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 ~~June 30, 2020~~March 31, 2021

Commission File No. 001-32404

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

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

1960 S. 4250 West, Salt Lake City, UT 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~~ NASDAQ

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

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

Large accelerated filer	☐	Accelerated filer	☒☐
Non-accelerated filer	☐☒	Smaller reporting company	☒
		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 ☒

As of ~~August 3, 2020,~~May 10, 2021, there were ~~38,740,704~~ 80,633,096shares of the Registrant’s common stock outstanding.

INDEX

		Page
PART I - FINANCIAL INFORMATION		3

Item 1. Financial Statements:		3
Condensed Consolidated Balance Sheets as of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019~~2020 (unaudited)	3	3
Condensed Consolidated Statements of Operations for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	4	4
Condensed Consolidated Statements of Comprehensive Loss for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	5	5
Condensed Consolidated Statements of Stockholders’ Equity for the three ~~and six~~ months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	6	6
Condensed Consolidated Statements of Cash Flows for the ~~six~~three months ended ~~June 30,~~March 31, 2021 and 2020 ~~and 2019~~ (unaudited)	7	7
Notes to Condensed Consolidated Financial Statements (unaudited)	8	8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		2126
Item 3. Quantitative and Qualitative Disclosures about Market Risk		3132
Item 4. Controls and Procedures		31
		32

PART II - OTHER INFORMATION		33

Item 1A. Risk Factors	33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	3233
Item 6. Exhibits	33	33

SIGNATURES		34

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

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

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements:

POLARITYTE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

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

	June 30, 2020			December 31, 2019			March 31, 2021			December 31, 2020
ASSETS
Current assets
Cash and cash equivalents	$	30,504		$	10,218		$	37,237		$	25,522
Short-term investments		–			19,022
Accounts receivable, net		2,115			1,731			4,320			3,819
Inventory		281			252			373			883
Prepaid expenses and other current assets		2,453			1,264			2,631			992
Total current assets		35,353			32,487			44,561			31,216
Property and equipment, net		12,729			14,911			9,414			10,550
Operating lease right-of-use assets		3,559			4,590			2,087			2,452
Intangible assets, net		636			731			495			542
Goodwill		278			278			278			278
Other assets		599			602			227			472
TOTAL ASSETS	$	53,154		$	53,599		$	57,062		$	45,510

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses	$	5,050		$	7,095		$	4,295		$	4,148
Other current liabilities		2,644			2,338			3,039			2,106
Current portion of long-term notes payable		1,436			528			2,508			2,059
Deferred revenue		97			98			207			168
Total current liabilities		9,227			10,059			10,049			8,481
Common stock warrant liability		8,736			–			15,866			5,975
Operating lease liabilities		2,192			2,994			1,142			1,476
Other long-term liabilities		1,022			1,630			596			723
Long-term notes payable		2,410			–			1,068			1,517
Total liabilities		23,587			14,683			28,721			18,172

Commitments and Contingencies (Note 14)		–			–
Commitments and Contingencies (Note 13)								-

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
Preferred stock - 25,000,000 shares authorized, 0 shares issued and outstanding at March 31, 2021 and December 31, 2020								–			–
Common stock – $.001 par value; 250,000,000 shares authorized; 80,316,309 and 54,857,099 shares issued and outstanding at March 31, 2021 and December 31, 2020, respectively								80			55
Additional paid-in capital		490,603			474,174			523,882			505,494
Accumulated other comprehensive income		–			72
Accumulated deficit		(461,074	)		(435,357	)		(495,621	)		(478,211	)
Total stockholders’ equity		29,567			38,916			28,341			27,338
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	53,154		$	53,599		$	57,062		$	45,510

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 Six Months Ended						2021			2020
	June 30,						June 30,						For the Three Months Ended March 31,
	2020			2019			2020			2019			2021			2020
Net revenues
Products	$	944		$	504		$	1,372		$	801		$	1,729		$	428
Services		1,322			822			1,827			1,990			2,980			505
Total net revenues		2,266			1,326			3,199			2,791			4,709			933
Cost of sales
Products		275			342			615			615			241			340
Services		607			254			783			757			1,924			176
Total cost of sales		882			596			1,398			1,372			2,165			516
Gross profit		1,384			730			1,801			1,419			2,544			417
Operating costs and expenses
Research and development		3,164			4,764			6,537			10,116			2,431			3,373
General and administrative		5,211			15,060			15,816			32,255			6,371			10,605
Sales and marketing		2,024			3,981			5,718			7,934			1,526			3,694
Restructuring and other charges		2,084			–			2,536			–			425			452
Total operating costs and expenses		12,483			23,805			30,607			50,305			10,753			18,124
Operating loss		(11,099	)		(23,075	)		(28,806	)		(48,886	)		(8,209	)		(17,707	)
Other income (expenses)
Change in fair value of common stock warrant liability		(1,591	)		–			2,941			–			(4,027	)		4,532
Interest (expense) income, net		(65	)		29			(77	)		99
Inducement loss on sale of liability classified warrants														(5,197	)		–
Interest expense, net														(38	)		(12	)
Other income, net		78			254			225			422			61			147
Net loss	$	(12,677	)	$	(22,792	)	$	(25,717	)	$	(48,365	)	$	(17,410	)	$	(13,040	)
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

Net loss per share attributable to common stockholders
Basic													$	(0.23	)	$	(0.39	)
Diluted													$	(0.24	)	$	(0.39	)
Weighted average shares outstanding
Basic														76,158,275			33,019,994
Diluted														76,396,078			33,019,994

~~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 Six Months Ended						2021			2020
	June 30,						June 30,						For the Three Months Ended March 31,
	2020			2019			2020			2019			2021			2020
Net loss	$	(12,677	)	$	(22,792	)	$	(25,717	)	$	(48,365	)	$	(17,410	)	$	(13,040	)
Other comprehensive income/(loss):
Unrealized gain on available-for-sale securities		7			160			11			312			–			4
Reclassification of realized gains included in net loss		(10	)		(134	)		(83	)		(269	)		–			(73	)
Comprehensive loss	$	(12,680	)	$	(22,766	)	$	(25,789	)	$	(48,322	)	$	(17,410	)	$	(13,109	)

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

Number Amount Capital Income Deficit Equity Number Amount Capital Income Deficit Equity
For the Three and Six Months Ended June 30, 2019 For the Three Months Ended March 31, 2021
Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’ Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’
Number Amount Capital Income Deficit Equity Number Amount Capital Income Deficit Equity
Balance – December 31, 2018 21,447,088 $ 21 $ 414,840 $ 36 $ (342,864 ) $ 72,033
Balance – December 31, 2020 54,857,099 $ 55 $ 505,494 $ – $ (478,211 ) $ 27,338
Issuance of common stock and pre-funded warrants through underwritten offering, net of issuance costs of $114 6,670,000 7 1,248 – – 1,255
Issuance of common stock, net of issuance costs of $1,319
Issuance of common stock, net of issuance costs of $1,319, shares
Issuance of common stock upon exercise of warrants 10,713,543 10 6,661 – – 6,671
Reclassification of warrant liability upon exercise – – 8,964 – – 8,964
Issuance of common stock upon exercise of pre-funded warrants 7,658,953 8 – – – 8
Stock-based compensation expense – – 10,327 – – 10,327 – – 1,651 – – 1,651
Stock option exercises 283,250 1 528 – – 529 2,500 – 3 – 3
Vesting of restricted stock units 100,912 – – – – – 565,427 – – – – –
Shares withheld for tax withholding (82,011 ) – (740 ) – – (740 ) (116,593 ) – (139 ) –   – (139 )
Other comprehensive income – – – 17 – 17
Forfeiture of restricted stock awards (34,620 ) – – – – –
Other comprehensive loss
Net loss – – – – (25,573 ) (25,573 ) – – – – (17,410 ) (17,410 )
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
Stock option exercises 9,167 – – – – –
Shares issued under the ESPP 7,260 – 35 – – 35
Vesting of restricted stock units 51,440 – – – – –
Shares withheld for tax withholding (17,418 ) – (62 ) – – (62 )
Other comprehensive income – – – 26 – 26
Net loss – – – – (22,792 ) (22,792 )
Balance – June 30, 2019 25,218,606 $ 25 $ 461,491 $ 79 $ (391,229 ) $ 70,366
Balance – March 31, 2021 80,316,309 $ 80 $ 523,882 $               – $ (495,621 ) $ 28,341
Number Amount Capital Income Deficit Equity
For the Three Months Ended March 31, 2020
Common Stock Additional Paid-in Accumulated Other Comprehensive Accumulated Total Stockholders’
Number Amount Capital Income Deficit Equity
Balance – December 31, 2019 27,374,653 $ 27 $ 474,174 $ 72 $ (435,357 ) $ 38,916
Issuance of common stock, net of issuance costs of $1,319 10,854,710 11 12,588 – – 12,599
Stock-based compensation expense – – 3,221 – – 3,221
Stock option exercises 10,000 – 31 – – 31
Vesting of restricted stock units 158,513 – – – – –
Shares withheld for tax withholding (4,587 ) – (5 ) – – (5 )
Other comprehensive loss – – – (69 ) – (69 )
Net loss – – – – (13,040 ) (13,040 )
Balance – March 31, 2020 38,393,289 $ 38 $ 490,009 $ 3 $ (448,397 ) $ 41,653
The accompanying notes are an integral part of these condensed consolidated financial statements
6

POLARITYTE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited, in thousands)
2020 2019 2021 2020

For the Six Months Ended
June 30,
For the Three Months Ended March 31,
2020 2019 2021 2020
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (25,717 ) $ (48,365 ) $ (17,410 ) $ (13,040 )
Adjustments to reconcile net loss to net cash used in operating activities:
Stock based compensation expense 3,784 18,907
Stock-based compensation expense 1,651 3,221
Depreciation and amortization 1,549 1,446 701 752
Amortization of intangible assets 95 99 47 48
Amortization of debt discount 13 28 – 8
Bad debt expense 97 –
Change in inventory reserve 391 –
Change in fair value of common stock warrant liability (2,941 ) – 4,027 (4,532 )
Change in fair value of contingent consideration – (48 )
Loss on abandonment of property and equipment 1,529
Inducement loss on sale of liability classified warrants 5,197 –
Loss on restructuring and other charges 425 –
Loss on sale of property and equipment 7 –
Other non-cash adjustments (21 ) 30 – (16 )
Changes in operating assets and liabilities:
Accounts receivable (384 ) (624 ) (598 ) 545
Inventory (29 ) (26 ) 119 19
Prepaid expenses and other current assets (1,189 ) (486 ) (1,639 ) (1,543 )
Operating lease right-of-use assets 899 791 328 448
Other assets 3 25 245 4
Accounts payable and accrued expenses (2,109 ) (17 ) 138 818
Other current liabilities 9 367 (15 ) (61 )
Deferred revenue (1 ) (126 ) 39 (75 )
Operating lease liabilities (903 ) (670 ) (360 ) (450 )
Other long-term liabilities – (120 )
Net cash used in operating activities (25,413 ) (28,789 ) (6,610 ) (13,854 )
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (1,170 ) (2,110 ) (12 ) (999 )
Proceeds from sale of property and equipment 10 –
Purchase of available-for-sale securities (14,144 ) (15,445 ) – (14,144 )
Proceeds from maturities of available-for-sale securities 16,945 9,278 – 15,945
Proceeds from sale of available-for-sale securities 16,171 – – 16,171
Net cash provided by (used in) investing activities 17,802 (8,277 )
Net cash (used in) provided by investing activities (2 ) 16,973
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from the sale of common stock and warrants 24,276 27,948
Proceeds from stock options exercised 31 529
Proceeds from ESPP purchase 40 35
Cash paid for tax withholdings related to net share settlement (6 ) (636 )
Payment of contingent consideration liability – (109 )
Principal payments on financing leases (243 ) (225 )
Proceeds from term note payable and financing arrangements 4,629 – 1,028 1,053
Principal payments on term note payable and financing arrangements (830 ) (262 ) (9 ) (55 )
Principal payments on financing leases (135 ) (123 )
Net proceeds from the sale of common stock and warrants – 24,276
Net proceeds from the sale of common stock, warrants and pre-funded warrants 9,884 –
Proceeds from the sale of new warrants 1,002 –
Proceeds from warrants exercised 6,671 –
Proceeds from pre-funded warrants exercised 8 –
Cash paid for tax withholdings related to net share settlement (125 ) (2 )
Proceeds from stock options exercised 3 31
Net cash provided by financing activities 27,897 27,280 18,327 25,180
Net increase (decrease) in cash and cash equivalents 20,286 (9,786 )
Net increase in cash and cash equivalents 11,715 28,299
Cash and cash equivalents - beginning of period 10,218 55,673 25,522 10,218
Cash and cash equivalents - end of period $ 30,504 $ 45,887 $ 37,237 $ 38,517
Non-cash investing and financing activities:

Supplemental cash flow information:
Cash paid for interest $ 31 $ 46

Supplemental schedule of non-cash investing and financing activities:
Unpaid liability for acquisition of property and equipment $ – $ 63 $ – $ 137
Reclassification of stock-based compensation expense that was previously classified as a liability to paid-in capital $ – $ 38
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 $ –
Fair value of placement agent warrants issued in connection with offering $ 838 $ –
Reclassification of warrant liability to stockholders’ equity upon exercise of warrant $ 8,964 $ –
Accrued offering costs $ 500 $ –
Allocation of proceeds to warrant liability $ 8,629 $ 11,677
The accompanying notes are an integral part of these condensed consolidated financial statements
7

POLARITYTE, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE, Inc. (together with its subsidiaries, the “Company”) is a biotechnology company developing ~~and commercializing~~ regenerative tissue products and biomaterials. The Company also operates a laboratory testing and clinical research business using equipment, personnel, and facilities it acquired to advance the development of regenerative tissue products.
The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim ~~period.~~periods presented. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. The 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, ~~2019~~2020 has been derived from the audited consolidated financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America (U.S. GAAP) for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, ~~2019~~2020 filed with the Securities and Exchange Commission on Form 10-K on March ~~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.~~2021.
~~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.
8

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.
3.2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. Significant intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates. The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements is the extent of progress toward completion of contracts, stock-based compensation, the valuation of common stock warrant ~~liability,~~liabilities, and the ~~valuation allowances for deferred tax benefits.~~impairment of property and equipment. Actual results could differ from those estimates.
Reclassifications. Certain reclassifications of amounts previously reported have been made to the accompanying consolidated statement of operations to maintain consistency and comparability between periods presented. Restructuring and other charges of $0.5 million were reclassified from general and administrative, research and development, and sales and marketing expenses for the three-month period ended March 31, 2020 on the condensed consolidated statement of operations. These reclassifications had no impact on previously reported operating loss or net loss within the consolidated results of operations.
Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase. As of March 31, 2021, the Company did not hold any cash equivalents.
Inventory. Inventory comprises raw materials, which are valued at the lower of cost or net realizable value, on a first-in, first-out basis. The Company evaluates the carrying value of its inventory on a regular basis, taking into account anticipated future sales compared with quantities on hand, and the remaining shelf life of goods on hand to record an inventory reserve. An inventory reserve of $0.4 million was recorded as of March 31, 2021. There was 0 inventory reserve recorded as of December 31, 2020.
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 the condensed consolidated balance sheet in property and equipment and other current and long-term liabilities. The ~~short-term~~current 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.
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The Company has lease agreements with lease and non-lease components. As allowed under ASC 842, the Company has elected not to separate lease and non-lease components for any leases involving real estate and office equipment classes of assets and, as a result, accounts for the lease and non-lease components as a single lease component. The Company has also elected not to apply the recognition requirement of ASC 842 to leases with a term of 12 months or less for all classes of assets.
Revenue Recognition. ~~Revenue~~Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration ~~which~~that the Company expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
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The Company records product revenues primarily from the sale of its regenerative tissue products. The Company sells its products to healthcare providers (customers), primarily through direct sales representatives. Product revenues consist of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognizes product revenue upon delivery to the customer.
~~The~~In the contract services segment, the Company records service revenues from the sale of its preclinical research services, ~~and contract services. Preclinical research services include~~which includes delivery of preclinical studies and other research services to unrelated third parties. ~~These customer contracts~~Service revenues generally consist of a single performance obligation that the Company satisfies over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. The Company believes that this method provides an appropriate measure of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue are recognized based on payment timing and work completed. Generally, a portion of the payment is due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services include research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer. As of March 31, 2021 and December 31, 2020, the Company had unbilled receivables of $0.4 million and $0.2 million, respectively, and deferred revenue of $0.2 million as of each period. The unbilled receivables balance is included in consolidated accounts receivable. Revenue of $0.2 million was recognized during the three months ended March 31, 2021 that was included in the deferred revenue balance as of December 31, 2020.
Research and Development Expenses. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements with third party research organizations are deferred and recognized as an expense as the related goods are delivered or the related services are performed.
Accruals for ~~Research and Development Expenses and~~ Clinical Trials. As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.
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Common Stock Warrant Liability. The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant ~~agreement. The Company’s warrants under~~agreements. Under certain change of control ~~situations,~~provisions, some warrants issued by the Company could require cash settlement ~~in cash,~~ which ~~require the~~necessitates such 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 fair value method and records such expense in general and administrative, research and development, and sales and marketing expenses. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards based on the fair value on the date of grant.
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The fair value of options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the ~~grant.~~grant commensurate with the expected term of the option. The volatility factor is determined based on the Company’s historical stock prices. Forfeitures are recognized as they occur.
The fair value of restricted stock grants is measured based on the fair market value of the Company’s common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.
Net Loss Per Share. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. ~~Since~~Gains on warrant liabilities are only considered dilutive when the average market price of the common stock during the period exceeds the exercise price of the warrants. All common stock warrants issued participate on a one-for-one basis with common stock in the distribution of dividends, if and when declared by the Board of Directors, on the Company’s common stock. For purposes of computing EPS, these warrants are considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and diluted EPS using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders and participating securities according to dividends declared and participation rights in undistributed earnings. No income was inallocated to the warrants for the year ended December 31, 2020, as results of operations were a loss ~~position~~ for ~~all periods presented, basic net loss~~the period and the warrant holders are not required to absorb losses. The Company has issued pre-funded warrants from time to time at an exercise price of $0.001 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing earnings per share isbecause the ~~same as diluted net loss per share since~~shares may be issued for little or no consideration, are fully vested, and are exercisable after the ~~effects of potentially dilutive securities are antidilutive.~~original issuance date.
Impairment of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment and 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.
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Goodwill. Under accounting guidelines, goodwill is not amortized, but must be tested for impairment annually, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of the reporting unit below the carrying amount. The Company reviews goodwill for impairment annually and whenever events or changes indicate that the carrying value of an asset may not be recoverable. These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of significant assets or products. Application of these impairment tests requires significant judgment. There were 0 goodwill impairments recorded during the three months ended March 31, 2021 and 2020.
Recent Accounting Pronouncements
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~~
In August ~~2018,~~2020, the FASB issued ASU ~~2018-13,~~No. 2020-06, ~~Fair Value Measurement (Topic 820), Disclosure Framework-Changes~~Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Those instruments that do not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion feature and would recognize less interest expense on a periodic basis. It also removes from ASC 815-40-25-10 certain conditions for equity classification and amends certain guidance in ASC Topic 260 on the ~~Disclosure Requirements~~computation of EPS for ~~Fair Value Measurement. The~~convertible instruments and contracts in an entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. As a smaller reporting company, the Company is required to adopt this ASU ~~modifies~~for the ~~disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The standard is effective~~fiscal year beginning January 1, 2024, with early adoption permitted for fiscal years beginning after December 15, ~~2019, including~~2020, and interim periods within those fiscal ~~years with early~~years. The Company is currently assessing the impact and timing of adoption ~~permitted.~~of this ASU.
In May 2021, the FASB issued ASU No. 2021-04, Earnings Per Share (Topic 260), Debt— Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging— Contracts in Entity’s Own Equity (Subtopic 815-40) (“ASU 2021-04”). ASU 2021-04 updates current accounting guidance for modifications or exchanges of freestanding equity-classified written call options that remain equity-classified after modification or exchange as an exchange of the original instrument for a new instrument. The ASU specifies that the effects of modifications or exchanges of freestanding equity-classified written call options that remain equity after modification or exchange should be recognized depending on the substance of the transaction, whether it be a financing transaction to raise equity (topic 340), to raise or modify debt (topic 470 and 835), or other modifications or exchanges. If the modification or exchange does not fall under topics 340, 470, or 835, an entity may be required to account for the effects of such modifications or exchanges as dividends which should adjust net income (or loss) in the basic EPS calculation. The Company is required to apply the amendments within this ASU prospectively to modifications or exchanges occurring on or after the effective date of the amendment. The Company plans to adopt this ASU on January 1, 2022 and is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing certain exceptions to the current guidance, and improving the consistent application of and simplification of other areas of the guidance. The Company adopted this standard prospectively on January 1, ~~2020.~~2021. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements and related disclosures.
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3. LIQUIDITY
The Company has experienced recurring losses and cash outflows from operating activities. As of March 31, 2021, the Company had an accumulated deficit of $495.6 million. As of March 31, 2021, the Company had cash and cash equivalents of $37.2 million. The Company has been funded historically through sales of equity and debt.
On January 14, 2021, the Company completed a registered direct offering of 6,670,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to purchase up to 2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant were sold together with a common warrant. The combined offering price of each common share and accompanying common warrant was $1.100 and for each pre-funded warrant and accompanying common warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each common warrant is exercisable for one share of the Company’s common stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering, warrants to purchase up to 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent warrants have substantially the same terms as the common warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $1.375 per share). The Company received net proceeds of $9.2 million in connection with the offering, after deducting placement agent fees and related offering expenses.
On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase 10,688,043 shares of common stock at an exercise price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder new common warrants to purchase up to 8,016,033 shares of the Company’s common stock, par value $0.001 per share, at a price of $0.125. Each new warrant is exercisable for one share of common stock at an exercise price of $1.20 per share. The new warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering in December 2020, warrants to purchase 6.0% of the aggregate number of new warrants issued under the letter agreement (or warrants to purchase up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The Company received net proceeds of $6.7 million from the exercise of the existing warrants and $0.9 million from the sale of the newly issued warrants, after deducting placement agent fees and related offering expenses. The offering closed on January 25, 2021.
The Company believes that its existing cash and cash equivalents will be adequate to satisfy its capital and operating needs for at least the next 12 months from the date of filing. The Company will continue to pursue fundraising opportunities when available, but 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. The Company plans to meet its capital requirements primarily through issuances of equity securities, debt financing, or strategic partnership arrangements. Failure to raise additional capital would adversely affect the Company’s ability to fully achieve its intended business objectives.
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4. FAIR VALUE
In accordance with ASC 820, Fair Value Measurements and Disclosures, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:
● Level 1: Observable inputs such as quoted prices in active markets for identical instruments.
● Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market.
● Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation.
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.
~~During the three months ended June 30, 2020, the Company transferred all available-for-sale securities to cash accounts.~~
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 (in thousands):
SCHEDULE OF FAIR VALUE OF FINANCIAL INSTRUMENTS MEASURED ON RECURRING BASIS
June 30, 2020 March 31, 2021
Level 1 Level 2 Level 3 Total Level 1 Level 2 Level 3 Total
Liabilities:
Common stock warrant liability $ – $ – $ 8,736 $ 8,736 $ – $ – $ 15,866 $ 15,866
Total $ – $ – $ 8,736 $ 8,736 $ – $ – $ 15,866 $ 15,866
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
December 31, 2020
Level 1 Level 2 Level 3 Total
Liabilities:
Common stock warrant liability $ – $ – $ 5,975 $ 5,975
Total $ – $ – $ 5,975 $ 5,975
The following table presents the change in fair value of the liability classified 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~~warrants for the ~~warrant liability was $11.7~~ ~~million upon the issuance date of February 14, 2020 and $8.7~~ ~~million as of June 30, 2020.~~three months ended March 31, 2021 (in thousands):
SCHEDULE OF FAIR VALUE OF LIABILITY CLASSIFIED COMMON STOCK WARRANTS
Fair Value at December 31, 2020 Initial Fair Value at Issuance (Gain) Loss Upon Change in Fair Value Liability Reduction Due to Exercises Fair Value on March 31, 2021
Warrant liabilities
February 14, 2020 issuance $ 328 $ – $ 217 $ – $ 545
December 23, 2020 issuance 5,647 – 3,861 (8,964 ) 544
January 14, 2021 issuance – 8,629 (797 ) – 7,832
January 25, 2021 issuance – 6,199 746 – 6,945
Inducement loss on initial fair value (1) – – 5,197 – –
Total $ 5,975 $ 14,828 $ 9,224 $ (8,964 ) $ 15,866
(1) Concurrent with the issuance of the January 25, 2021 warrants, upon the exercise of the December 23, 2020 warrants, an inducement loss of $5.2 million was recorded as the fair value of the initial warrant liability for the new warrants of $6.2 million exceeded the gross proceeds received upon sale of the new warrants of approximately $1.0 million.
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The following ~~assumptions were used~~table presents the change in ~~estimating~~fair value of the liability classified common stock warrants for the three months ended March 31, 2020 (in thousands):
Fair Value at December 31, 2019 Initial Fair Value at Issuance (Gain) Loss Upon Change in Fair Value Liability Reduction Due to Exercises Fair Value on March 31, 2020
Warrant liabilities
February 14, 2020 issuance $ 0 $ 11,677 $ (4,532 ) $ 0 $ 7,145
The Company uses the Monte Carlo simulation model to determine the fair value of the ~~warrant~~ liability classified warrants. Input assumptions used to measure the fair value of these freestanding instruments during the three months ended March 31, 2021 are as ~~of June 30, 2020 and upon the issuance date of February 14, 2020:~~
follows:
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
For the Three Months ended March 31, 2021
Stock price $ 1.02–1.21
Exercise price $ 0.10 –1.38
Risk-free rate 0.42 –1.13 %
Volatility 99.0 –102.7 %
Remaining term (years) 4.73 –5.87
~~The contingent consideration related~~Input assumptions used to measure the ~~IBEX acquisition~~fair value of $31~~,000 outstanding at December 31, 2019, was paid~~these freestanding instruments during ~~the six months ended June 30, 2020. As of June 30, 2020, the obligation related to the contingent consideration was fully satisfied.~~
5. ~~CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS~~
~~During~~ the three months ended ~~June 30,~~March 31, 2020 ~~the Company transferred all available-for-sale securities to cash accounts.~~
~~Cash equivalents and short-term investments consisted of the following~~are as ~~of December 31, 2019 (in thousands):~~follows:

For the Three Months ended March 31, 2020
Stock price $ 1.08 – 1.69
Exercise price $ 2.80
Risk-free rate 0.54 – 1.51 %
Volatility 93.4 – 94.2 %
Remaining term (years) 6.87 – 6.99
~~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 December 31, 2019 in addition to $3.4~~ ~~million of cash.~~
~~For the six months ended June 30, 2020 and 2019, the Company recognized net realized gains on available-for-sale securities of $0.1~~ ~~million and $0.3~~ ~~million, respectively.~~
6.5. PROPERTY AND EQUIPMENT, NET
The following table presents the components of property and equipment, net (in thousands):
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
June 30, 2020 December 31, 2019 March 31, 2021 December 31, 2020
Machinery and equipment $ 12,198 $ 12,083 $ 11,604 $ 12,232
Land and buildings 2,000 2,000 2,000 2,000
Computers and software 1,255 1,189 1,207 1,240
Leasehold improvements 3,044 2,282 2,107 2,107
Construction in progress 179 1,606 – 87
Furniture and equipment 233 470 148 148
Total property and equipment, gross 18,909 19,630 17,066 17,814
Accumulated depreciation and amortization (6,180 ) (4,719 ) (7,652 ) (7,264 )
Total property and equipment, net $ 12,729 $ 14,911 $ 9,414 $ 10,550
The Company ~~abandoned~~sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision to file an investigational new drug application (IND) under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. On or about April 21, 2021, the FDA announced that enforcement discretion will not be extended beyond May 31, 2021. As a result of this development and the Company’s plan to file its IND in the second half of 2021, the Company has decided it will terminate commercial sales of SkinTE on May 31, 2021, and wind down its SkinTE commercial operation. Approximately $~~1.5~~3.0 million of ~~construction~~total property and equipment is related to commercial SkinTE operations, of which, the Company has determined approximately $2.5 million can be repurposed primarily as research and development equipment. The Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately $0.4 million during the first quarter of 2021. The impairment charges occurred within the Company’s regenerative medicine business segment and are included in ~~progress~~restructuring and other ~~equipment during~~charges within the ~~period~~accompanying consolidated statement of operations for the three months ended ~~June 30, 2020. See note 13.~~March 31, 2021. Certain production assets will remain in use until commercial operations have officially ceased. Accordingly, the lives of such production assets were reduced and will be depreciated over their remaining estimated economic useful lives.
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Depreciation and amortization expense for property and equipment, including assets acquired under financing leases was as follows (in thousands):
SCHEDULE OF DEPRECIATION AND AMORTIZATION EXPENSE
For the Three Months Ended March 31,
2021 2020
General and administrative expense $ 304 $ 392
Research and development expense 397 360
Total depreciation and amortization expense $ 701 $ 752
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
7.6. LEASES
The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through ~~November~~August 2024. These leases require monthly lease payments that may be subject to annual increases throughout the lease term. Certain of these leases may include options to extend or terminate the lease at the election of the Company. These optional periods have not been considered in the determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did not consider it reasonably certain it would exercise the options.
Operating Leases
On December 27, 2017, the Company entered into a commercial lease agreement with Adcomp LLC, a Utah limited liability company, pursuant to which the Company leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah from the landlord. The initial term of the lease is five years and it expires on November 30, 2022. The Company has a one-time option to renew for an additional five years. The initial base rent under this lease is $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increases 3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of 10% to determine the present value of the lease payments.
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 third quarter of 2020, the Company initiated a business analysis to determine the long-term strategy of the remote facility and cost to remain operational. During the fourth quarter of fiscal year 2020, it was determined that the Company would cease operations and vacate the facility. As a result, the Company determined that the approved plan to vacate the lease represented a triggering event requiring the long-lived assets attributable to the disposal group be assessed for impairment. Given the facts and circumstances, the Company determined that the carrying value of the related assets of the disposal group were not recoverable. As a result, the carrying values were reduced to $0 as of December 31, 2020.
Financing Leases
In November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development activities. The financing leases have remaining terms that range from 12 to 37 months as of March 31, 2021 and include options to purchase equipment at the end of the lease. Because the rate implicit in the lease is not readily determinable, the Company has used an incremental borrowing rate of approximately 10% to determine the present value of the lease payments for these leases.
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As of ~~June 30, 2020,~~March 31, 2021, the maturities of ~~our~~ operating and finance lease liabilities were as follows (in thousands):
SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES
Operating leases Finance leases
2021 (excluding the three months ended March 31, 2021) $ 1,231 $ 491
2022 1,345 405
2023 132 336
2024 87 42
Total lease payments 2,795 1,274
Less:
Imputed interest (231 ) (143 )
Total $ 2,564 $ 1,131
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~~SHCEDULE 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
Finance leases
March 31, 2021 December 31, 2020
Finance lease right-of-use assets included within property and equipment, net $ 1,135 $ 1,301

Current finance lease liabilities included within other current liabilities $ 544 $ 556
Non-current finance lease liabilities included within other long-term liabilities 587 711
Total finance lease liabilities $ 1,131 $ 1,267
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
14

March 31, 2021 December 31, 2020
Current operating lease liabilities included within other current liabilities $ 1,422 $ 1,485
Operating lease liabilities – non current 1,142 1,476
Total operating lease liabilities $ 2,564 $ 2,961
The components of lease expense were as follows (in thousands):
SUMMARY OF COMPONENTS OF LEASE EXPENSE
For the Three Months Ended For the Six Months Ended 2021 2020
June 30, June 30, For the Three Months Ended March 31,
2020 2019 2020 2019 2021 2020
Operating lease costs included within operating costs and expenses $ 548 $ 546 $ 1,104 $ 1,061 $ 394 $ 556
Finance lease costs:
Amortization of right-of-use assets $ 174 $ 170 $ 349 $ 309 $ 165 $ 175
Interest on lease liabilities 39 44 82 67 30 43
Total $ 213 $ 214 $ 431 $ 376 $ 195 $ 218
16
Supplemental cash flow information related to leases was as follows (in thousands):
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
For the Three Months Ended March 31,
2021 2020
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases $ 426 $ 558
Operating cash out flows from finance leases $ 30 $ 43
Financing cash out flows from finance leases $ 135 $ 123
Lease liabilities arising from obtaining right-of-use assets:
Remeasurement of operating lease liability due to lease modification $ 37 $ –
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 ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the weighted average remaining lease term for operating leases was ~~2.5~~ 1.9and ~~2.8~~ 2.1years, respectively, and the weighted average discount rate used for operating leases was ~~9.76%~~ 9.81% and ~~9.83%~~9.75%, respectively. As of ~~June 30, 2020~~March 31, 2021 and December 31, ~~2019,~~2020, the weighted average remaining lease term for finance leases was ~~3.0~~ 2.4and ~~3.5~~ 2.6years, respectively, and the weighted average discount rate used for finance leases was ~~9.77%~~ 9.78% for both periods. ~~In May 2020, the Company reduced office space related to one of its existing lease agreements resulting in lower monthly payments.~~
8.7. ACCOUNTS PAYABLE AND ACCRUED ~~EXPENSES AND OTHER CURRENT LIABILITIES~~EXPENSES
The following table presents the major components of accounts payable and accrued expenses (in thousands):
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
March 31, 2021 December 31, 2020
Accounts payable $ 339 $ 1,193
Salaries and other compensation 1,519 1,129
Legal and accounting 377 241
Accrued severance 83 330
Benefit plan accrual 700 659
Accrued offering costs 500 –
Other 777 596
Total accounts payable and accrued expenses $ 4,295 $ 4,148
Accrued severance as of March 31, 2021 and December 31, 2020 consists of accrued compensation owed to Dr. Denver Lough, a former officer and director, under a settlement terms agreement dated August 21, 2019 (Note 14).
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
8. ~~Other~~OTHER CURRENT LIABILITIES
The following table presents the major components of other current liabilities ~~are comprised of the current portion of operating lease liabilities and finance lease liabilities, and short-term debt.~~ (in thousands):
SCHEDULE OF OTHER CURRENT LIABILITIES
March 31, 2021 December 31, 2020
Current finance lease liabilities $ 544 $ 556
Current operating lease liabilities 1,422 1,485
Short-term financing arrangement 1,048 20
Other 25 45
Total other current liabilities $ 3,039 $ 2,106
The short-term ~~debt had a balance of~~ ~~$0.6~~ ~~million as of June 30, 2020, while the other components are disclosed in the footnotes above. The short-term debt~~financing balance is related to ~~two~~a financing ~~arrangements~~arrangement entered into during the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 to fund an insurance contract. Under the financing ~~arrangements,~~arrangement, the ~~Company borrowed~~ ~~$0.8~~ ~~million and~~ ~~$0.2~~ ~~million. The~~ amounts will be repaid in nine equal monthly installments, with an interest rate of ~~4.25%~~ 3.85~~and~~ ~~6.35%, respectively.~~%.
1517

9. STOCK-BASED COMPENSATION
2020, 2019 and 2017 Equity Incentive Plans
2020 Plan
On October 25, 2019, the Company’s Board of Directors (the “Board”) approved the Company’s 2020 Stock Option and Incentive Plan (the “2020 Plan”). The 2020 Plan became effective on December 19, 2019, the date approved by the stockholders. The 2020 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, unrestricted stock awards, dividend equivalent rights, and cash-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2020 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to ~~3,000,000~~7,191,917 shares of common stock are issuable pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. The 2020 Plan provides that effective on January 1 of each year the number of shares of common stock reserved and available for issuance under the 2020 Plan shall be cumulatively increased by the lesser of 4% of the number of shares of common stock issued and outstanding on the immediately preceding December 31 or such lesser number of shares as determined by the 2020 plan administrator. As of ~~June 30, 2020,~~March 31, 2021, the Company had ~~18,000~~3,583,950 shares available for future issuances under the 2020 Plan.
2019 Plan
On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2019 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 3,000,000 shares of common stock are issuable pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on October 5, 2028. As of ~~June 30, 2020,~~March 31, 2021, the Company had ~~257,570~~392,999 shares available for future issuances under the 2019 Plan.
2017 Plan
On December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the Board will administer the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 7,300,000 shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the 2017 Plan shall terminate at the close of business on December 1, 2026. As of ~~June 30, 2020,~~March 31, 2021, the Company had ~~1,177,365~~311,863 shares available for future issuances under the 2017 Plan.
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A summary of the Company’s employee and non-employee stock option activity for the ~~six~~three months ended ~~June 30, 2020~~March 31, 2021 is presented below:
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY

Number of
Shares

Weighted-
Average
Exercise Price

Number of
Shares

Weighted-
Average
Exercise Price

Outstanding – December 31, 2019 4,529,988 $ 15.26
Outstanding – December 31, 2020 4,794,567 $ 10.03
Granted 1,458,026 $ 1.19 1,352,058 $ 1.30
Exercised(1) (10,000 ) $ 3.12 (2,500 ) $ 1.10
Forfeited (867,432 ) $ 11.78 (62,415 ) $ 6.26
Outstanding – June 30, 2020 5,110,582 $ 11.84
Options exercisable, June 30, 2020 3,603,571 $ 14.87
Outstanding – March 31, 2021 6,081,710 $ 8.13
Options exercisable, March 31, 2021 4,030,490 $ 11.27
(1) The number of exercised options includes shares withheld on behalf of employees to satisfy 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%~~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.
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~~2020 ~~1,843,001~~3,468,969
Granted ~~3,401,036~~498,628
Vested (1) (~~832,910~~740,657 )
Forfeited (~~79,803~~165,870 )
Unvested – ~~June 30, 2020~~March 31, 2021 ~~4,331,324~~3,061,070
(1) The number of vested restricted stock units and awards includes shares that were withheld on behalf of employees to satisfy the minimum statutory tax withholding requirements.
Stock-Based Compensation Expense
The stock-based compensation expense related to stock options, restricted stock awards, and the employee stock purchase plan was as follows (in thousands):
SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS
For the Three Months Ended For the Six Months Ended
June 30, June 30, For the Three Months Ended March 31,
2020 2019 2020 2019 2021 2020
General and administrative expense $ 143 $ 6,892 $ 3,220 $ 15,929 $ 1,229 $ 3,076
Research and development expense 404 1,481 367 2,565 323 (36 )
Sales and marketing expense 16 245 197 413 99 181
Total stock-based compensation expense $ 563 $ 8,618 $ 3,784 $ 18,907 $ 1,651 $ 3,221
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10. SALE OF COMMON STOCK, WARRANTS AND PRE-FUNDED WARRANTS
On ~~February~~January 14, ~~2020,~~2021, the Company completed ~~an underwritten~~a registered direct offering of ~~10,638,298~~6,670,000 shares of its common stock, ~~and~~par value $0.001 per share, pre-funded warrants to purchase up to ~~10,638,298~~2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each common stock share and accompanying warrant ~~were sold together~~was $1.10 and for ~~a combined public purchase price of~~ ~~$2.35~~ ~~before underwriting discount~~each pre-funded warrant and ~~commission.~~accompanying warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each warrant is exercisable for one share of the Company’s common stock at an exercise price of $~~$2.80~~1.20 per share. The warrants are immediately exercisable and will expire five years form the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or $1.375 per share). The net proceeds to the ~~warrants~~Company from the offering were ~~exercisable immediately, and they will expire~~ $~~February 12, 2027~~9.2 . million, after direct offering expenses of $0.8 million payable by the Company.
As the common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $8.1 million and $0.5 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision, these warrants were classified as a ~~liability and are recorded at an estimated fair value using a Monte Carlo simulation model.~~ component of stockholders’ equity within additional paid-in-capital. The pre-funded warrants were equity classified because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated ~~first~~ to the ~~warrant~~ liability classified warrants, based on ~~the~~their estimated fair ~~value~~values, with the residual $1.4 million allocated to the common ~~shares. As~~stock and pre-funded common stock warrants in equity. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of ~~June 30, 2020, none~~$0.1 million were recorded as a reduction to additional paid-in capital. Issuance costs allocated to the liability classified warrants of $0.7 million were recorded as an expense. The Company measured the fair value of the accompanying common warrants and placement agent warrants using the Monte Carlo simulation model at issuance and again at March 31, 2021 using the following inputs:
Accompanying common warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 14, 2021 March 31, 2021
Stock price $ 1.21 $ 1.11
Exercise price $ 1.20 $ 1.20
Risk-free rate 0.49 % 0.86 %
Volatility 100.1 % 102.4 %
Remaining term (years) 5.0 4.8
Placement agent warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF PLACEMENT AGENT WARRANTS
January 14, 2021 March 31, 2021
Stock price $ 1.21 $ 1.11
Exercise price $ 1.38 $ 1.38
Risk-free rate 0.49 % 0.86 %
Volatility 99.3 % 102.4 %
Remaining term (years) 5.0 4.8
On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase 10,688,043 shares of common stock at an exercise price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder common warrants to purchase up to 8,016,033 shares of the Company’s common stock, par value $0.001 per share, at a price of $0.125. Each warrant is exercisable for one share of Common Stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years from the date of issuance.A holder may not exercise any portion of the warrants ~~had been exercised.~~to the extent that the holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent, warrants to purchase 6.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The 10,688,043 warrants issued on December 23, 2020 were exercised on January 22, 2021 and closing of the offering occurred on January 25, 2021. The Company received gross proceeds of approximately $6.7 million from the exercise of the existing warrants and gross proceeds of approximately $1.0 million from the sale of the new warrants.
1720

Immediately prior to the exercise of the existing 10,688,043
liability classified common stock warrants, a remeasurement loss of $3.6 million was recorded. The ~~change in~~Company measured the fair value of the common stock ~~warrant liability is presented in~~warrants using the Monte Carlo simulation model on January 22, 2021 using the following ~~table and is reported as a change in fair value of common stock warrant liability in the statements of operations (in thousands):~~inputs:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON ~~STOCK~~WARRANTS
January 22, 2021
Stock price $ 1.05
Exercise price $ 0.624
Risk-free rate 0.43 %
Volatility 99.4 %
Remaining term (years) 4.92
As the new common stock warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new common stock warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated fair values of $5.8 million and $0.4 million, respectively. Cash issuance costs of $0.1 million were recorded as an expense. The Company measured the fair value of the accompanying common stock warrants and placement agent common stock warrants using the Monte Carlo simulation model at issuance and again at March 31, 2021 using the following inputs:
Accompanying new common stock warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 25, 2021 March 31, 2021
Stock price $ 1.02 $ 1.11
Exercise price $ 1.20 $ 1.20
Risk-free rate 0.42 % 0.87 %
Volatility 99.0 % 102.4 %
Remaining term (years) 5.0 4.8
Placement agent warrants:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF COMMON WARRANTS
January 22, 2021 March 31, 2021
Stock price $ 1.05 $ 1.11
Exercise price $ 1.20 $ 1.20
Risk-free rate 0.44 % 0.87 %
Volatility 99.6 % 102.4 %
Remaining term (years) 5.0 4.8
21
The following table summarizes warrant activity for the year ended March 31, 2021.
SUMMARY OF WARRANT ~~LIABILITY~~ACTIVITY
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
Outstanding December 31, 2020 Warrants Issued Warrants Exercised Outstanding March 31, 2021
Transaction
February 14, 2020 common warrants 565,000 – (25,500 ) 539,500
December 23, 2020 common warrants 10,688,043 – (10,688,043 ) –
December 23, 2020 placement agent warrants 641,283 – – 641,283
December 23, 2020 pre-funded warrants 5,238,043 – (5,238,043 ) –
January 14, 2021 common warrants – 9,090,910 – 9,090,910
January 14, 2021 placement agent warrants – 545,455 – 545,455
January 14, 2021 pre-funded warrants – 2,420,910 (2,420,910 ) –
January 25, 2021 common warrants – 8,016,033 – 8,016,033
January 22, 2021 placement agent warrants – 480,962 – 480,962
Total 17,132,369 20,554,270 (18,372,496 ) 19,314,143
On March 30, 2021, the Company entered into a sales agreement with Cantor Fitzgerald & Co. to sell shares of common stock having aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity offering program under which Cantor Fitzgerald & Co. will act as sales agent. As of March 31, 2021, no common stock had been sold.
Pursuant to an Equity Purchase Agreement dated as of December 5, 2019 (the “Purchase Agreement”) that the Company entered into with Keystone Capital Partners, LLC (“Keystone”), Keystone agreed to purchase up to $25.0 million of shares of our common stock, subject to certain limitations, at our direction from time to time during the 36-month term of the Purchase Agreement. In anticipation of the “at the market” equity offering program described above, the Company provided notice to Keystone of its decision to terminate the Purchase Agreement, which was effective on March 26, 2021.
11. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share for the three months ended March 31, 2021 and 2020:
SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED
March 31, 2021 March 31, 2020
Numerator:
Net loss $ (17,410 ) $ (13,040 )
Less: Gain from change in fair value of warrant liabilities (755 ) –
Net loss, available to common stockholders $ (18,165 ) $ (13,040 )
March 31, 2021 March 31, 2020
Denominator:
Basic weighted average number of common shares ⁽¹⁾ 76,158,275 33,019,994
Incremental shares from assumed exercise of warrants 237,803 –
Diluted weighted average number of common shares 76,396,078 33,019,994
(1) In December 2020 and January 2021, the Company sold pre-funded warrants to purchase up to 5,238,043 and 2,420,910 shares of common stock, respectively. The shares of common stock associated with the pre-funded warrants are considered outstanding for the purposes of computing earnings per share prior to exercise because the shares may be issued for little or no consideration, are fully vested, and are exercisable after the original issuance date. The pre-funded warrants sold in December 2020 and January 2021 were exercised during the period and included in the denominator for the period of time the warrants were outstanding.
22
The following outstanding potentially dilutive securities have been excluded from the calculation of diluted net loss per share for the periods presented due to their anti-dilutive effect:
SCHEDULE OF ANTI-DILUTIVE POTENTIAL SHARES OUTSTANDING ACTIVITY
As of June 30, As of March 31,
2020 2019 2021 2020
Stock options 5,110,582 6,604,461 6,081,710 4,348,559
Restricted stock 4,331,324 493,447 3,061,070 1,574,878
Common stock warrants 10,638,298 – 10,223,233 10,638,298
Shares committed under ESPP 56,806 54,632
12. DEBT
PPP Loan
On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loan in the amount of $3,576,145made 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 24monthly 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~~On October 15, 2020, the Borrower applied to the Lender for forgiveness ~~will be determined, subject to limitations,~~of the PPP loan in its entirety based on the Borrower’s use of the PPP loan ~~proceeds~~ for ~~payment of~~ payroll costs, ~~and any payments of mortgage interest,~~ rent, and utilities. On October 26, 2020, the Borrower was advised that the Lender approved the application, and that the Lender was submitting the application to the SBA for a final decision. The Company classified the principal balance of the PPP loan within “Current portion of long-term notes payable” and “Long-term notes payable” on the consolidated balance sheet as of March 31, 2021. If the Borrower’s application for forgiveness of the PPP loan is not approved or approved only in part, it will be obligated to repay the unforgiven portion of the loan after the SBA makes its decision on the application for forgiveness. No assurance ishas been provided that the Company will obtain forgiveness of the Loan in whole or in part.
~~13.~~ ~~RESTRUCTURING~~
InThe SBA adopted a procedure for auditing all PPP loans over $2 million and pursuant to that procedure the ~~first half of 2020, management approved several actions as part of a restructuring plan designed to improve operational efficiency~~Company completed the SBA’s form requesting information surrounding the Borrower’s original application for the Loan and ~~financial results. Management approved a reduction in force which affected 40~~information on use of the ~~126 employees~~Loan proceeds, which was submitted to the SBA in December 2020. The Borrower has yet to receive any response from the ~~regenerative medicine business segment,~~SBA. If the SBA makes a determination pursuant to its audit of the Borrower that it was not eligible to obtain the Loan or ~~approximately~~ ~~31.7%~~ ~~of that workforce. The Company~~ did not ~~make any change in~~use 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~~Loan for the ~~three and six-month periods ended June 30, 2020, respectively. It~~purposes contemplated by the CARES Act, it is ~~expected that~~likely the ~~full amount~~Borrower will be ~~paid by~~required to promptly repay the ~~end of 2020. Management also recorded~~ ~~$1.5million of asset abandonments within the Company’s regenerative medicine business segment for both the three~~Loan in full and ~~six-month periods ended June 30, 2020.~~may be subject to additional charges or penalties.
18
~~14.~~13. 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~~On November 28, 2018, the Court consolidated the Moreno ~~Complaint~~ and Lawi ~~Complaint allege~~cases under the caption In re PolarityTE, Inc. Securities Litigation with Case No. 2:18-cv-00510 (the “Consolidated Securities Litigation”). The gravamen of the consolidated complaint in the Consolidated Securities Litigation was that ~~the~~ defendants made statements or ~~were responsible for, disseminating~~disseminated 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~~thereunder, specifically 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 “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 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 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. AFollowing a hearing on the Company’s motion to dismiss ~~was held~~the Court issued an order on November ~~19, 2019; no order has been issued to date. At this early stage of~~22, 2020, dismissing the ~~proceedings~~complaint in the ~~Company is unable to make any prediction regarding the outcome of the litigation.~~Consolidated Securities Litigation with prejudice.
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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. After disposition of the Consolidated Securities Litigation described above the parties to the shareholder derivative lawsuit agreed to dismiss the lawsuit without prejudice and the lawsuit was dismissed on January 29, 2021.
Other Matters
In the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual property, commercial arrangements, employment, regulatory compliance, and other matters. Except as noted above, ~~as of June 30, 2020,~~at March 31, 2021, the Company was not party to any legal or arbitration proceedings that may have ~~material~~significant effects on its financial position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of the ~~Company~~Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or its subsidiaries.
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.
On September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between the parties provides that Arches will perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics will arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches bills Co-Diagnostics for the testing services and Co-Diagnostics manages all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provides that Co-Diagnostics will make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the agreement is 12 months, requires Arches to use Co-Diagnostics tests exclusively in the machine, and establishes for Arches a minimum monthly purchase obligation, valued at approximately $1.1 million annually for Co-Diagnostics tests and related consumables used in the testing process. The COVID-19 Laboratory Services Agreement can be canceled by the Company at any time by providing 60 days written notice, and the Rental Agreement can be canceled at any time by written notice given within 60 days after termination of the Laboratory Services Agreement.
~~15.~~14. CERTAIN RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
On August 21, 2019, the Company and Dr. Denver Lough, a principal shareholder and former officer and director, signed a settlement terms agreement that provides, in part, that the Company pay to Dr. Lough $1,500,000 in cash on October 1, 2019 and an additional $1,500,000 in cash in equal monthly installments beginning November 1, 2019 and ending April 1, 2021. In addition, the Company agreed to award to Dr. Lough 200,000 restricted stock units that vest in 18 equal monthly installments beginning October 1, 2019. As of March 31, 2021, the Company has recorded a liability of $0.1 million related to future cash payments under the agreement. The fair value of the restricted stock units was $$0.8 ~~million. The Company~~million and was fully 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.~~
19

In October 2018, the Company entered into an office lease covering approximately 7,250square feet of rental space in the building located at 40 West 57^th57th Street in New York City. The lease is for a term of three ~~years.~~years. The annual lease rate is $60per square foot. Initially the Company ~~occupied~~will occupy and ~~paid~~pay for only 3,275 square feet of space, and the Company is not obligated under the lease to pay for the remaining 3,975 square feet covered by the lease unless ~~we elect~~it elects to occupy that additional space. The Company believes the terms of the lease are very favorable to us, and the Company obtained these favorable terms through the assistance of Peter A. Cohen, a director, which he provided so that the company he owns, Peter A. Cohen, LLC (“Cohen LLC”), could sublease a portion of the office space.
During ~~2019,~~Q1 2021, the Company ~~increased~~decreased the space leased from ~~3,275~~5,500 square feet to ~~6,232~~ 4,747 square feet. ~~In May 2020, the Company reduced the space from~~ ~~6,232~~ to ~~4,554~~. The Company is using 1,099 square feet, and Cohen LLC is using approximately ~~3,455~~ 3,648 square feet as of ~~June 30, 2020.~~March 31, 2021. The monthly lease payment for ~~4,554~~4,747 square feet is $~~22,771~~23,737. Of this amount $~~17,277~~$18,243 is ~~charged~~allocated pro rata to Cohen, LLC based on square footage occupied. Additional lease charges for operating expenses and taxes are ~~also charged~~allocated under the sublease based on the ratio of rent paid by the Company and Cohen LLC to total rent. IfOnce the space ~~becomes~~is fully occupied, the Company will reduce the overall annual lease rate for the Cohen LLC space to $58.60 per square foot. However, the Company has yet to fully occupy the 7,250 square feet covered by the office lease and the lease expires at the end of October 2021. The Company recognized $55,000 and $69,000 of sublease income related to this agreement ~~of $63,000~~ ~~and $51,000~~for the three months ended ~~June 30,~~March 31, 2021 and 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 condensed consolidated statement of operations. As of ~~June 30, 2020~~March 31, 2021, and December 31, ~~2019,~~2020, there were 0amounts due from the related party under this agreement.
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~~16.~~15. SEGMENT REPORTING
Reportable segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM)~~. In April 2020,~~, the ~~Company designated its~~ Chief Executive Officer ~~(CEO) to be its Chief Operating Decision Maker (CODM) and dissolved the function~~ of the ~~Office of the Chief Executive consisting of the President, Chief Operating Officer, and Chief Financial Officer which previously acted as its CODM.~~Company.
The CODM allocates resources to and assesses the performance of each segment using information about its revenue and operating income (loss). These measures are presented in the following 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.~~
SCHEDULE OF SEGMENT INFORMATION
For the Three Months Ended For the Six Months Ended For the Three Months Ended March 31,
June 30, June 30, 2021 2020
2020 2019 2020 2019
Net revenues by segment:
Net revenues:
Reportable segments:
Regenerative medicine $ 944 $ 504 $ 1,372 $ 801 $ 1,729 $ 428
Contract services 1,322 822 1,827 1,990 2,980 505
Total net revenues $ 2,266 $ 1,326 $ 3,199 $ 2,791 $ 4,709 $ 933

Net loss by segment:
Net income/(loss):
Reportable segments:
Regenerative medicine $ (12,567 ) $ (22,572 ) $ (25,270 ) $ (47,781 ) $ (17,702 ) $ (12,703 )
Contract services (110 ) (220 ) (447 ) (584 ) 292 (337 )
Total net loss $ (12,677 ) $ (22,792 ) $ (25,717 ) $ (48,365 ) $ (17,410 ) $ (13,040 )

16. SUBSEQUENT EVENT
The FDA developed and published in November 2017 a regenerative medicine policy framework to help facilitate regenerative medicine therapies. Under the framework, the FDA stated its intent to exercise enforcement discretion until November 2020 with respect to the FDA’s IND and premarket approval requirements for 361 HCT/Ps, which was subsequently extended through May 2021. We continued to sell SkinTE as a 361 HCT/P in 2020 and into 2021 in reliance on our view that there is a reasonable basis for regulating SkinTE as a 361 HCT/P and also in reliance on the enforcement discretion position stated in the policy framework. On or about April 21, 2021, the FDA announced that enforcement discretion will not be extended beyond May 31, 2021. As a result of this development and our decision to submit an IND for SkinTE, which we expect to submit in the second half of 2021, we plan to terminate our commercial sales effort for SkinTE on May 31, 2021, wind down our commercial operation before the end of June 2021, and focus on the IND for SkinTE.
2025

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The 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 heading “Disclosure Regarding Forward-Looking Statements” below.
Overview
~~We are~~PolarityTE, Inc., headquartered in Salt Lake City, Utah, is a ~~commercial-stage~~ biotechnology ~~and regenerative biomaterials~~ company ~~focused on transforming the lives of patients by discovering, designing and~~ developing regenerative tissue products and ~~biomaterials~~biomaterials. We also operate a laboratory testing and clinical research business using equipment, personnel, and facilities we acquired to advance our development of regenerative tissue products.
Regenerative Tissue Product
Our first regenerative tissue product is SkinTE, which is intended for the ~~fields~~repair, reconstruction, replacement, and supplementation of ~~medicine, biomedical engineering and material sciences. Historically, we~~skin in patients who have ~~operated two segments:~~a need for treatment of acute or chronic wounds, burns, surgical reconstruction events, scar revision, or removal of dysfunctional skin grafts. Given our significant real-world experience with the ~~regenerative medicine product segment and the contract services segment.~~
~~Segment Reporting~~
~~Regenerative Medicine Product Segment~~
~~The regenerative medicine product segment is engaged in the development~~application of SkinTE ~~our first commercial product,~~ and ~~also~~several supporting publications, we believe SkinTE can be successful in closing full-thickness complex wounds, such as DFUs penetrating to tendon, capsule, and bone classified Wagner Grades 2 through 4; Stage 3 and 4 pressure injuries; and, acute wounds. We believe that SkinTE could significantly improve clinical outcomes versus the ~~development~~standards of ~~SkinTE POC (point-of-care device~~care for on-site SkinTE processing and deployment), Skin TE Cryo (cryopreservation of SkinTE for multiple deployments on a single patient), and PTE 11000 (allogeneic, biologically active dressing for use in wound care).these wounds.
SkinTE was registered and listed with the United States Food and Drug Administration ~~(FDA)~~(“FDA”) in August 2017 based on our determination that SkinTE is appropriately regulated solely under Section 361 of the Public Health Service Act and Part 1271 of Title 21 of the Code of Federal Regulations (i.e., as a so-called ~~“361~~361 HCT/~~P”)~~P) and that, as a result, no premarket review or approval by the FDA iswas required. We proceeded to develop sales and manufacturing capabilities for SkinTE and focused on advancing commercialization of SkinTE. We began a regional commercial rollout of SkinTE in October 2018.
Following informal, voluntary discussions between us and the FDA we were advised by the FDA in April 2020 that its preliminary assessment is that SkinTE does not meet the requirements to be regulated solely as a 361 HCT/P. Rather, the FDA’s ~~view is~~preliminary assessment was that SkinTE is a biological product that should be regulated under Section 351 of the Public Health Service Act. We re-evaluated our regulatory approach and determined it is prudent to submit an investigational new drug application ~~(IND),~~(“IND”) for SkinTE and ~~thereafter a~~an eventual biologics license application ~~(BLA)~~(“BLA”) because we believe it will create a more valuable asset with a greater likelihood of achieving widespread commercial adoption, and to avoid the possibility of a protracted dispute with the FDA. As a result of the change in the regulatory approach for SkinTE, ~~and~~we decided to adjust our SkinTE commercial operations as disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020.
The FDA developed and published in November 2017 a regenerative medicine policy framework to help facilitate regenerative medicine therapies. Under the framework, the FDA stated its intent to exercise enforcement discretion until November 2020 with respect to the FDA’s IND and premarket approval requirements for 361 HCT/Ps, which was subsequently extended through May 2021. We continued to sell SkinTE as a 361 HCT/P in 2020 and into 2021 in reliance on our view that there is a reasonable basis for regulating SkinTE as a 361 HCT/P and also in reliance on the enforcement discretion position stated in the policy framework. On or about April 21, 2021, the FDA announced that enforcement discretion will not be extended beyond May 31, 2021. As a result of this development and our decision to submit an IND for SkinTE, which we expect to submit in the second half of 2021, we plan to terminate our commercial sales of SkinTE on May 31, 2021, wind down our commercial operations before the end of June 2021, and focus on the IND for SkinTE.
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In connection with terminating commercial sales of SkinTE we expect to effectuate reductions in staff and resources that support the commercial operations, which we believe will offset the loss of revenues from SkinTE sales, but we cannot predict to what extent such reductions will make up for lost SkinTE revenues in future periods.
Notwithstanding this development, our experience indicates that SkinTE benefits patients with immediately life-threatening conditions and other serious diseases or conditions. In 2009, the FDA implemented new regulations related to Expanded Access Investigational New Drug Applications (“Expanded Access INDs”), which are often colloquially referred to as “compassionate use,” and pertain to the use of an investigational drug or biologic when the primary purpose is to diagnose, monitor, or treat a patient’s disease or condition, rather than to obtain the kind of information about the drug that is generally derived from clinical trials. The FDA has proposed several processes for obtaining Expanded Access INDs, which we will evaluate for potential implementation in connection with a successful opening of an IND for SkinTE. Under FDA regulations the amount that may be charged for SkinTE used under an Expanded Use IND is limited to our direct costs of manufacture. Accordingly, Expanded Access INDs are not a means of replacing revenue we lose when we discontinue our commercial sale of SkinTE, but we believe this may enable us to provide SkinTE to providers treating patients with life-threatening or serious diseases and conditions and maintain on-going relationships with physicians we believe to be key opinion leaders in the wound care industry.
Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our ~~commercial effort~~clinical trials and our expenditures for satisfying all the conditions of obtaining FDA premarket approval for SkinTE. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our accounts payable and accrued research and development and other current liabilities.
Testing and Research Services
Beginning in 2017 we developed internally a laboratory and research capability to advance the development of SkinTE ~~based on~~and related technologies, which we operate through our subsidiary, Arches Research, Inc. (“Arches”). At 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.
~~Contract Services Segment~~
~~The contract services segment operates~~beginning of May 2018, we acquired a preclinical research and veterinary sciences business to be used, in part, for preclinical studies on our regenerative tissue products, which we operate through our subsidiary ~~Ibex~~IBEX Preclinical Research, Inc. We(“IBEX”). Through Arches and IBEX, 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~~basis. At the end of May 2020, we ~~received unsolicited inquiries from third parties regarding our laboratory and its capacity~~began to ~~perform~~offer COVID-19 testing which we 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 resourcesservices 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~~
Revenues generated from our laboratory ~~under the Clinical Laboratory Improvement Amendments~~testing and ~~obtained that certificate in late April 2020. We started providing COVID-19 testing services on May 27, 2020.~~
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~~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 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 a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer.
~~Research and Development 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~~
General and administrative expenses primarily represent employee related costs, including stock compensation for corporate 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, 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 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 )%
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~~Net Revenues~~
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 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 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 a 361 HCT/P on a limited basis at a future meeting, both until May 31, 2021, which marks the end of 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 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 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~~helpful in ~~many regions across~~lowering 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 andrate at which 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 foruse capital obtained from external sources. In the first quarter of ~~2020. The number~~2021 57% 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~~our testing and research services 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 waswere 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.
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~~Contract Services Segment~~
~~As noted above we began~~ COVID-19 testing ~~at the beginning~~and 93% of ~~June 2020, so that at June 30, 2020, we had~~our COVID-19 testing revenues were obtained under 30-day renewable testing agreements with 29multiple nursing ~~homes located~~home and pharmacy facilities in the state of New York controlled by a single ~~company.~~company (the “NY Client”). On ~~May 10, 2020,~~March 26, 2021, we were advised by the ~~Governor of~~NY Client it is adopting on-site employee testing at its facilities as allowed under new regulations in the ~~State~~state of New ~~York issued an order requiring COVID-19 testing~~York. Based on the number of ~~all employees working~~tests we performed for the NY Client in ~~nursing homes within the state weekly, which has been renewed on~~April 2021, we estimate 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-19decrease of approximately 75% 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 from tests performed for the ~~contract services segment~~NY Client in the second quarter of ~~2020~~2021 compared to the first quarter, and we cannot predict whether we will obtain any further business from the ~~remainder~~NY Client in future periods. We are a relatively unknown testing laboratory, so we have relied on word of mouth and management relationships to connect with prospects and vied for new business on the basis of price and service. We cannot predict how well this marketing approach will work in finding new customers, how quickly we may be able to find new customers to replace the net revenues lost from the NY Client, or how much any such revenues may be. Even if we are able to find new customers for the COVID-19 testing business there remain substantial uncertainties around the COVID-19 testing business due to rapid developments in testing and vaccines. We intend to carefully monitor the performance of our COVID-19 testing business and scale our laboratory testing operations accordingly.
Liquidity and Capital Resources
As of March 31, 2021, we had $37.2 million in cash and cash equivalents and working capital of approximately $34.5 million. In January 2021, we raised an additional $17.7 million in gross proceeds before offering expenses in a registered direct offering and through a warrant exercise agreement.
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In the first calendar quarter of 2021 the gross profit on sales of SkinTE was ~~generated~~$1.5 million, which contributed to covering our operating costs for the period. As discussed above, we expect SkinTE sales will be phased out in the second calendar quarter of 2021, so the contribution of SkinTE sales to defraying our operating costs will be lower in the second quarter and SkinTE sales in the third quarter of 2021 are expected to be nil. We plan to mitigate the effect of this lost revenue by eliminating staff and resources that supported the SkinTE commercial effort. Nevertheless, the termination of our ~~historical clinical~~commercial SkinTE operation in the second quarter could have an adverse effect on our working capital in future periods that we cannot predict at this time.
In the first calendar quarter of 2021 the gross profit from services amounted to approximately $1.1 million, which contributed to covering our operating costs for the period. As discussed above, we expect our service ~~offerings. Net~~revenue will be substantially diminished on a go forward basis due to the loss of business from our major COVID-19 testing client. We expect the loss of revenues ~~for contract services~~in the service segment will be significant in the second quarter of ~~2020 are $1.322 million compared~~2021, and we cannot predict whether or to ~~$0.505 million for the first quarter of 2020. This change is primarily attributable to the revenues generated by the new~~what extent our COVID-19 testing business will recover, if at all, in future periods, so the contribution of our services ~~offered~~business to defraying our operating costs will be lower in the second quarter and are unpredictable beyond June 30, 2021. We plan to mitigate the effect of this lost revenue by ~~Arches.~~
~~Gross Profit~~
~~Cost~~scaling staff and resources that support our laboratory and research services to be commensurate with the amount of ~~sales for~~business we believe we can generate. Nevertheless, the ~~product segment as a percentage~~loss of ~~product revenues was 68%~~business in the second quarter of ~~2019 compared to 29% for~~2021 and the ~~second quarter of 2020. Built~~uncertainty regarding future periods will likely have an adverse effect on our working capital in ~~production capacity results in a lower incremental cost per unit as product sales increase. There was a reduction in staff~~future periods 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 forcannot predict at this decrease is a $6.75 million reduction in stock compensation expense, due to restricted stock and option forfeitures related to the reduction in 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~~time.

~~Restructuring and other charges totaled $2.08 million for~~We believe 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.
24
~~Comparison of the 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 $.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.
25
~~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~~on our balance sheet will fund our business activities through the end of 2021 and into the third quarter of 2022. In the first quarter of 2021 cash used in operating activities was $6.6 million, or an average of $2.2 million per month. After our IND is filed and ~~our working capital was~~then accepted by the FDA, we will move to begin clinical trials as soon as possible. Preliminary estimates indicate one clinical trial could cost approximately ~~$26.13~~$5.0 million ~~compared~~over two years, and we believe we will need to ~~cash and cash equivalents and short-term investments of $29.24 million and our working capital of approximately $22.43 million~~conduct at ~~December 31, 2019. Our accumulated deficit at June 30, 2020, was approximately $461.07 million.~~
26
~~On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured loan~~least two clinical trials for SkinTE. Clinical trials are the major expense we see in the ~~amount~~near and long term, and while we are pursuing clinical trials we will continue to incur the costs of ~~$3,576,145 made~~maintaining our business. In addition to ~~us under~~clinical trials, the ~~Paycheck Protection Program (the “Loan”). The Paycheck Protection Program (or “PPP”) was established under the Coronavirus Aid, Relief,~~most significant uses of cash to maintain our business going forward are compensation and ~~Economic Security Act (the “CARES Act”) and is administered by the U.S. Small Business Administration. The Loan~~costs of occupying our facilities.
We will need to the Borrower was made through KeyBank, N.A., a national banking association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion of a loan granted under the PPP. Such forgiveness will be determined, subject to limitations, based on the use of loan proceeds for payment of payroll costs and any payments of mortgage interest, rent, and utilities. No assurance is provided that the Borrower will obtain forgiveness of the Loan in whole or in part.
On February 14, 2020, we completed an underwritten offering 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 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 raisingraise additional capital to ~~finance its operations.~~fund our effort to obtain FDA approval of SkinTE and maintain our operations in the future. Although ~~the Company has~~we have been successful in raising capital in the past, financing may not be available on terms favorable to us, if at all, so there is no assurance that itwe 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 to us in the future, we may be required to delay, reduce the scope of, or eliminate ~~one or more of~~ our ~~product development programs~~plans for obtaining regulatory approval for SkinTE or be unable to continue operations over a longer term. ~~We plan to meet our future capital requirements primarily through issuances~~
Results 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 objectivesOperations
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 forecastComparison 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.
27
~~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~~three months ended ~~June 30, 2020, net cash used in operating activities was $25.41 million, which included $1.16 million of issuance fees related~~March 31, 2021 compared 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.three months ended March 31, 2020.
For the Three Months Ended
Increase
(Decrease)

(in thousands) March 31, 2021 March 31, 2020 Amount %
(Unaudited)
Net revenues
Products $ 1,729 $ 428 $ 1,301 304 %
Services 2,980 505 2,475 490 %
Total net revenues 4,709 933 3,776 405 %
Cost of sales
Products 241 340 (99 ) (29 )%
Services 1,924 176 1,748 993 %
Total cost of sales 2,165 516 1,649 320 %
Gross profit 2,544 417 2,127 510 %

Operating costs and expenses
Research and development 2,431 3,373 (942 ) (28 )%
General and administrative 6,371 10,605 (4,234 ) (40 )%
Sales and marketing 1,526 3,694 (2,168 ) (59 )%
Restructuring and other charges 425 452 (27 ) (6 )%
Total operating costs and expenses 10,753 18,124 (7,371 ) (41 )%
Operating loss (8,209 ) (17,707 ) 9,498 (54 )%
Other income (expense)
Change in fair value of common stock warrant liability (4,027 ) 4,532 (8,559 ) (189 )%
Inducement loss on sale of liability classified warrants (5,197 ) – (5,197 ) *
Interest income (expense), net (38 ) (12 ) (26 ) 217 %
Other income, net 61 147 (86 ) (59 )%
Net loss $ (17,410 ) $ (13,040 ) $ (4,370 ) 34 %
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* Not meaningful
~~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 condensed consolidated financial statements.~~
Our discussion and analysis of the financial condition and results of operations is based upon our condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.
28

Net Revenues
Net revenues increased by 405% to $4.709 million for the three-month period ended March 31, 2021, compared to $0.933 million for the same period in 2020. The ~~preparation~~increase in net revenues for sale of ~~financial statements~~products was the result of a sales strategy adopted in ~~conformity~~May 2020 to focus on regions and facilities where we had repeat users of SkinTE. During the first quarter of 2021 the average wound size treated with ~~accounting principles generally accepted~~SkinTE was 637 cm² compared to 62 cm² in the ~~United States~~first quarter of ~~America requires management~~2020, which corresponds with the difference in revenue between those periods. The increase in net revenues for services was the result of new COVID-19 testing services we began to ~~make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies~~offer through Arches at the ~~date~~end of May 2020, which we did not offer in the first three months of 2020.
Cost of Sales
Cost of sales increased by 320% to $2.165 million in 2021, which is largely attributable to the cost of sales for providing COVID-19 testing services we began to offer through Arches at the end of May 2020, which we did not offer in the first three months of 2020.
Operating Costs and Expenses
Total operating costs and expenses decreased to $10.753 million for the three-month period ended March 31, 2021, compared to $18.124 million for the same period in 2020, which is largely attributable to the substantial reduction in personnel effectuated in May 2020 that reduced salary and benefit costs across the Company. Salary and benefits totaled $3.862 million for the first three months of 2021 compared to $6.665 million for the same period in 2020. Severance expenses decreased from $0.495 million in the first quarter of 2020 to $0.004 million in the first quarter of 2021. Stock-based compensation decreased from $3.221 million in the first quarter of 2020 to $1.651 million in the first quarter of 2021. In addition to the reduction of salary and benefit costs, the following significant changes also contributed to the decrease in operating costs and expenses, which are a consequence of our reduction of personnel and adjustment of our operating activities that began in May 2020:
● Travel and related costs decreased from $0.525 million in the first quarter of 2020 to $0.123 million in the first quarter of 2021;
● Issuance costs, which are included in operating expenses, decreased from $1.156 million in the first quarter of 2020 to $0.824 million in the first quarter of 2021;
● Consulting costs, including legal, accounting, and audit fees, decreased from $1.301 million in the first quarter of 2020 to $0.897 million in the first quarter of 2021;
● Promotional consulting and expense decreased from $0.701 million in the first quarter of 2020 to $0.045 million in the first quarter of 2021; and
● Lease expenses for our corporate office facility was $0.119 million in the first quarter of 2020, which did not recur in the first quarter of 2021 because the lease expired in 2020.
29
In connection with terminating commercial sales of SkinTE, the Company recorded as a restructuring charge a loss on impairment of property and equipment in the amount of $0.425 million during the first quarter of 2021, while the $0.452 million of restructuring and other charges in the first quarter of 2020 were severance costs arising from a reduction in force in March 2020.
Operating Loss and Net Loss
As a result of the ~~financial statements~~developments described above, our operating loss decreased from an operating loss of $17.707 million for the three-month period ended March 31, 2020, to an operating loss of $8.209 million for the comparable period in 2021. Net loss, however, increased from $13.040 million for the three-month period ended March 31, 2020, to $17.410 million for the comparable period in 2021. The increase in net loss is attributable to a day one loss on warrants issued in January 2021 of approximately $5.0 million plus a loss on the change in fair value of common stock warrant liability of approximately $4.0 million in addition to the drivers previously noted. Warrants issued in connection with financings we completed in January 2021 are classified as liabilities and remeasured each period until settled or until classified as equity, which resulted in our recording a charge for common stock warrants of $9.224 million for the ~~reported amounts~~three months ended March 31, 2021. For additional information on the change in fair value of ~~revenues and expenses during~~common stock warrant liability please see note 10 to the ~~reporting periods. Among the more significant estimates~~Condensed Consolidated Financial Statements (unaudited) included in ~~these financial statements~~this report.
The table below shows adjusted net loss, which is a non-GAAP measure that shows net loss before fair value adjustments relating to our common stock warrant liability and warrant inducement loss. We believe this measure is useful to investors because it eliminates the ~~extent~~effect of ~~progress toward completion~~non-operating items that can significantly fluctuate from period to period due to fair value remeasurements. For purposes of ~~contracts, stock-based compensation,~~calculating non-GAAP per share metrics, the ~~valuation allowances for deferred tax benefits,~~same denominator is used as that which would be used in calculating net loss per share under GAAP.
Adjusted Net Loss Attributable to Common Stockholders
(in thousands - unaudited non-GAAP measure)
For the Three Months Ended March 31,
2021 2020
GAAP Net loss $ (17,410 ) $ (13,040 )
Change in fair value of common stock warrant liability 4,027 (4,532 )
Inducement loss on sale of liability classified warrants 5,197 –
Non-GAAP adjusted net loss attributable to common stockholders $ (8,186 ) $ (17,572 )

GAAP net loss per share attributable to common stockholders
Basic $ (0.23 ) $ (0.39 )
Diluted $ (0.24 ) $ (0.39 )

Non-GAAP adjusted net loss per share attributable to common stockholders
Basic $ (0.11 ) $ (0.53 )
Diluted $ (0.12 ) $ (0.53 )
Critical Accounting Policies and ~~the valuation of tangible and intangible assets included in acquisitions. Actual results could differ from those estimates.~~Estimates
~~Revenue Recognition~~
Revenue ~~is recognized when a customer obtains control of promised goods or services, in an amount that reflects the consideration which the entity expects~~Recognition. With respect to ~~receive in exchange for those goods or services. To determine~~ revenue recognition for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies a performance obligation.
The Company records product revenues primarily from the sale of its regenerative tissue products. The Company sells its products to healthcare providers, primarily through direct sales representatives. Product revenues consists of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognizes product revenue upon delivery to the customer.
~~The Company records service revenues from the sale of its preclinical research~~contract services ~~and contract services. Preclinical research services includes delivery of preclinical studies and other research services to unrelated third parties. Service~~provided by IBEX, revenues generally consist of a single performance obligation that ~~the Company~~IBEX 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~~We believe that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires ~~the Company to~~that our services personnel at IBEX make reasonable estimates of the extent of progress toward completion of the ~~contract. As~~contract and, 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 single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer.
Stock-Based Compensation
~~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~~. We measure all stock-based compensation to employees and non-employees using a fair value ~~method and records such expense in research and development, general and administrative, and sales and marketing expenses. Compensation expense for~~method. For stock options with graded vesting, ~~is recognized~~we recognize compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple ~~awards.~~
awards based on the fair value on the date of grant. The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the ~~grant.~~grant commensurate with the expected term of the option. The volatility factor is determined based on ~~the Company’s~~our historical stock prices. Forfeitures are recognized as they occur.
The fair value of restricted stock grants is measured based on the fair market value of ~~the Company’s~~our common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years.
2930

~~Accruals for Research and Development Expenses and Clinical Trials~~
As part of the process of preparing its financial statements, the Company is required to estimate its expenses resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result in it reporting amounts that are too high or too low for any particular period.
~~Impairment of Long-Lived Assets~~
The Company reviews long-lived assets, including property and equipment, intangible assets and goodwill for impairment whenever events or changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value, determined based on discounted cash flows.
Common Stock ~~and~~ Warrant ~~Transactions~~Liability
. The ~~Company issued units consisting of common stock and warrants and subsequently remeasured those warrants at fair value. Determining the~~ fair value of the ~~securities in these transactions requires significant judgment, including adjustments to quoted share prices and expected~~common stock ~~volatility. Such estimates may significantly impact~~warrant liability is estimated using the Monte Carlo simulation model, which involves simulated future stock price amounts over the remaining life of the commitment. The fair value estimate is affected by our ~~results~~stock price as well as estimated change of ~~operations and losses applicable to common stockholders.~~control considerations.
Disclosure Regarding Forward-Looking Statements
~~Statements that are not historical facts contained in or incorporated by reference into this~~This Quarterly Report on Form 10-Q contains forward-looking statements. Risks and uncertainties are ~~“forward-looking statements” within~~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 ~~meaning of the Private Securities Litigation Reform Act of 1995,~~safe harbor provisions in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). ~~Forward-looking~~All statements ~~involve risks and uncertainties that could cause actual results to differ from projected results. The~~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,” ~~“goal,~~“believe,” ~~“seek,~~“contemplate,” ~~“project,~~“continue,” ~~“strategy,” “future,” “likely,” “may,” “should,” “will,” “believe,~~“could,” “estimate,” “expect,” “intend,” “may,” “plan,” ~~“intend” and similar expressions and references to future periods, as they relate to us, are intended to identify~~“potential,” “predict,” “project,” “seek,” “should,” “target,” “would,” or the negative of these words or other comparable terminology. These forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are subject to certain risks, uncertainties and assumptions. We cannot assure you that any of our expectations will be realized. Forward-looking statements include, ~~among others,~~but are not limited to, statements ~~we make regarding:~~about:
● 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~~pre-clinical studies or 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;~~
30
● ~~size and growth of our target markets;~~
● sufficiency of our working capital to fund our operations ~~for~~over the next 12 months;
● infrastructure required to support operations in future periods, including the expected costs thereof;
● estimates associated with revenue recognition, asset impairments, and cash flows;
● variance in our estimates of future operating costs;
● future vesting and forfeitures of compensatory equity awards;
● the effectiveness of our disclosure controls and our internal control over financial reporting; ~~and~~
● the impact of new accounting pronouncements;
● size and growth of our ~~plans to remediate material weaknesses in~~target markets; and
● the initiation, timing, progress, and results of our ~~internal control over financial reporting.~~research and development programs.
Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:
● the ability to comply with regulations applicable to the manufacture ~~marketing, sale~~ and distribution of our ~~products;~~products and delivery of our services;
● the ability to ~~gain adoption by healthcare providers of~~meet demand for our products ~~for patient care;~~and services;
● the ability to ~~manufacture product~~deliver our products and services if employees are quarantined due to ~~meet demand;~~the impact of COVID-19;
● ~~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;
● new discoveries or the development of new therapies or ~~new discoveries~~technologies that render our products ~~obsolete;~~or services obsolete or unviable;
● outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade, and business operations;
● political and economic instability, whether resulting from natural disasters, wars, terrorism, pandemics, or other sources;
● ~~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~~gain adoption by healthcare ~~industry when there is a major outbreak~~providers of ~~life-threatening infectious disease, such as COVID-19;~~our products for patient care;
● ~~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;
31
● 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~~the other risks and uncertainties described ~~under “Risk Factors”~~ in ~~our 2019 Annual Report on Form 10-K and~~this report under Item ~~1A of this Quarterly Report~~1A. Risk Factors, beginning on ~~Form 10-Q.~~page 20.
~~We undertake~~Forward-looking statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance, or achievements to be materially different from any future results, performance, or achievements expressed or implied by these forward-looking statements. Any forward-looking statement in this Quarterly Report on Form 10-Q and the documents incorporated by reference herein reflects our current view with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry, and future growth. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to ~~publicly~~ update or revise ~~any~~these forward-looking statements ~~whether as a result of~~for any reason, even if new information ~~future~~becomes available in the future.
This Quarterly Report on Form 10-Q also contains estimates, projections, and other information concerning our industry, our business, and the markets for certain diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates, forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or ~~otherwise. All forward-looking statements are~~circumstances may differ materially from events and circumstances reflected in this information. Unless otherwise expressly ~~qualified~~stated, we obtained this industry, business, market and other data from reports, research surveys, studies, and similar data prepared by ~~these cautionary statements.~~market research firms and other third parties, industry, medical and general publications, government data, and similar sources.
Item 3. Quantitative and Qualitative Disclosure about Market Risk
Not applicable.
Item 4. Controls and Procedures
We previously identified a material weakness in our internal control over financial reporting as of December 31, 2019, that continued to exist as of March 31, 2020, which was the 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 related accounts. In the first quarter of 2020 management implemented a systemic tool to enhance the reconciliation and review procedures identified in the material weakness above. This change in our internal control over financial reporting remediated the material weakness as of June 30, 2020.
31

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 ~~June 30, 2020,~~March 31, 2021, our principal executive and financial officers concluded that, as of such date, our disclosure controls and procedures were effective. There were no changes in our internal control over financial reporting during the three-month period ended ~~June 30, 2020.~~March 31, 2021.
32
PART II. OTHER INFORMATION
Item 1A. Risk Factors
You should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2019, and our Quarterly Report on Form 10-Q for the period ended March 31,~~ 2020, which could materially affect our business, financial position, or future results of operations. The risks described in that Annual ~~Report and Quarterly~~ Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially, adversely affect our business, financial position, or future results of operations. ~~The risk factors set forth below update,~~
Item 2. Unregistered Sales of Equity Securities and ~~should be read together with,~~Use of Proceeds
During 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~~three-month ended March 31, ~~2020.~~
~~Risks Related~~2021, we withheld or acquired from employees shares of common stock to ~~Our Financial Position and Capital Requirements~~
~~We will need additional funding to pursue~~satisfy statutory withholding tax liability upon the ~~regulatory process~~vesting of share-based awards. The following table sets forth information on our acquisition of these shares for ~~SkinTE and sustain our operations, and may be unable to raise capital when needed,~~each month during the period in which ~~would force us to delay, reduce, eliminate or abandon our product development programs.~~
~~We reported a 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 continue as a going concern beyond the second quarter of 2021 unless we can raise additional capital from external sources.acquisition occurred.
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 product development programs or be unable to continue operations over a longer term.
32

Issuer Purchases of Equity Securities
(a) (b) (c) (d)
Period Total number of shares (or units) purchased Average price paid per share (or unit) Total number of shares (or units) purchased as part of publicly announced plans or programs Maximum number (or approximate dollar value) of shares (or units) that may yet be purchased under the plans or programs
January 2021 44,324 $ 1.08 N/A N/A
February 2021 43,298 $ 1.26 N/A N/A
March 2021 28,971 $ 1.25 N/A N/A
Total 116,593 $ 1.19
Item 6. Exhibits
Except as otherwise noted, the following exhibits are included in this filing:
4.1 Form of Series A Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on January 14, 2021)
4.2 Form of Series B Pre-Funded Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on January 14, 2021)
4.3 Form of Placement Agent Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on January 14, 2021)
4.4 Form of Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on January 26, 2021)
4.5 Form of Placement Agent Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on January 26, 2021)
10.1 ~~Note and Loan~~Form of Securities Purchase Agreement dated ~~April 12, 2020, between PolarityTE MD, Inc., and KeyBank National Association~~January 11, 2021 (incorporated by reference to Exhibit 10.1 to our ~~Current Report on~~ Form 8-K filed with the SEC on ~~April 15, 2020)~~January 14, 2021)
10.2 Form of letter agreement for exercise of Series A Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on January 26, 2021)
31.1 Certification Pursuant to Rule 13a-14(a)
31.2 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 - the Instance Document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL ~~document.~~document
101.SCH XBRL Schema ~~Document.~~Document
101.CAL XBRL Calculation Linkbase ~~Document.~~Document
101.DEF XBRL Definition Linkbase ~~Document.~~Document
101.LAB XBRL Label Linkbase ~~Document.~~Document
101.PRE XBRL Presentation Linkbase ~~Document.~~Document
104 Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101)
33

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~~May 13, 2021 /s/ David Seaburg
David Seaburg
Chief Executive Officer
Duly Authorized Officer
Date: ~~August 6, 2020~~May 13, 2021 /s/ Jacob Patterson
Jacob Patterson
Interim Chief Financial Officer
Chief Accounting Officer
34

	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

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

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

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

	June 30, 2020								March 31, 2021
	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Liabilities:
Common stock warrant liability	$	–	$	–	$	8,736	$	8,736	$	–	$	–	$	15,866	$	15,866
Total	$	–	$	–	$	8,736	$	8,736	$	–	$	–	$	15,866	$	15,866

	Fair Value at December 31, 2020		Initial Fair Value at Issuance		(Gain) Loss Upon Change in Fair Value			Liability Reduction Due to Exercises			Fair Value on March 31, 2021
Warrant liabilities
February 14, 2020 issuance	$	328	$	–	$	217		$	–		$	545
December 23, 2020 issuance		5,647		–		3,861			(8,964	)		544
January 14, 2021 issuance		–		8,629		(797	)		–			7,832
January 25, 2021 issuance		–		6,199		746			–			6,945
Inducement loss on initial fair value (1)		–		–		5,197			–			–
Total	$	5,975	$	14,828	$	9,224		$	(8,964	)	$	15,866

	Fair Value at December 31, 2019		Initial Fair Value at Issuance		(Gain) Loss Upon Change in Fair Value			Liability Reduction Due to Exercises		Fair Value on March 31, 2020
Warrant liabilities
February 14, 2020 issuance	$	0	$	11,677	$	(4,532	)	$	0	$	7,145

	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

	For the Three Months ended March 31, 2021
Stock price	$	1.02–1.21
Exercise price	$	0.10 –1.38
Risk-free rate		0.42 –1.13	%
Volatility		99.0 –102.7	%
Remaining term (years)		4.73 –5.87

	For the Three Months ended March 31, 2020
Stock price	$	1.08 – 1.69
Exercise price	$	2.80
Risk-free rate		0.54 – 1.51	%
Volatility		93.4 – 94.2	%
Remaining term (years)		6.87 – 6.99

	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

	Operating leases			Finance leases
2021 (excluding the three months ended March 31, 2021)	$	1,231		$	491
2022		1,345			405
2023		132			336
2024		87			42
Total lease payments		2,795			1,274
Less:
Imputed interest		(231	)		(143	)
Total	$	2,564		$	1,131

	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

	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

	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

	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	$	–

	March 31, 2021		December 31, 2020
Accounts payable	$	339	$	1,193
Salaries and other compensation		1,519		1,129
Legal and accounting		377		241
Accrued severance		83		330
Benefit plan accrual		700		659
Accrued offering costs		500		–
Other		777		596
Total accounts payable and accrued expenses	$	4,295	$	4,148

	March 31, 2021		December 31, 2020
Current finance lease liabilities	$	544	$	556
Current operating lease liabilities		1,422		1,485
Short-term financing arrangement		1,048		20
Other		25		45
Total other current liabilities	$	3,039	$	2,106

	Number of Shares			Weighted- Average Exercise Price		Number of Shares			Weighted- Average Exercise Price
Outstanding – December 31, 2019		4,529,988		$	15.26
Outstanding – December 31, 2020							4,794,567		$	10.03
Granted		1,458,026		$	1.19		1,352,058		$	1.30
Exercised(1)		(10,000	)	$	3.12		(2,500	)	$	1.10
Forfeited		(867,432	)	$	11.78		(62,415	)	$	6.26
Outstanding – June 30, 2020		5,110,582		$	11.84
Options exercisable, June 30, 2020		3,603,571		$	14.87
Outstanding – March 31, 2021							6,081,710		$	8.13
Options exercisable, March 31, 2021							4,030,490		$	11.27

	Number of Shares
Unvested - December 31, ~~2019~~2020		~~1,843,001~~3,468,969
Granted		~~3,401,036~~498,628
Vested (1)		(~~832,910~~740,657	)
Forfeited		(~~79,803~~165,870	)
Unvested – ~~June 30, 2020~~March 31, 2021		~~4,331,324~~3,061,070

	January 14, 2021			March 31, 2021
Stock price	$	1.21		$	1.11
Exercise price	$	1.20		$	1.20
Risk-free rate		0.49	%		0.86	%
Volatility		100.1	%		102.4	%
Remaining term (years)		5.0			4.8

	January 22, 2021
Stock price	$	1.05
Exercise price	$	0.624
Risk-free rate		0.43	%
Volatility		99.4	%
Remaining term (years)		4.92

	January 25, 2021			March 31, 2021
Stock price	$	1.02		$	1.11
Exercise price	$	1.20		$	1.20
Risk-free rate		0.42	%		0.87	%
Volatility		99.0	%		102.4	%
Remaining term (years)		5.0			4.8

	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

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

	March 31, 2021			March 31, 2020
Numerator:
Net loss	$	(17,410	)	$	(13,040	)
Less: Gain from change in fair value of warrant liabilities		(755	)		–
Net loss, available to common stockholders	$	(18,165	)	$	(13,040	)

	March 31, 2021		March 31, 2020
Denominator:
Basic weighted average number of common shares ⁽¹⁾		76,158,275		33,019,994
Incremental shares from assumed exercise of warrants		237,803		–
Diluted weighted average number of common shares		76,396,078		33,019,994

	As of June 30,				As of March 31,
	2020		2019		2021		2020
Stock options		5,110,582		6,604,461		6,081,710		4,348,559
Restricted stock		4,331,324		493,447		3,061,070		1,574,878
Common stock warrants		10,638,298		–		10,223,233		10,638,298
Shares committed under ESPP						56,806		54,632

	●	~~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.

	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	)%

	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	)

	For the Three Months Ended						Increase (Decrease)
(in thousands)	March 31, 2021			March 31, 2020			Amount			%
	(Unaudited)
Net revenues
Products	$	1,729		$	428		$	1,301			304	%
Services		2,980			505			2,475			490	%
Total net revenues		4,709			933			3,776			405	%
Cost of sales
Products		241			340			(99	)		(29	)%
Services		1,924			176			1,748			993	%
Total cost of sales		2,165			516			1,649			320	%
Gross profit		2,544			417			2,127			510	%

Operating costs and expenses
Research and development		2,431			3,373			(942	)		(28	)%
General and administrative		6,371			10,605			(4,234	)		(40	)%
Sales and marketing		1,526			3,694			(2,168	)		(59	)%
Restructuring and other charges		425			452			(27	)		(6	)%
Total operating costs and expenses		10,753			18,124			(7,371	)		(41	)%
Operating loss		(8,209	)		(17,707	)		9,498			(54	)%
Other income (expense)
Change in fair value of common stock warrant liability		(4,027	)		4,532			(8,559	)		(189	)%
Inducement loss on sale of liability classified warrants		(5,197	)		–			(5,197	)		*
Interest income (expense), net		(38	)		(12	)		(26	)		217	%
Other income, net		61			147			(86	)		(59	)%
Net loss	$	(17,410	)	$	(13,040	)	$	(4,370	)		34	%