking Statements” below.

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-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.Overview

~~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~~product segment and the contract services segment.

Segment Reporting

Regenerative Medicine Product Segment

The regenerative medicine ~~business~~product segment ~~over~~is engaged in the ~~last year has established and advanced our core “TE” program, which includes~~development of SkinTE, our first commercial product, ~~SkinTE. The commercial launch~~and also the development of SkinTE ~~has included the build out of commercial, manufacturing,~~POC (point-of-care device for on-site SkinTE processing and ~~corporate structure to support the growth~~deployment), Skin TE Cryo (cryopreservation of SkinTE ~~revenue~~for multiple deployments on a single patient), and ~~deployments~~PTE 11000 (allogeneic, biologically active dressing for use in ~~2019~~wound care).

SkinTE was registered and ~~beyond. This includes equipment, personnel, systems,~~listed with the United States Food and ~~leased properties. Research~~Drug Administration (FDA) in August 2017 based on our determination that SkinTE is appropriately regulated solely under Section 361 of the Public Health Service Act and ~~development continue~~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 is required. We proceeded to ~~expand~~develop sales and manufacturing capabilities for SkinTE and focused on advancing commercialization of SkinTE.

Following informal, voluntary discussions between us and the FDA we were advised by the FDA in April 2020 that its preliminary assessment is that SkinTE does not meet the requirements to ~~advance~~be regulated as a 361 HCT/P. Rather, FDA’s view is that SkinTE is a biological product that should be regulated under Section 351 of the ~~product development pipeline.~~Public Health Service Act. We re-evaluated our regulatory approach and determined it is prudent to submit an investigational new drug application (IND), and thereafter a biologics license application (BLA) for SkinTE, and to adjust the focus of our commercial effort for SkinTE based on the following factors:

	●	license exclusivity for 12 years that arises under a BLA could enhance the value of SkinTE;

	●	clinical testing in the BLA process could advance commercial acceptance of SkinTE;

	●	the possibility the FDA could restrict our commercial sale of SkinTE in the future; and

	●	the contraction of the commercial opportunity for SkinTE in March and April 2020 because healthcare providers were dedicating resources to the care and treatment of COVID-19 patients and the acute and traumatic care needs of the general population and, as a result, were putting a hold on elective procedures in many regions across the country.

~~In May 2018 we acquired assets of~~Contract Services Segment

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 and laboratory testing services to unrelated third parties on a contract basis through our subsidiary, Arches Research, Inc. (“Arches”).

In April 2020 we received unsolicited inquiries from third parties regarding our laboratory and its capacity to perform COVID-19 testing, which we ~~offer~~attribute to the surge in COVID-19 testing throughout the United States and what we believe to be a lack of laboratory testing capacity to meet the surging demand. Management evaluated Arches’ resources and found that it has the capability of performing molecular polymerase chain reaction testing for COVID-19. Management decided that COVID-19 testing offered an opportunity to use existing resources to generate additional revenue in the contract services segment and thereby help defray our operating expenses. Consequently, we applied to the Centers for Medicare and Medicaid Services for a certificate of registration for our laboratory under the ~~trademark POLARITYRD. Contract~~Clinical Laboratory Improvement Amendments and obtained that certificate in late April 2020. We started providing COVID-19 testing services on May 27, 2020.

Revenue Recognition

In the regenerative medicine products segment, we record product revenues primarily from the sale of our 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 expected to be required to satisfy the performance obligation. Contract services include research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of ~~maintaining~~ a ~~first-rate research facility and allow us~~single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to ~~meet companies pursuing new technologies that may be opportunities for collaborative or strategic relationships going forward.~~the customer.

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~~and corporate and business development initiatives.

Sales and Marketing Expenses

Sales and marketing expenses primarily represent employee related costs, including stock compensation for sales and marketing executives and staff, marketing and advertising expenses, trade shows and other promotional costs, and other related charges.

Results of Operations

Comparison of the ~~Securities and Exchange Commission (SEC), and corporate- and business-development initiatives.~~three months ended June 30, 2020 compared to the three months ended June 30, 2019.

	For the Three Months Ended						Increase (Decrease)
(in thousands)	June 30, 2020			June 30, 2019			Amount			%
	(Unaudited)
Net revenues
Products	$	944		$	504		$	440			87	%
Services		1,322			822			500			61	%
Total net revenues		2,266			1,326			940			71	%
Cost of sales
Products		275			342			(67	)		(20	)%
Services		607			254			353			139	%
Total cost of sales		882			596			286			48	%
Gross profit		1,384			730			654			90	%

Operating costs and expenses
Research and development		3,164			4,764			(1,600	)		(34	)%
General and administrative		5,211			15,060			(9,849	)		(65	)%
Sales and marketing		2,024			3,981			(1,957	)		(49	)%
Restructuring and other charges		2,084			_–			2,084			*
Total operating costs and expenses		12,483			23,805			(11,322	)		(48	)%
Operating loss		(11,099	)		(23,075	)		11,976			(52	)%
Other income (expense)
Change in fair value of common stock warrant liability		(1,591	)		–			(1,591	)		*
Interest income, net		(65	)		29			(94	)		(324	)%
Other income, net		78			254			(176	)		(69	)%
Net loss	$	(12,677	)	$	(22,792	)	$	10,115			(44	)%

~~Income Taxes.~~Net Revenues ~~Income taxes consist~~

For the three-month period ended June 30, 2020, we recorded net revenues of $2.266 million, which represents an increase of $0.940 million or 71% from the $1.326 million of net revenues recorded for the three months ended June 30, 2019. The $0.940 million increase in net revenues was due to an increase in revenue in both our ~~provisions~~regenerative medicine product segment and the contract services segment.

Regenerative Medicine Product Segment

As noted above, we plan to submit to FDA an IND and BLA for ~~income taxes,~~SkinTE. We are in the process of arranging meetings with FDA to determine the most appropriate development plan for a BLA submission. 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 ~~affected by our net operating loss carryforwards. Future utilization~~a 361 HCT/P on a limited basis at a future meeting, both until May 31, 2021, which marks the end of ~~our net operating loss,~~a period of enforcement discretion that FDA announced in revised final guidance issued in July 2020 that it would generally observe unless there are reported or ~~NOL, carryforwards may be~~potential significant safety concerns, and beyond May 2021. It is not customary for the FDA to allow wide-spread commercial sales of a product subject to a pending BLA.

At the same time as the regulatory development described above, we were experiencing the effects of the COVID-19 pandemic. Throughout the country, healthcare assets in terms of facilities and providers were dedicated in March, April, and May to the care and treatment of COVID-19 patients while still trying to meet the acute and traumatic care needs of the general population. The substantial ~~annual limitation~~rise in COVID-19 cases in the first part of the summer indicates that the dedication of resources to the treatment of COVID-19 will continue for the immediate future. Consequently, medical care and procedures that are considered “elective” have been put on hold in many regions across the country. We experienced the effect of the COVID-19 pandemic in our commercial operations in March 2020, when there was a drop in paid cases in that month followed by cancellation or postponement of SkinTE procedures scheduled for April 2020. This negative impact was most evident in chronic wounds without amputation risk and we expect this impact to continue in subsequent periods as long as the pandemic continues to surge.

We do not know, and cannot predict, whether FDA will allow us to continue selling SkinTE while our BLA is pending. Accordingly, management determined it was prudent under the circumstances discussed above to focus our commercialization effort on the territories where we have current and repeat users of SkinTE. As a result, in May 2020 we eliminated 40 positions in the regenerative medicine product segment, including 24 positions engaged in performing sales and marketing functions. Net revenues for SkinTE in the second quarter of 2020 are $0.944 million compared to $0.428 million for the first quarter of 2020. The number of paid SkinTE cases in the second quarter of 2020 increased by 9.9% over the first quarter from 81 in the first quarter to 88 in the second quarter while net revenues more than doubled, and this disjunction is attributable to the larger wound sizes in traumatic wounds treated with SkinTE in the second quarter so that the average revenue per paid case was higher in the second quarter of 2020 compared to the first quarter. Of SkinTE revenues for the second quarter, $0.489 million, or 51.8%, of net revenues was generated by three hospital systems, and one of these hospital systems alone was the source of 31.2% of the revenues.

For the three-month period ended June 30, 2020, net revenues from the regenerative medicine product segment are $0.944 million, which represents an increase of $0.440 million or 87% from the $0.504 million of net revenues from the regenerative medicine product segment recorded for the three months ended June 30, 2019. This change is attributable to an increase of 91.3% in the number of paid cases from 46 in the second quarter of 2019 to 88 in the second quarter of 2020, and the higher average revenue per paid case we experienced in the second quarter of 2020.

Contract Services Segment

As noted above we began COVID-19 testing at the beginning of June 2020, so that at June 30, 2020, we had testing agreements with 29 nursing homes located in the state of New York controlled by a single company. On May 10, 2020, the Governor of the State of New York issued an order requiring COVID-19 testing of all employees working in nursing homes within the state weekly, which has been renewed on a monthly basis. Previously the New York Governor issued an order, Executive Order 202.10 (the “Executive Order’) that, among other things, suspended the requirement that a laboratory outside New York obtain a clinical laboratory permit from New York State if the laboratory holds a CLIA certificate and is engaged to test for COVID-19 in specimens collected from persons in New York State. The Executive Order had a limited duration until April 22, 2020 but has been extended monthly and now expires August 8, 2020. We have not received any indication from the State of New York that the Executive Order will not be renewed in August 2020. This new testing service contributed $0.712 million to net revenues for the contract services segment in the second quarter of 2020 and the remainder was generated by our historical clinical service offerings. Net revenues for contract services segment in the second quarter of 2020 are $1.322 million compared to $0.505 million for the first quarter of 2020. This change is primarily attributable to the revenues generated by the new COVID-19 testing services offered by Arches.

Gross Profit

Cost of sales for the product segment as a percentage of product revenues was 68% in the second quarter of 2019 compared to 29% for the second quarter of 2020. Built in production capacity results in a lower incremental cost per unit as product sales increase. There was a reduction in staff that reduced fixed overhead costs increasing gross profit. Cost of sales for the services segment as a percentage of service revenues was 31% in the second quarter of 2019 compared to 46% for the second quarter of 2020, which we attribute to variations in service specific materials requirements for performing services in the second quarter of 2020 compared to the same quarter in 2019. As a result of the changes in net revenues and cost of sales in both segments, the combined effect is that gross profit increased as a percentage higher than net revenues period over period from $.73 million for the three-month period ended June 30, 2019 to $1.38 million for the three-month period ended June 30, 2020, or an increase in gross profit of 90%.

Research and Development

For the three-month period ended June 30, 2020, we recorded research and development expenses totaling $3.16 million, which represents a decrease of $1.60 million, or 34%, from $4.76 million of research and development expenses for the three months ended June 30, 2019. There was a reduction in staff in research and development that reduced compensation and benefits costs by $0.50 million and stock compensation expense decreased $1.08 million.

General and Administrative Expenses

General and administrative expenses totaled $5.21 million for the three-month period ended June 30, 2020, which represents a decrease of $9.85 million as compared to $15.06 million of general and administrative expenses incurred during the three months ended June 30, 2019. The primary drivers for this decrease is a $6.75 million reduction in stock compensation expense, due to restricted stock and option forfeitures related to the ~~“change~~reduction in ~~ownership” provisions~~force taken during the second quarter of 2020, a $0.99 million reduction in legal, accounting, and consulting fees, a $0.76 million reduction in compensation-related expenses, and a $0.28 million reduction in travel expenses in the second quarter of 2020 compared to the second quarter of 2019.

Sales and Marketing

Sales and marketing expenses totaled $2.02 million for the three-month period ended June 30, 2020, which represents a decrease of $1.96 million, as compared to $3.98 million of sales and marketing expenses incurred during the three months ended June 30, 2019. There was a reduction in staff in sales and marketing that reduced compensation and benefits costs by $0.47 million and reduction of marketing and consultant spending of $1.47 million in the second quarter of 2020 compared to the second quarter of 2019. The contract service segment does not have a meaningful sales and marketing component to its business.

Restructuring and Other Charges

Restructuring and other charges totaled $2.08 million for the three-month period ended June 30, 2020. There were no restructuring and other charges for the three-month period ended June 30, 2019. Management approved several actions designed to improve operational efficiency and financial results including a reduction in force taken during the second quarter of 2020 that increased severance expense by $0.55 million. Management also recorded $1.53 million of asset abandonments within the Company’s regenerative medicine business segment during the three-month period ended June 30, 2020.

Comparison of the ~~Internal Revenue Code.~~six months ended June 30, 2020 compared to the six months ended June 30, 2019.

	For the Six Months Ended						Increase (Decrease)
(in thousands)	June 30, 2020			June 30, 2019			Amount			%
	(Unaudited)
Net revenues
Products	$	1,372		$	801		$	571			71	%
Services		1,827			1,990			(163	)		(8	)%
Total net revenues		3,199			2,791			408			15	%
Cost of sales
Products		615			615			–			0	%
Services		783			757			26			3	%
Total cost of sales		1,398			1,372			26			2	%
Gross profit		1,801			1,419			382			27	%

Operating costs and expenses
Research and development		6,537			10,116			(3,579	)		(35	)%
General and administrative		15,816			32,255			(16,439	)		(51	)%
Sales and marketing		5,718			7,934			(2,216	)		(28	)%
Restructuring and other charges		2,536			–			2,536			*
Total operating costs and expenses		30,607			50,305			(19,698	)		(39	)%
Operating loss		(28,806	)		(48,886	)		20,080			(41	)%
Other income (expense)
Change in fair value of common stock warrant liability		2,941			–			2,941			*
Interest income, net		(77	)		99			(176	)		(178	)%
Other income, net		225			422			(197	)		(47	)%
Net loss	$	(25,717	)	$	(48,365	)	$	22,648			(47	)%

Net Revenues

For the six-month period ended June 30, 2020, we recorded net revenues of $3.20 million, which represents an increase of $.41 million or 15% from the $2.79 million of net revenues recorded for the six months ended June 30, 2019. The ~~annual limitation~~$.41 million increase in net revenues was due primarily to an increase in revenue in our regenerative medicine product segment.

Regenerative Medicine Product Segment

As noted above, we plan to submit to FDA an IND and BLA for SkinTE. We do not know, and cannot predict, whether FDA will allow us to continue selling SkinTE while our BLA is pending. Accordingly, management determined it was prudent under the circumstances discussed above focus our commercialization effort on the territories where we have current and repeat users of SkinTE. As a result, in May 2020 we eliminated 40 positions in the regenerative medicine product segment, including 24 positions engaged in performing sales and marketing functions. Net revenues for SkinTE in the six-month period ended June 30, 2020 increased by 71% over the comparable period in 2019 to $1.37 million for the six months ended June 30, 2020, compared to $0.80 million for the six months ended June 30, 2019. This change is attributable to an increase of 94.25% in the number of paid SkinTE cases from 87 in the first half of 2019 to 169 for the first half of 2020, and the higher average revenue per paid case we experienced in the second quarter of 2020. Of SkinTE revenues for the six months ended June 30, 2020, $0.325 million, or 23.6%, of net revenues was generated by one hospital system.

Contract Services Segment

As noted above we began COVID-19 testing at the beginning of June 2020, so that at June 30, 2020, we had testing agreements with 29 nursing homes located in the state of New York controlled by a single company. This new testing service contributed $0.712 million to net revenues for the contract services segment in the first half of 2020 and the remainder was generated by our historical clinical service offerings. Net revenues for contract services segment in the six months ended June 30, 2020 are $1.827 million compared to $1.990 million for the six months ended June 30, 2019. This change is attributable to a decline in net revenues from pre-clinical testing services that was only partially offset by net revenues generated by the new COVID-19 testing services offered by Arches.

Gross Profit

Cost of sales for the product segment as a percentage of product revenues was 77% in the first six months of 2019 compared to 45% for the first six months of 2020. Built in production capacity results in a lower incremental cost per unit as product sales increase. There was a reduction in staff that reduced fixed overhead costs increasing gross profit. Cost of sales for the services segment as a percentage of service revenues was 38% in the first six months of 2019 compared to 43% for the first six months of 2020, which we attribute to variations in service specific materials requirements for performing services in the first half of 2020 compared to the first half of 2019. As a result of the changes in net revenues and cost of sales in both segments, the combined effect is that gross profit increased as a percentage higher than net revenues period over period from $1.42 million for the six-month period ended June 30, 2019 to $1.80 million for the six-month period ended June 30, 2020, or an increase in gross profit of 27%.

Research and Development

For the six-month period ended June 30, 2020, we recorded research and development expenses totaling $6.54 million, which represents a decrease of $3.58 million, or 35%, from $10.12 million of research and development expenses for the six months ended June 30, 2019. There was a reduction in staff in research and development that reduced compensation and benefits costs by $1.22 million and stock compensation expense decreased $2.20 million.

General and Administrative Expenses

General and administrative expenses totaled $15.82 million for the six-month period ended June 30, 2020, which represents a decrease of $16.44 million as compared to $32.26 million of general and administrative expenses incurred during the six months ended June 30, 2019. The primary driver for this decrease is a $12.71 million reduction in stock compensation expense due to restricted stock and option forfeitures in the first half of 2020 compared to the first half of 2019.

Sales and Marketing

Sales and marketing expenses totaled $5.72 million for the six-month period ended June 30, 2020, compared to $7.93 million of sales and marketing expenses incurred during the six months ended June 30, 2019. There was a reduction in staff in sales and marketing in the second quarter of 2020 that reduced compensation and benefits costs and reduced marketing and consultant spending compared to the second quarter of 2019.The service segment does not have a meaningful sales and marketing component to its business.

Restructuring and Other Charges

Restructuring and other charges totaled $2.54 million for the six-month period ended June 30, 2020. There were no restructuring and other charges for the six-month period ended June 30, 2019. Management approved several actions designed to improve operational efficiency and financial results including a reduction in force taken during the first half of 2020 that increased severance expense by $1.01 million. Management also recorded $1.53 million of asset abandonments within the Company’s regenerative medicine business segment during the six-month period ended June 30, 2020.

Liquidity and Capital Resources

As of June 30, 2020, our cash and cash equivalents totaled $30.50 million and our working capital was approximately $26.13 million, compared to cash and cash equivalents and short-term investments of $29.24 million and our working capital of approximately $22.43 million at December 31, 2019. Our accumulated deficit at June 30, 2020, was approximately $461.07 million.

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 us under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the ~~expiration~~repayment of ~~NOL carryforwards~~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 of 10,638,298 shares of our 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 ~~utilization. Due~~underwriting discount and commission. Each warrant has an exercise price of $2.80 per share, was exercisable immediately, and will expire February 12, 2027. The net proceeds to the Company from the offering were $22.5 million, after 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.

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 agreed to 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 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 common stock pursuant to the Purchase Agreement under our existing shelf registration statement on Form S-3 or a new registration statement. During the period from the date of the Purchase Agreement to 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 preceding paragraph, we agreed not to sell any additional shares under the Purchase Agreement for a period of 90 days after the closing date of the offering.

As of August 6, 2020, the date of issuance of these unaudited interim condensed financial statements, the Company expects that its cash and cash equivalents of $30.50 million as of June 30, 2020, will not be sufficient to fund its current business plan including related operating expenses and capital expenditure requirements into the second quarter of 2021. Accordingly, there is substantial doubt about the Company’s ability to continue as a going concern as the Company does not believe that its cash and cash equivalents will be sufficient to fund such business plan for at least twelve months from the date of issuance of these interim financial statements. The Company plans to address this condition by raising additional capital to finance its operations. Although the Company has been successful in raising capital in the past, financing may not be available on terms favorable to us, if at all, so there is no assurance that it will be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that the Company’s plans to raise additional capital will alleviate the substantial doubt regarding its ability to continue as a going concern.

For the foreseeable future we will continue to pursue fundraising opportunities when available. If adequate funds are not available, we may be required to delay, reduce the scope of, or eliminate one or more of our product development programs or 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, or strategic partnership arrangements. Failure to generate revenue or raise additional capital would adversely affect our ability to achieve our intended business objectives

Our actual capital requirements will depend on many factors, including the cost and timing of pursuing a biologics license application for SkinTE we intend to 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 for our product candidates. Our forecast of the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. The foregoing factors, along with the other factors described in the section, Item 1A, “Risk Factors” in Part II of this Report on Form 10-Q 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 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.

The following table sets forth the primary sources and uses of cash for each period indicated:

	Six Months Ended
(in thousands)	June 30, 2020			June 30, 2019
Net cash provided by (used in)
Operating activities	$	(25,413	)	$	(28,789	)
Investing activities		17,802			(8,277	)
Financing activities		27,897			27,280
Net increase/(decrease) in cash and cash equivalents	$	20,286		$	(9,786	)

Cash used in operating activities

During the six-month period ended June 30, 2020, net cash used in operating activities was $25.41 million, which included $1.16 million of issuance fees related to the February raise. The cash used in operating activities was due to a net loss of $25.72 million adjusted by $2.94 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 $3.78 million for stock compensation expense.

During the six-month period ended June 30, 2019, net cash used in operating activities was $28.79 million, which was due to a net loss of $48.37 million offset primarily by the non-cash expenses of $18.91 million for stock compensation expense

Cash provided by (used in) investing activities

During the six-month period ended June 30, 2020, net cash provided by investing activities was $17.80 million, which was due primarily to proceeds from the sale and maturities of available for sale securities.

During the six-month period ended June 30, 2019, net cash used in investing activities was $8.28 million, which was due primarily due to purchases of available for sale securities.

Cash provided by financing activities

During the six-month period ended June 30, 2020, net cash provided by financing activities was $27.90 million due to proceeds from financing arrangements and net proceeds received from the sale of common stock and warrants.

During the six-month period ended June 30, 2019, net cash provided by financing activities was $27.28 million primarily due to proceeds received from the sale of common stock.

Critical Accounting Policies and Estimates

For a description of our significant accounting policies, see note 2 to our history of losses, a valuation allowance sufficient to fully offset our NOL 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.condensed consolidated financial statements.

~~Critical Accounting Estimates~~

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 ~~are~~is the ~~valuation~~extent of ~~warrant liability, valuation~~progress toward completion of ~~derivative liability,~~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.

~~We have identified~~Revenue Recognition

Revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the ~~policies below as critical~~consideration which the entity expects to ~~our business operations and~~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 ~~understanding~~performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.

The Company records product revenues primarily from the sale of ~~our financial results.~~its regenerative tissue products. The ~~impact~~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.

The Company records service revenues from the sale of its preclinical research services and ~~any associated risks related~~contract services. Preclinical research services includes delivery of preclinical studies and other research services to ~~these policies~~unrelated third parties. Service revenues generally consist of a single performance obligation that the Company satisfies over time using an input method based on ~~our business operations is discussed throughout management’s discussion and analysis~~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 ~~financial condition and results~~the transfer of ~~operations when such policies affect our reported and expected financial results.~~

~~Goodwill and Intangible Assets.~~~~Goodwill represents the excess acquisition cost~~services 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 stepterm 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,performance obligation based on the ~~excess~~remaining services needed to satisfy the obligation. This requires the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue are recognized based on payment timing and work completed. Generally, a portion of the payment is due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services includes research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of a ~~reporting unit’s carrying amount~~single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer.

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 ~~its~~the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.

The fair ~~value.~~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 ~~reporting units~~restricted stock grants is measured based on ~~widely accepted valuation techniques that~~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.

Accruals for Research and Development Expenses and Clinical Trials

As part of the process of preparing its financial statements, the Company ~~believes market participants would use, although~~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 ~~valuation process requires significant judgment~~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 ~~often involves the use of significant estimates and assumptions.~~efforts are expended. The Company ~~utilizes~~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 ~~market cap approach in estimating~~clinical trial, the ~~fair value~~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 ~~units. The~~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 ~~assumptions used in determining fair value could have a significant effect on whether or not an impairment charge is recorded~~timing of services performed relative to the actual status and ~~the magnitude~~timing of ~~such a charge. Adverse market or economic events could~~services performed may vary and may result in ~~impairment charges in future periods.~~it reporting amounts that are too high or too low for any particular period.

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.~~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. ~~No impairment loss has been recognized.~~

~~Income Taxes.~~Common Stock and Warrant Transactions

The Company ~~accounts for income taxes under~~issued units consisting of common stock and warrants and subsequently remeasured those warrants at fair value. Determining 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~~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 ~~stock on the date of grant and amortized over the vesting period of, generally, six months to three years.~~stockholders.

~~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 obligationDisclosure Regarding Forward-Looking Statements

Statements that ~~the Company satisfies at a point~~are not historical facts contained 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 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.

~~Leases.~~~~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~~incorporated 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, ofreference into this Quarterly Report on Form 10-Q ~~for additional information regarding~~are “forward-looking statements” within the ~~adoption.~~

~~Results of Operations~~

~~Three months ended September 30, 2019 versus three months ended September 30, 2018~~

~~Net Revenues~~. For the three-month period ended September 30, 2019, total net revenues were $1.4 million. Products revenues from the sale of SkinTE were $0.8 million for the three months ended September 30, 2019 compared to $0.2 million for 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.

~~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 as a percentage of products revenues has declined quarter over quarter during the first nine months of 2019, primarily due to a reduction in direct manufacturing costs. Services cost of sales were $0.3 million or approximately 59% of services revenues. Product cost of sales for the three-month period ended September 30, 2018 were $0.3 million or approximately 136% of products revenues. Services cost of sales for the three-month 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 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 million for the three-month period ended September 30, 2018, primarily reflecting the increase in operating costs and expenses driven by expanding operations discussed above.

~~Nine months ended September 30, 2019 versus nine months ended September 30, 2018~~

~~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 million, or approximately 42%, in the nine-month period ended September 30, 2019 compared to the nine-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 nine-month period ended September 30, 2019, sales and marketing expenses increased $11.3 million or 699%, in the nine-month period ended September 30, 2019 compared to the nine-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 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, our cash, cash equivalents and short-term investments balance was approximately $45.9 million and our working capital was approximately $35.7 million, compared to cash and cash equivalents and short-term investments of $61.8 million and working capital of $56.8 million at December 31, 2018.

As reflected in the condensed consolidated financial statements, we had an accumulated deficit of 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.

~~On April 10 and May 6, 2019, the Company completed an underwritten offering providing for the issuance and sale of 3,418,918 shares~~meaning of the ~~Company’s common stock, par value $0.001 per share, at an offering price~~Private Securities Litigation Reform Act of ~~$8.51 per share, for net proceeds of approximately $27.9 million, after deducting offering expenses payable by the Company.~~

The Company has taken numerous steps to further reduce its cash burn during the three months ended September 30, 2019, including outsourcing various aspects of our business, conducting a thorough budget review by department, enhancing fiscal discipline and prioritizing resource allocation to those areas1995, Section 27A of the ~~business that are most likely to generate revenue in~~Securities Act of 1933, as amended, and Section 21E of the ~~near term. We expect these efforts will continue in the fourth quarter~~Securities Exchange Act of 2019, but the results 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.

Based upon the current status of our product development and commercialization plans, we believe that our existing cash, cash equivalents and short-term investments will be adequate to satisfy our capital needs for at least the next 12 months from the date of filing. Nevertheless, it is likely in the future we may need additional financing to continue clinical deployment 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 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 or development programs. The Company may also implement additional spending reductions. We plan to meet our future capital requirements primarily through issuances of equity securities, debt financing, revenue from product sales and future collaborations. Failure to generate revenue or raise additional capital1934, as ~~needed in the future would adversely affect our ability to achieve our business objectives.~~

Our actual capital requirements will depend on many factors, including among other things: our ability to scale the manufacturing for and to commercialize successfully our lead product, SkinTE; the progress and success of clinical evaluation and acceptance of SkinTE; our ability to develop our other product candidates; and the costs and timing of obtaining any required regulatory registrations or approvals. Ouramended (the “Exchange Act”). Forward-looking statements ~~regarding the period of time through which our financial resources will be adequate to support our operations is a forward-looking statement that involves~~involve risks and uncertainties ~~and~~that could cause actual results ~~could vary materially.~~to differ from projected results. The ~~foregoing factors, along~~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 ~~the other factors described in Part I, Item 1A. Risk Factors~~respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot assure you that any of our ~~Transition Report on Form 10-K filed with the SEC on March 18, 2019~~expectations will ~~impact~~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;
	●	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 ~~capital requirements and the adequacy of our available funds. If we~~events or otherwise. All forward-looking statements 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 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~~

~~As of September 30, 2019, we had no off-balance sheet arrangements.~~

~~Inflation~~

~~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 the nine-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 net cash used in operating activities mostly relates to the expansion of infrastructure and sales and marketing expenses related to the commercial expansion of SkinTE.

~~Investing Cash Flows~~

Cash used in investing activities 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.

~~Financing Cash Flows~~

~~Net cash provided~~expressly qualified by financing activities for the nine-month period ended September 30, 2019, was approximately $27.1 million. $92.8 million of 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 proceeds from stock options exercised and 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, offset by principal payments on finance leases and contingent consideration liability payments. For the nine-month period ended September 30, 2018, the activity relates 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.these cautionary statements.

~~Recent Accounting Pronouncements~~

Refer to our discussion of recent accounting pronouncements in Note 2 - Summary of Significant Accounting Policies to the accompanying condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

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~~previously identified a material weakness in our ~~reports filed under~~internal control over financial reporting as of December 31, 2019, that continued to exist as of March 31, 2020, which was the ~~Exchange Act, is recorded, processed, summarized~~failure 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 ~~reported within~~related accounts. In the ~~time periods specified~~first quarter of 2020 management implemented a systemic tool to enhance the reconciliation and review procedures identified in the ~~SEC’s rules and forms, and that such information is accumulated and communicated to~~material weakness above. This change in our ~~management, including our principal executive officer and principal~~internal control over financial ~~and accounting officer,~~reporting remediated the material weakness as ~~appropriate, to allow timely decisions regarding required disclosure.~~of June 30, 2020.

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~~June 30, ~~2019,~~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~~effective. There were no changes in our internal control over financial reporting ~~identified below. To address~~during the material weaknesses, 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.three-month period ended June 30, 2020.

~~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 material weaknesses previously identified as of December 31, 2018, continued to exist as of September 30, 2019, which include (1) insufficient internal controls related to information technology general controls in the areas 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~~

There were no 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. 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.

PART II. OTHER INFORMATION

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

~~On June 26, 2018, a class action complaint alleging violations of~~You should carefully consider the ~~Federal securities laws was filed~~factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the ~~United States District Court, District of Utah, by Jose Moreno against~~fiscal year ended December 31, 2019, and our Quarterly Report on Form 10-Q for 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 betweenperiod ended 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 Company is unable to make any prediction regarding the outcome of the litigation.

~~In the ordinary course of~~2020, which could materially affect our business, we may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, regulatory compliance, 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 future results of operations. WeThe risks described in that Annual Report and Quarterly Report are not ~~a party to any material proceedings in which any director, member of senior management or affiliate of ours is either a party adverse~~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 ~~subsidiaries~~business, financial position, or ~~has~~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 and our Quarterly Report on Form 10-Q for the period ended March 31, 2020.

Risks Related to Our Financial Position and Capital Requirements

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

We reported a ~~material interest adverse~~net loss of $25.7 million for the six months ended June 30, 2020 and at June 30, 2020, we had an accumulated deficit of $461.1 million. We believe we can fund our current business plan including related operating expenses and capital expenditure requirements into the second quarter of 2021. Accordingly, there is substantial doubt about our ability to uscontinue as a going concern beyond the second quarter of 2021 unless we can raise additional capital from external sources.

We expect to incur significant operating costs in the near term as we pursue the regulatory process for filing an IND and BLA with FDA, conduct clinical trials and studies, and pursue product research, all while operating our business segments and incurring continuing fixed costs related to the maintenance of our assets and business. We cannot predict whether we will be restricted by FDA with respect to SkinTE sales while our BLA is pending, and the net revenues generated from COVID-19 testing is a very recent development, so we are unable to predict any future trend for this testing revenue. In any event, we do not expect net revenues from our business segments will be enough to defray our costs of doing business. Consequently, we expect to incur significant losses in the future, and those losses could be more severe as a result of unforeseen expenses, difficulties, complications, delays, and other unknown events, including the unpredictable effects of the COVID-19 pandemic.

We will need additional funding to meet our future business needs and we may be unable to raise additional funds in a timely manner or on terms that are acceptable to us. If are not able to obtain sufficient funds, we may have to delay, reduce the scope of, or eliminate one or more of our ~~subsidiaries.~~product development programs or be unable to continue operations over a longer term.

Item 6. Exhibits

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

10.1	~~Settlement Terms~~Note and Loan Agreement dated ~~August 21, 2019~~April 12, 2020, between ~~Denver Lough~~PolarityTE MD, Inc., and ~~PolarityTE, Inc.~~KeyBank National Association (incorporated by reference to Exhibit 10.1 to our Current Report on Form 8-K filed on April 15, 2020)
~~10.2~~31.1	~~Change in Control Compensation Plan~~
~~31.1~~	Certification Pursuant to Rule 13a-14(a)
31.2	Certification Pursuant to Rule 13a-14(a).
~~31.3~~32.1	~~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.~~Document - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document.
101.SCH	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.
104	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)

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.

Date: August 6, 2020	/s/ ~~Paul Mann~~David Seaburg
	~~Paul Mann~~	David Seaburg
	Chief Executive Officer
	Duly Authorized Officer

Date: August 6, 2020	/s/ Jacob Patterson
	Jacob Patterson
	Interim Chief Financial Officer
	~~Duly Authorized~~Chief Accounting Officer

~~Date:~~	~~November 12, 2019~~

	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

	September 30, 2019
	Amortized Cost		Unrealized Gains		Unrealized Losses		Market Value
Cash equivalents:
Money market funds	$	7	$	–	$	–	$	7
Commercial paper		10,037		32		–		10,069
U.S. government debt securities		1,930		6		–		1,936
Total cash equivalents (1)		11,974		38		–		12,012
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
Total short-term investments		18,650		25		–		18,675
Total	$	30,624	$	63	$	–	$	30,687

	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

	As of September 30, 2019
Finance lease right-of-use assets included within property and equipment, net	$	2,112

Current finance lease liabilities included within other current liabilities	$	456
Non-current finance lease liabilities included within other long-term liabilities		1,199
Total	$	1,655

	As of September 30, 2019
Current operating lease liabilities included within other current liabilities	$	1,814
Operating lease liabilities – non current		3,358
Total	$	5,172

	Three months ended September 30, 2019		Nine months ended September 30, 2019
Operating lease costs included within operating costs and expenses	$	556	$	1,617
Finance lease costs:
Amortization of right of use assets	$	171	$	479
Interest on lease liabilities		42		109
Total	$	213	$	588

	Nine months ended September 30, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases	$	1,550
Operating cash out flows from finance leases		109
Financing cash out flows from finance leases		336
Lease liabilities arising from obtaining right-of-use assets:
Finance leases	$	1,828
Lease payments made in prior period reclassified to property and equipment		535
Remeasurement of finance lease liability due to lease modification		(22	)
Operating leases		936

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

	As of September 30,
	2019		2018
Stock options		6,357,029		6,125,628
Restricted stock		2,027,100		685,730
Shares committed under ESPP		15,235		–