POLARITYTE, INC.
CONDENSED CONSOLIDATED
B
AL
ANCE
SHEETS
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
Current
assets:
|
|
|
Cash
and cash equivalents
|
$
6,902
|
$
6,523
|
Accounts
receivable
|
101
|
113
|
Capitalized
software development costs and license fees
|
50
|
50
|
Prepaid
expenses and other current assets
|
251
|
47
|
Total
current assets
|
7,304
|
6,733
|
Property
and equipment, net
|
1,473
|
18
|
TOTAL ASSETS
|
$
8,777
|
$
6,751
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
|
|
Current
liabilities:
|
|
|
Accounts
payable and accrued expenses
|
$
2,268
|
$
1,284
|
Warrant
liability
|
-
|
70
|
Total
current liabilities
|
2,268
|
1,354
|
Total
liabilities
|
2,268
|
1,354
|
|
|
|
Commitments and Contingencies
|
|
|
|
|
|
STOCKHOLDERS’ EQUITY:
|
|
|
Convertible
preferred stock – 10,000,000 shares authorized, 6,091,697 and
7,374,454 shares issued and outstanding at January 31, 2017 and
October 31, 2016, aggregate liquidation preference $4,029 and
$4,854, respectively
|
8,532
|
10,153
|
Common
stock — $.001 par value; 250,000,000 shares
authorized; 4,307,317 and 2,782,963 shares issued and outstanding
at January 31, 2017 and October 31, 2016, respectively
|
4
|
3
|
Additional
paid-in capital
|
131,810
|
123,417
|
Accumulated
deficit
|
(133,837
)
|
(128,176
)
|
Total
stockholders’ equity
|
6,509
|
5,397
|
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
|
$
8,777
|
$
6,751
|
See accompanying notes to condensed consolidated financial
statements.
POLARITYTE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
O
P
ERATIONS
(Unaudited, in thousands, except share and per share
amounts)
|
For the three months ended
|
|
|
|
|
|
Net revenues
|
$
156
|
$
591
|
Cost of sales
|
|
|
Software
development costs and license fees
|
-
|
58
|
Gross profit
|
156
|
533
|
Operating costs and expenses
|
|
|
Product
research and development
|
20
|
35
|
Selling
and marketing
|
31
|
23
|
General
and administrative
|
5,679
|
1,122
|
Depreciation
and amortization
|
83
|
7
|
|
5,813
|
1,187
|
Operating loss
|
(5,657
)
|
(654
)
|
Other expenses (income)
|
|
|
Interest
income
|
(4
)
|
(7
)
|
Change
in fair value of warrant liability
|
8
|
-
|
Net loss
|
(5,661
)
|
(647
)
|
Special
cash dividend attributable to preferred stockholders
|
-
|
(6,002
)
|
Net loss attributable to common stockholders
|
$
(5,661
)
|
$
(6,649
)
|
|
|
|
Net loss per share, basic and diluted:
|
$
(1.69
)
|
$
(3.97
)
|
Weighted average shares outstanding, basic and
diluted:
|
3,346,788
|
1,673,021
|
See accompanying notes to condensed consolidated financial
statements.
POLARITYTE, INC.
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS'
E
QUITY
(Unaudited, in thousands, except share and per share
amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of October 31, 2016
|
7,374,454
|
$
10,153
|
2,782,963
|
$
3
|
$
123,417
|
$
(128,176
)
|
$
5,397
|
Conversion
of Series A preferred stock to common stock
|
(1,213,851
)
|
(297
)
|
202,306
|
-
|
297
|
-
|
-
|
Conversion
of Series B preferred stock to common stock
|
(6,092
)
|
(513
)
|
101,540
|
-
|
513
|
-
|
-
|
Conversion
of Series C preferred stock to common stock
|
(1,148
)
|
(90
)
|
19,150
|
-
|
90
|
-
|
-
|
Conversion
of Series D preferred stock to common stock
|
(61,666
)
|
(721
)
|
102,775
|
-
|
721
|
-
|
-
|
Warrant
exchange to common stock
|
-
|
-
|
56,250
|
-
|
78
|
-
|
78
|
Stock-based
compensation expense
|
-
|
-
|
283,000
|
-
|
4,417
|
-
|
4,417
|
Shares
issued for cash
|
-
|
-
|
759,333
|
1
|
2,277
|
-
|
2,278
|
Net
loss
|
-
|
-
|
-
|
-
|
-
|
(5,661
)
|
(5,661
)
|
Balance as of January 31, 2017
|
6,091,697
|
$
8,532
|
4,307,317
|
$
4
|
$
131,810
|
$
(133,837
)
|
$
6,509
|
POLARITYTE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF
CA
SH
FLOWS
(Unaudited, in thousands)
|
For
the three months ended
January 31,
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES
|
|
|
Net
loss
|
$
(5,661
)
|
$
(647
)
|
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
|
|
Depreciation
and amortization
|
83
|
7
|
Stock
based compensation expense
|
4,417
|
547
|
Amortization
of capitalized software development costs and license
fees
|
-
|
58
|
Change
in fair value of warrant liability
|
8
|
-
|
Changes
in operating assets and liabilities:
|
|
|
Accounts
receivable
|
12
|
(227
)
|
Capitalized
software development costs and license fees
|
-
|
(29
)
|
Prepaid
expenses and other current assets
|
(204
)
|
(142
)
|
Accounts
payable and accrued expenses
|
984
|
35
|
Net
cash used in operating activities
|
(361
)
|
(398
)
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES
|
|
|
Purchase
of property and equipment
|
(1,538
)
|
-
|
Net
cash used in investing activities
|
(1,538
)
|
-
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES
|
|
|
Special
cash dividend
|
-
|
(10,000
)
|
Proceeds
from stock options exercised
|
-
|
130
|
Payments
to Zift
|
-
|
(133
)
|
Proceeds
from the sale of common stock
|
2,278
|
-
|
Net
cash provided by (used in) financing activities
|
2,278
|
(10,003
)
|
|
|
|
Net
increase (decrease) in cash and cash
equivalents
|
379
|
(10,401
)
|
Cash
and cash equivalents — beginning of period
|
6,523
|
17,053
|
Cash
and cash equivalents — end of period
|
$
6,902
|
$
6,652
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION
|
|
|
Cash
paid during the period for income taxes
|
$
-
|
$
-
|
|
|
|
Supplemental schedule of non-cash investing and financing
activities:
|
|
|
Conversion
of Series A preferred stock to common stock
|
$
297
|
$
130
|
Conversion
of Series B preferred stock to common stock
|
$
513
|
$
-
|
Conversion
of Series C preferred stock to common stock
|
$
90
|
$
-
|
Conversion
of Series D preferred stock to common stock
|
$
721
|
$
43
|
Warrant
exchange for common stock shares
|
$
78
|
$
-
|
See accompanying notes to condensed consolidated financial
statements.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1.
B
USINESS ACTIVITY
AND BASIS OF PRESENTATION
Asset Acquisition and Name
Change.
On December 1,
2016
,
Majesco Entertainment Company (the
“Company”) entered into an agreement to acquire the
assets of PolarityTE, Inc., (the "Seller"), a regenerative medicine
company. The asset acquisition was subject to shareholder approval,
which was received on March 10, 2017. In January, 2017, the Company
changed its name to “PolarityTE,
Inc.”
At
closing, upon satisfaction of each of the closing conditions, the
Seller will be issued 7,050 shares of the Company’s newly
authorized Series E Preferred Stock (the “Preferred
Shares”) convertible into an aggregate of 7,050,000 shares of
the Company’s common stock, expected to constitute
approximately 40% of the issued and outstanding common stock of the
Company on a fully diluted basis at closing and depending in part,
upon the Company’s expected cash balance at
closing.
On
December 1, 2016, the Company hired Dr. Denver Lough as Chief
Executive Officer, Chief Scientific Officer and Chairman of our
Board of Directors and Dr. Ned Swanson as Chief Operating Officer
of the Company. Until their hiring both doctors were associated
with Johns Hopkins University, Baltimore, Maryland, as full time
residents.
The
doctors lead the Company’s current efforts focused on
scientific research and development and in this regard on December
1, 2016, the Company leased laboratory space and purchased
laboratory equipment in Salt Lake City, Utah. Subsequent
expenditures during January 2017 include approximately $1.4 million
for the purchase of medical equipment, including microscopes for
high end real-time imaging of cells and tissues required for tissue
engineering and regenerative medicine research. The Company has
added additional facilities, and established university and
scientific relationships and collaborations in order to pursue its
business. None of these activities were performed by Dr. Lough or
Dr. Swanson prior to December 1, 2016 in connection with their
university positions or privately.
Dr.
Lough is the named inventor under a pending patent application for
a novel regenerative medicine and tissue engineering platform filed
in the United States and elsewhere. The Company believes that its
future success depends significantly on its ability to protect its
inventions and technology. Accordingly, the Company is seeking to
acquire the pending patent application. Prior to December 1, 2016
no employees, consultants or partners engaged in any business
activity related to the patent application and no licenses or
contracts were granted related to the patent application, other
than professional services related to preparation and filing of the
patent. On December 1, 2016 Dr. Lough assigned the patent
application as well as all related intellectual property to a
newly-formed Nevada corporation, PolarityTE, Inc. (“Polarity
NV”), and the Company entered into an Agreement and Plan of
Reorganization (the “Agreement”) with Polarity NV and
Dr. Lough.
As
a result, at closing, the patent application would be owned by the
Company without the need for further assignments or recordation
with the Patent Trademark Office.
There
was never any intent to acquire an ongoing business and no ongoing
business was acquired. The asset is preserved in a stand-alone
entity merely as a vehicle to provide the Company a seamless means
to acquire the asset (a patent application) without undue cost,
expense and time. Polarity NV has never had employees and therefore
no employees will be acquired in the transaction.
The Company adopted ASU 2017-01,
Business
Combinations (Topic 805), Clarifying the Definition of a
Business
, during the first
quarter of fiscal 2017. In accordance with ASU 2017-01 we
analyzed the above transaction as follows:
Step
1 - Is substantially all the fair value of the gross assets
acquired concentrated in a single (group of similar) identifiable
asset(s)? – The Company has a proposal to acquire a single
intellectual property asset and no employees on the acquisition
date.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Step
2 - Evaluate whether an input and a substantive process
exists? Does the set have outputs? – The set does not
yet have outputs, as Polarity NV’s intellectual property does
not generate any revenue. Without outputs, the set requires
employees that form an organized workforce with skills, knowledge,
or experience to perform an acquired process that is critical to
the ability to create outputs to qualify as a business. Polarity NV
never has had any employees or workforce. On December 1,
2016, prior to any Polarity NV acquisition, the Company hired
Denver Lough as its Chief Executive and Chief Scientific Officer
and Edward Swanson as Chief Operating Officer
(“COO”). Both of these executives were employed
full-time by Johns Hopkins University and were not employed by
Polarity NV. In December 2016, the Company established a clinical
advisory board and added three members in December 2016 and three
more in January 2017. Establishing the clinical advisory board and
hiring a COO are critical to establishing at the Company for the
first time a workforce that has the knowledge and experience to
obtain regulatory approval of the Company’s intellectual
property. Therefore, the proposal to acquire an intellectual
property asset and no employees from Polarity NV on the acquisition
date would not represent an organized workforce with the necessary
skills and experience to create outputs that would be acquired from
Polarity NV upon its ultimate acquisition date, following approval
by stockholders and satisfaction of other conditions precedent to
closing, which will not occur until at least March
2017.
General.
The accompanying consolidated financial statements
present the financial results of PolarityTE, Inc. and its wholly
owned United Kingdom subsidiary. The inactive U.K. subsidiary was
dissolved during the year ended October 31,
2016.
Segments.
The Company's operations involve dissimilar
products which are managed separately. Accordingly, it operates in
two segments: 1) video games and 2) regenerative
medicine.
Video
Games
The
Company is a provider of video game products primarily for the
casual-game consumer and has published video games for interactive
entertainment hardware platforms, including Nintendo’s DS,
3DS, Wii and WiiU, Sony’s PlayStation 3 and 4, or PS3 and
PS4, Microsoft’s Xbox 360 and Xbox One and the personal
computer, or PC. The Company sells its products through digital
distribution.
The
Company’s video game titles are targeted at various
demographics at a range of price points. Due to the larger budget
requirements for developing and marketing premium console titles
for core gamers, the Company has focused on publishing lower-cost
games targeting casual-game consumers and independent game
developer fans. In some instances, the Company’s titles are
based on licenses of well-known properties and, in other cases,
original properties. The Company enters into agreements with
content providers and video game development studios for the
creation of its video games.
The
Company currently has no plans or understandings to discontinue or
divest its current existing software business although the Company
has received inquiries from prospective purchasers of various
assets and the business. The Company may determine to dispose of
such business in whole or in part, or discontinue such business,
and may reevaluate from time to time although presently 4 employees
continue to be employed in direct activities related to such
software business and administration and the Company is continuing
to generate revenue from its sales of digital online games. The
Company is diversifying its business model in an attempt to
mitigate risk associated with focusing on one industry and increase
the overall value of the Company for its shareholders.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Regenerative
Medicine
Through
its regenerative medicine efforts, the Company is developing the
proprietary tissue engineering platform invented by Dr. Denver
Lough to translate regenerative products into clinical application.
Preliminarily, the technological platform has demonstrated the
potential capacity to grow fully functional tissue across the
entire spectrum of the musculoskeletal and integumentary systems,
including skin, muscle, bone, cartilage, peripheral nerve, fat, and
fascia. Preliminary results indicate it has applications across
solid organ and specialty tissue regeneration as well, including
bowel, liver, kidney, and urethra. The product furthest in the
development pipeline is an autologous (tissue from the patient
themselves) skin regeneration construct, SkinTE
TM
, to regenerate
fully functional skin with all of its layers, including epidermis,
dermis, hypodermis, and all appendages including hair and glands.
SkinTE
TM
is preparing for clinical testing and market entry, and targeting a
global wound care market of $40 billion. The platform provides a
pipeline of products to follow in parallel, with plans for serial
clinical and market entry, and each addressing separate and
similarly sized potential markets. The Company’s approach
seeks to benefit from fewer regulatory and capital barriers to
market entry, avoiding the long timelines associated with three
phase trials and their associated costs seen with other competing
technologies and therapeutics. The regenerative medicine business
model being pursued takes advantage of the smaller regulatory
hurdles, with streamlined product development from cell/tissue in
vitro and ex vivo testing, to small and large animal preclinical
models, manufacturing technology transfer, and ultimately clinical
application and market entry occurring in a mapped out stepwise
fashion for each product. Although skin regeneration and wound care
is a robust market in and of itself, the platform technology
provides a base that the Company believes will support a strategy
to build a company that can diversify and grow
continuously.
NASDAQ listing.
On January 6, 2017, PolarityTE, Inc.,
was notified by The NASDAQ Stock Market, LLC of failure to comply
with Nasdaq Listing Rule 5605(b)(1) which requires that a majority
of the directors comprising the Company’s Board of Directors
be considered “independent”, as defined under the Rule.
The notice has no immediate effect on the listing or trading of the
Company’s common stock on The NASDAQ Capital Market and, at
this time, the common stock will continue to trade on The NASDAQ
Capital Market under the symbol
“COOL”.
On
February 22, 2017, the Company regained compliance with Listing
Rule 5605(b)(1), the independent director requirement for continued
listing on The NASDAQ Stock Market, with the appointment of Mr.
Steve Gorlin and Dr. Jon Mogford, and that the matter is now
closed. PolarityTE’s common stock will continue to be listed
on The NASDAQ Capital Market.
Major customers.
Microsoft, Sony, and Valve accounted
for 40%, 26%, and 21%, respectively, of sales for the three months
ended January 31, 2017. Microsoft, Sony, Valve and Nintendo
accounted for 37%, 26%, 15% and 14%, respectively, of sales for the
quarter ended January 31, 2016. Sony and Microsoft accounted for
44% and 35%, respectively, of accounts receivable as of
January 31, 2017.
Concentrations.
The
Company develops and distributes video game software for
proprietary platforms under licenses from Nintendo, Sony and
Microsoft, which must be periodically renewed. The Company’s
agreements with these manufacturers also grant them certain control
over the Company’s products. In addition, for the three
months ended January 31, 2017 and 2016 sales of the Company’s
Zumba Fitness games accounted for approximately 17% and 10% of net
revenues, respectively.
The
accompanying interim condensed consolidated financial statements of
the Company are unaudited, but in the opinion of management,
reflect all adjustments, consisting of normal recurring accruals,
necessary for a fair presentation of the results for the interim
period. Accordingly, they do not include all information and notes
required by generally accepted accounting principles for complete
financial statements. The Company’s financial results are
impacted by the seasonality of the retail selling season and the
timing of the release of new titles. The results of operations for
interim periods are not necessarily indicative of results to be
expected for the entire fiscal year. The balance sheet at October
31, 2016 has been derived from the audited financial statements at
that date but does not include all of the information and footnotes
required by accounting principles generally accepted in the United
States of America for complete financial statements. These interim
condensed consolidated financial statements should be read in
conjunction with the Company’s consolidated financial
statements and notes thereto for the year ended October 31, 2016
filed with the Securities and Exchange Commission on Form 10-K on
December 30, 2016.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of
Consolidation.
The
accompanying consolidated financial statements include the accounts
of the Company and its wholly owned subsidiary located in the
United Kingdom. The subsidiary was dissolved during the year ended
October 31, 2016. Significant intercompany accounts and
transactions have been eliminated in
consolidation.
Revenue Recognition.
Since July 2015 when retail
distribution activities were transferred and retail sales ceased,
the Company's software products are sold exclusively as downloads
of digital content for which the consumer takes possession of the
digital content for a fee. Revenue from product downloads is
generally recognized when the download is made available (assuming
all other recognition criteria are met).
Prior
to July 2015, when the Company entered into license or distribution
agreements that provided for multiple copies of games in exchange
for guaranteed amounts, revenue was recognized in accordance with
the terms of the agreements, generally upon delivery of a master
copy, assuming our performance obligations were complete and all
other recognition criteria were met, or as per-copy royalties are
earned on sales of games.
Cash and cash
equivalents.
Cash
equivalents consist of highly liquid investments with original
maturities of three months or less at the date of purchase. At
various times, the Company has deposits in excess of the Federal
Deposit Insurance Corporation limit. The Company has not
experienced any losses on these accounts.
Accounts Receivable and
Accounts Payable and Accrued Expenses.
The carrying amounts of accounts receivable and
accounts payable and accrued expenses approximate fair value as
these accounts are largely current and short term in
nature.
Allowance for Doubtful
Accounts
. The Company
recognizes an allowance for losses on accounts receivable for
estimated probable losses. The allowance is based on historical
experiences, current aging of accounts, and other expected future
write-offs, including specific identifiable customer accounts
considered at risk or uncollectible. Any related expense associated
with an allowance for doubtful accounts is recognized as general
and administrative expense. As of January 31, 2017 and 2016, there
was no allowance for doubtful accounts.
Capitalized Software
Development Costs and License Fees.
Software development costs include fees in the
form of milestone payments made to independent software developers
and licensors. Software development costs are capitalized once
technological feasibility of a product is established and
management expects such costs to be recoverable against future
revenues. For products where proven game engine technology exists,
this may occur early in the development cycle. Technological
feasibility is evaluated on a product-by-product basis. Amounts
related to software development that are not capitalized are
charged immediately to product research and development costs.
Commencing upon a related product’s release, capitalized
costs are amortized to cost of sales based upon the higher of (i)
the ratio of current revenue to total projected revenue or (ii)
straight-line charges over the expected marketable life of the
product.
Prepaid
license fees represent license fees to owners for the use of their
intellectual property rights in the development of the
Company’s products. Minimum guaranteed royalty payments for
intellectual property licenses are initially recorded as an asset
(prepaid license fees) and a current liability (accrued royalties
payable) at the contractual amount upon execution of the contract
or when specified milestones or events occur and when no
significant performance remains with the licensor. Licenses are
expensed to cost of sales at the higher of (i) the contractual
royalty rate based on actual sales or (ii) an effective rate
based upon total projected revenue related to such license.
Capitalized software development costs and prepaid license fees are
classified as non-current if they relate to titles for which the
Company estimates the release date to be more than one year from
the balance sheet date.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
amortization period for capitalized software development costs and
prepaid license fees is usually no longer than one year from the
initial release of the product. If actual revenues or revised
forecasted revenues fall below the initial forecasted revenue for a
particular license, the charge to cost of sales may be larger than
anticipated in any given quarter. The recoverability of capitalized
software development costs and prepaid license fees is evaluated
quarterly based on the expected performance of the specific
products to which the costs relate. When, in management’s
estimate, future cash flows will not be sufficient to recover
previously capitalized costs, the Company expenses these
capitalized costs to “cost of sales-software development
costs and license fees,” in the period such a determination
is made. These expenses may be incurred prior to a game’s
release for games that have been developed. If a game is cancelled
prior to completion of development and never released to market,
the amount is expensed to operating costs and expenses. If the
Company was required to write off licenses, due to changes in
market conditions or product acceptance, its results of operations
could be materially adversely affected.
Costs
of developing online free-to-play social games, including payments
to third-party developers, are expensed as research and development
expenses. Revenue from these games is largely dependent on
players’ future purchasing behavior in the game and currently
the Company cannot reliably project that future net cash flows from
developed games will exceed related development costs.
Prepaid
license fees and milestone payments made to the Company’s
third party developers are typically considered non-refundable
advances against the total compensation they can earn based upon
the sales performance of the products. Any additional royalty or
other compensation earned beyond the milestone payments is expensed
to cost of sales as incurred.
Property and
Equipment.
Property
and equipment is stated at cost. Depreciation and amortization is
being provided for by the straight-line method over the estimated
useful lives of the assets, generally five years. Amortization of
leasehold improvements is provided for over the shorter of the term
of the lease or the life of the asset.
Income
Taxes.
The Company
accounts for income taxes under the asset and liability method.
Deferred tax assets and liabilities are recognized for the future
tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and
their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the
period that includes the enactment date. The Company evaluates the
potential for realization of deferred tax assets at each quarterly
balance sheet date and records a valuation allowance for assets for
which realization is not more likely than not.
Stock Based
Compensation.
The Company
measures all stock-based compensation to employees using a fair
value method and records such expense in general and administrative
expenses. Compensation expense for stock options with cliff vesting
is recognized on a straight-line basis over the vesting period of
the award, based on the fair value of the option on the date of
grant. For stock options with graded vesting, the Company
recognizes compensation expense over the service period for each
separately vesting tranche of the award as though the award were in
substance, multiple awards.
The
fair value for options issued is estimated at the date of grant
using a Black-Scholes option-pricing model. The risk-free rate is
derived from the U.S. Treasury yield curve in effect at the
time of the grant. The volatility factor is determined based on the
Company’s historical stock prices.
The
value of restricted stock grants are measured based on the fair
market value of the Company's common stock on the date of grant and
amortized over the vesting period of, generally, six months to
three years.
Loss Per Share.
Basic loss per share of common stock
is computed by dividing net loss attributable to common
stockholders by the weighted average number of shares of common
stock outstanding for the period. Diluted loss per share excludes
the potential impact of common stock options, unvested shares of
restricted stock and outstanding common stock purchase warrants
because their effect would be anti-dilutive due to our net
loss.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Commitments and
Contingencies.
We
are subject to claims and litigation in the ordinary course of our
business. We record a liability for contingencies when the amount
is both probable and reasonably estimable. We record associated
legal fees as incurred. We accrued contingent liabilities for
certain potential licensor and customer liabilities and claims that
were transferred to Zift but may not be extinguished by such
transaction.
Accounting for
Warrants
. The
Company accounts for the issuance of common stock purchase warrants
issued in connection with the equity offerings in accordance with
the provisions of ASC 815, Derivatives and Hedging (“ASC
815”). The Company classifies as equity any
contracts that (i) require physical settlement or net-share
settlement or (ii) gives the Company a choice of net-cash
settlement or settlement in its own shares (physical settlement or
net-share settlement). The Company classifies as assets
or liabilities any contracts that (i) require net-cash settlement
(including a requirement to net-cash settle the contract if an
event occurs and if that event is outside the control of the
Company) or (ii) gives the counterparty a choice of net-cash
settlement or settlement in shares (physical settlement or
net-share settlement). In addition, under ASC 815, registered
common stock warrants that require the issuance of registered
shares upon exercise and do not expressly preclude an implied right
to cash settlement are accounted for as derivative
liabilities. The Company classifies these derivative warrant
liabilities on the condensed consolidated balance sheet as a
current liability.
Change in Fair Value of
Warrant Liability.
The Company
assessed the classification of common stock purchase warrants as of
the date of each offering and determined that certain instruments
met the criteria for liability classification. Accordingly, the
Company classified the warrants as a liability at their fair value
and adjusts the instruments to fair value at each reporting period.
This liability is subject to re-measurement at each balance sheet
date until the warrants are exercised or expired, and any change in
fair value is recognized as “change in fair value of warrant
liability” in the condensed consolidated statements of
operations. The fair value of the warrants has been estimated using
a Black-Scholes valuation model (see Note 7).
Reverse
stock-split
. On July 27, 2016,
Majesco Entertainment Company (the “Company”) filed a
certificate of amendment (the “Amendment”) to its
Restated Certificate of Incorporation with the Secretary of State
of the State of Delaware in order to effectuate a reverse stock
split of the Company’s issued and outstanding common stock,
par value $0.001 per share on a one (1) for six (6) basis,
effective on July 29, 2016 (the “Reverse Stock
Split”).
The
Reverse Stock Split was effective with The NASDAQ Capital Market
(“NASDAQ”) at the open of business on August 1, 2016.
The par value and other terms of Company’s common stock were
not affected by the Reverse Stock Split. The Company’s
post-Reverse Stock Split common stock has a new CUSIP number,
560690 406. The Company’s transfer agent, Equity Stock
Transfer LLC, acted as exchange agent for the Reverse Stock
Split.
As
a result of the Reverse Stock Split, every six shares of the
Company’s pre-Reverse Stock Split common stock was combined
and reclassified into one share of the Company’s common
stock. No fractional shares of common stock were issued as a result
of the Reverse Stock Split. Stockholders who otherwise would be
entitled to a fractional share shall receive a cash payment in an
amount equal to the product obtained by multiplying (i) the closing
sale price of our common stock on the business day immediately
preceding the effective date of the Reverse Stock Split as reported
on NASDAQ by (ii) the number of shares of our common stock held by
the stockholder that would otherwise have been exchanged for the
fractional share interest.
All
common share and per share amounts have been restated to show the
effect of the Reverse Stock Split.
Estimates.
The preparation of financial statements in
conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities or the disclosure of gain or loss contingencies at the
date of the financial statements and the reported amounts of
revenues and expenses during the reporting periods. Among the more
significant estimates included in these financial statements are
the recoverability of advance payments for capitalized software
development costs and intellectual property licenses, the valuation
of warrant liability, and the valuation allowances for deferred tax
benefits. Actual results could differ from those
estimates.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Recently Adopted Accounting Pronouncements
In August 2014, the FASB issued ASU
No. 2014-15, Disclosure of Uncertainties about an
Entity’s Ability to Continue as a Going Concern (“ASU
No. 2014-15”) that will require management to evaluate
whether there are conditions and events that raise substantial
doubt about the Company’s ability to continue as a going
concern within one year after the financial statements are issued
on both an interim and annual basis. Management will be required to
provide certain footnote disclosures if it concludes that
substantial doubt exists or when its plans alleviate substantial
doubt about the Company’s ability to continue as
a
going
concern. The Company
adopted ASU No. 2014-15 and its adoption did not
have a material impact on the Company’s financial
statements.
Recent Accounting Pronouncements.
In May 2014, the Financial Accounting Standards
Board ("FASB”) issued an Accounting Standards Update
("ASU") creating a new Topic 606,
Revenue from Contracts with
Customers
, which broadly
establishes new standards for the recognition of certain revenue
and updates related disclosure requirements. The update becomes
effective for the Company on November 1, 2018. The Company is
reviewing the potential impact of the statement on its financial
position, results of operations, and cash
flows.
In February 2016, FASB issued ASU No.
2016-02,
Leases (Topic 842),
which supersedes FASB ASC Topic
840,
Leases
(Topic 840)
and
provides principles for the recognition, measurement, presentation
and disclosure of leases for both lessees and lessors. The new
standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle
of whether or not the lease is effectively a financed purchase by
the lessee. This classification will determine whether lease
expense is recognized based on an effective interest method or on a
straight-line basis over the term of the lease, respectively. A
lessee is also required to record a right-of-use asset and a lease
liability for all leases with a term of greater than twelve months
regardless of classification. Leases with a term of twelve months
or less will be accounted for similar to existing guidance for
operating leases. The standard is effective for annual and interim
periods beginning after December 15, 2018, with early adoption
permitted upon issuance. When adopted, the Company does not expect
this guidance to have a material impact on our financial
statements.
In March 2016, the FASB issued ASU No. 2016-08,
Revenue
from Contracts with Customers
(Topic 606): Principal versus Agent
Considerations
. The purpose of
ASU No. 2016-08 is to clarify the implementation of guidance on
principal versus agent considerations. For public entities, the
amendments in ASU No. 2016-08 are effective for interim and annual
reporting periods beginning after December 15, 2017. The Company is
currently assessing the impact of ASU No. 2016-08 on its condensed
consolidated financial statements and related
disclosures.
In March 2016, the FASB issued ASU No.
2016-09,
Compensation-Stock
Compensation (Topic 718), Improvements to Employee Share-Based
Payment Accounting
. Under ASU
No. 2016-09, companies will no longer record excess tax benefits
and certain tax deficiencies in additional paid-in capital
(“APIC”). Instead, they will record all excess tax
benefits and tax deficiencies as income tax expense or benefit in
the income statement and the APIC pools will be eliminated. In
addition, ASU No. 2016-09 eliminates the requirement that excess
tax benefits be realized before companies can recognize them. ASU
No. 2016-09 also requires companies to present excess tax benefits
as an operating activity on the statement of cash flows rather than
as a financing activity. Furthermore, ASU No. 2016-09 will increase
the amount an employer can withhold to cover income taxes on awards
and still qualify for the exception to liability classification for
shares used to satisfy the employer’s statutory income tax
withholding obligation. An employer with a statutory income tax
withholding obligation will now be allowed to withhold shares with
a fair value up to the amount of taxes owed using the maximum
statutory tax rate in the employee’s applicable
jurisdiction(s). ASU No. 2016-09 requires a company to classify the
cash paid to a tax authority when shares are withheld to satisfy
its statutory income tax withholding obligation as a financing
activity on the statement of cash flows. Under current U.S. GAAP,
it was not specified how these cash flows should be classified. In
addition, companies will now have to elect whether to account for
forfeitures on share-based payments by (1) recognizing forfeitures
of awards as they occur or (2) estimating the number of awards
expected to be forfeited and adjusting the estimate when it is
likely to change, as is currently required. The amendments of this
ASU are effective for reporting periods beginning after December
15, 2016, with early adoption permitted but all of the guidance
must be adopted in the same period. The Company is currently
assessing the impact that ASU No. 2016-09 will have on its
condensed
consolidated
financial statements.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
In April 2016, the FASB issued ASU No.
2016-10,
Revenue from Contracts with
Customer
. The new guidance
is an update to ASC 606 and provides clarity on: identifying
performance obligations and licensing implementation. For public
companies, ASU No. 2016-10 is effective for annual
periods, including interim periods within those annual periods,
beginning after December 15, 2017. The Company is currently
evaluating the impact that ASU No. 2016-10 will have on its
condensed consolidated financial statements.
In January 2017, the FASB issued an ASU
2017-01,
Business Combinations (Topic
805) Clarifying the Definition of a Business
. The amendments in this Update is to clarify the
definition of a business with the objective of adding guidance to
assist entities with evaluating whether transactions should be
accounted for as acquisitions (or disposals) of assets or
businesses. The definition of a business affects many areas of
accounting including acquisitions, disposals, goodwill, and
consolidation. The guidance is effective for annual periods
beginning after December 15, 2017, including interim periods within
those periods. The Company adopted this guidance effective November
1, 2016.
3. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid
expenses and other current assets consist of the following (in
thousands):
|
|
|
Legal
retainer
|
$
150
|
$
-
|
Prepaid
insurance
|
50
|
22
|
Tax
receivable
|
-
|
18
|
Other
|
51
|
7
|
Total
prepaid expenses and other current assets
|
$
251
|
$
47
|
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
4. PROPERTY AND EQUIPMENT, NET
Property
and equipment, net, consist of the following (in
thousands):
|
|
|
Medical
equipment
|
$
1,429
|
$
-
|
Computers
and software
|
139
|
61
|
Furniture
and equipment
|
109
|
78
|
Total
property and equipment, gross
|
1,677
|
139
|
Accumulated
depreciation
|
(204
)
|
(121
)
|
Total
property and equipment, net
|
$
1,473
|
$
18
|
5. ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses consist of the following (in
thousands):
|
|
|
Accounts
payable-trade
|
$
402
|
$
130
|
Royalties,
fees and development
|
698
|
680
|
Medical
equipment purchase
|
631
|
-
|
Salaries
and other compensation
|
527
|
463
|
Other
accruals
|
10
|
11
|
Total
accounts payable and accrued expenses
|
$
2,268
|
$
1,284
|
Salaries
and other compensation include accrued payroll expense and employer
401K plan contributions.
6. STOCKHOLDERS’ EQUITY
Convertible
preferred stock as of January 31, 2017 consisted of the following
(in thousands, except share amounts):
|
|
Shares
Issued and Outstanding
|
|
Aggregate
Liquidation Preference
|
Common
Shares Issuable Upon Conversion
|
Series
A
|
8,830,000
|
5,924,307
|
$
1,448
|
$
4,029
|
987,385
|
Series
B
|
54,250
|
48,109
|
4,055
|
-
|
801,821
|
Series
C
|
26,000
|
24,615
|
1,920
|
-
|
410,250
|
Series
D
|
170,000
|
94,666
|
1,108
|
-
|
157,777
|
Other
authorized, unissued
|
919,750
|
-
|
-
|
-
|
-
|
Total
|
10,000,000
|
6,091,697
|
$
8,532
|
$
4,029
|
2,357,232
|
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Convertible
preferred stock as of October 31, 2016 consisted of the following
(in thousands, except share amounts):
|
|
Shares
Issued and Outstanding
|
|
Aggregate
Liquidation Preference
|
Common
Shares Issuable Upon Conversion
|
Series
A
|
8,830,000
|
7,138,158
|
$
1,745
|
$
4,854
|
1,189,693
|
Series
B
|
54,250
|
54,201
|
4,569
|
-
|
903,362
|
Series
C
|
26,000
|
25,763
|
2,010
|
-
|
429,392
|
Series
D
|
170,000
|
156,332
|
1,829
|
-
|
260,553
|
Other
authorized, unissued
|
919,750
|
-
|
-
|
-
|
-
|
Total
|
10,000,000
|
7,374,454
|
$
10,153
|
$
4,854
|
2,783,000
|
Series A Preferred Shares
The
Series A Preferred Shares are convertible into shares of common
stock based on a conversion calculation equal to the stated value
of such Series A Preferred Share, plus all accrued and unpaid
dividends, if any, on such Series A Preferred Share, as of such
date of determination, divided by the conversion price. The stated
value of each Preferred Share is $0.68 and the initial conversion
price is $4.08 per share, each subject to adjustment for stock
splits, stock dividends, recapitalizations, combinations,
subdivisions or other similar events. In addition, in the event the
Company issues or sells, or is deemed to issue or sell, shares of
its common stock at a per share price that is less than the
conversion price then in effect, the conversion price shall be
reduced to such lower price, subject to certain exceptions.
Pursuant to the Certificate of Designations, Preferences and Rights
of the 0% Series A Convertible Preferred Stock of PolarityTE, Inc.,
the Company is prohibited from incurring debt or liens, or entering
into new financing transactions without the consent of the lead
investor (as defined in the December Subscription Agreements) as
long as any of the Series A Preferred Shares are outstanding. The
Series A Preferred Shares bear no dividends.
The
holders of Series A Preferred Shares shall vote together with the
holders of common stock on all matters on an as if converted basis,
subject to certain conversion and ownership limitations, and shall
not vote as a separate class. Notwithstanding the foregoing, the
conversion price for purposes of calculating voting power shall in
no event be lower than $3.54 per share. At no time may all or a
portion of the Series A Preferred Shares be converted if the number
of shares of common stock to be issued pursuant to such conversion
would exceed, when aggregated with all other shares of common stock
owned by the holder at such time, the number of shares of common
stock which would result in such Holder beneficially owning (as
determined in accordance with Section 13(d) of the 1934 Act and the
rules thereunder) more than 4.99% of all of the common stock
outstanding at such time; provided, however, that the holder may
waive the 4.99% limitation at which time he may not own
beneficially own more than 9.99% of all the common stock
outstanding at such time.
The
Series A Preferred Shares do not represent an unconditional
obligation to be settled in a variable number of shares of common
stock, are not redeemable and do not contain fixed or indexed
conversion provisions similar to debt instruments. Accordingly, the
Series A Preferred Shares are considered equity hosts and recorded
in stockholders’ equity.
The
Company entered into separate Registration Rights Agreements with
each Series A Preferred Shares Investor, (as amended on January 30,
2015 and March 31, 2015, the “December Registration Rights
Agreement”). The Company agreed to use its best efforts to
file by March 31, 2015 a registration statement covering the resale
of the shares of common stock issuable upon exercise or conversion
of the Series A Preferred Shares and to maintain its effectiveness
until all such securities have been sold or may be sold without
restriction under Rule 144 of the Securities Act. In the event the
Company fails to satisfy its obligations under the December
Registration Rights Agreements, the Company is required to pay to
the Investors on a monthly basis an amount equal to 1% of the
investors’ investment, up to a maximum of 12%. On March 31,
2015, the Company and the required holders of Series A Preferred
Shares amended the registration rights agreement to extend the
filing deadline for the registration statement to June 30,
2015.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Series B Preferred
Shares
The
Series B Preferred Shares are convertible into shares of common
stock based on a conversion calculation equal to the stated value
of such Series B Preferred Shares, plus all accrued and unpaid
dividends, if any, on such Series B Preferred Shares, as of such
date of determination, divided by the conversion price. The stated
value of each Preferred Share is $140.00 and the initial conversion
price is $8.40 per share, each subject to adjustment for stock
splits, stock dividends, recapitalizations, combinations,
subdivisions or other similar events. The Company is prohibited
from effecting a conversion of the Series B Preferred Shares to the
extent that, as a result of such conversion, such holder would
beneficially own more than 4.99% of the number of shares of common
stock outstanding immediately after giving effect to the issuance
of shares of common stock upon conversion of the Series B Preferred
Shares, which beneficial ownership limitation may be increased by
the holder up to, but not exceeding, 9.99%. Subject to
such beneficial ownership limitations, each holder is entitled to
vote on all matters submitted to stockholders of the Company on an
as converted basis, based on a conversion price of $8.40 per
shares. The Series B Preferred Shares rank junior to the
Series A Preferred Shares and bear no dividends. All of the
convertible preferred shares do not represent an unconditional
obligation to be settled in a variable number of shares, are not
redeemable and do not contain fixed or indexed conversion
provisions similar to debt instruments. Accordingly, the
convertible preferred shares are considered equity hosts and
recorded in stockholders’ equity.
Series C Preferred Shares
The
Series C Preferred Shares are convertible into shares of common
stock based on a conversion calculation equal to the stated value
of such Series C Preferred Shares, plus all accrued and unpaid
dividends, if any, on such Series C Preferred Shares, as of such
date of determination, divided by the conversion
price. The stated value of each Series C Preferred Share
is $120.00 per share, and the initial conversion price is $7.20 per
share, each subject to adjustment for stock splits, stock
dividends, recapitalizations, combinations, subdivisions or other
similar events. In addition, in the event the Company
issues or sells, or is deemed to issue or sell, shares of common
stock at a per share price that is less than the conversion price
then in effect, the conversion price shall be reduced to such lower
price, subject to certain exceptions and provided that the
conversion price may not be reduced to less than $5.16, unless and
until such time as the Company obtains shareholder approval to
allow for a lower conversion price. The Company is
prohibited from effecting a conversion of the Series C Preferred
Shares to the extent that, as a result of such conversion, such May
Investor would beneficially own more than 4.99% of the number of
shares of common stock outstanding immediately after giving effect
to the issuance of shares of common stock upon conversion of the
Series C Preferred Shares, which beneficial ownership limitation
may be increased by the holder up to, but not exceeding,
9.99%. Subject to the beneficial ownership limitations
discussed previously, each holder is entitled to vote on all
matters submitted to stockholders of the Company, and shall have
the number of votes equal to the number of shares of common stock
issuable upon conversion of such holder’s Series C Preferred
Shares, based on a conversion price of $7.80 per
share. The Series C Preferred Shares bear no dividends
and shall rank junior to the Company’s Series A Preferred
Shares but senior to the Company’s Series B Preferred
Shares.
In
connection with the sale of the Series C Preferred Shares, the
Company also entered into separate registration rights agreements
(the “May Registration Rights Agreement”) with each
Investor. The Company agreed to use its best efforts to file a
registration statement to register the Shares and the common stock
issuable upon the conversion of the Series C Preferred Shares,
within thirty days following the Closing Date, to cause such
registration statement to be declared effective within ninety days
of the filing day and to maintain the effectiveness of the
registration statement until all of such shares of common stock
have been sold or are otherwise able to be sold pursuant to Rule
144 without restriction. In the event the Company fails
to satisfy its obligations under the Registration Rights Agreement,
the Company is obligated to pay to the Investors on a monthly
basis, an amount equal to 1% of the Investor’s investment, up
to a maximum of 12%. Effective as of the original filing deadline
of the registration statement, the Company obtained the requisite
approval from the Investors for the waiver of its obligations under
the May Registration Rights Agreement.
The Company evaluated the guidance ASC
480-10
Distinguishing Liabilities
from Equity and
ASC
815-40
Contracts in an Entity’s
Own Equity
to determine the
appropriate classification of the instruments. The Series C
Preferred Shares do not represent an unconditional obligation to be
settled in a variable number of shares of common stock, are not
redeemable and do not contain fixed or indexed conversion
provisions similar to debt instruments. Accordingly, the Series C
Preferred Shares are considered equity hosts and recorded in
stockholders’
equity.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Series D Preferred Shares
The
Preferred D Shares are convertible into shares of common stock
based on a conversion calculation equal to the stated value of such
Preferred D Shares, plus all accrued and unpaid dividends, if any,
on such Preferred D Share, as of such date of determination,
divided by the conversion price. The stated value Preferred D
Shares is $1,000 per share and the initial conversion price is $600
per share, each subject to adjustment for stock splits, stock
dividends, recapitalizations, combinations, subdivisions or other
similar events. The Company is prohibited from effecting a
conversion of the Preferred D Shares to the extent that, as a
result of such conversion, such investor would beneficially own
more than 4.99% of the number of shares of Common Stock outstanding
immediately after giving effect to the issuance of shares of Common
Stock upon conversion of the Preferred D Shares. Upon 61 days
written notice, the beneficial ownership limitation may be
increased by the holder up to, but not exceeding, 9.99%. Except as
otherwise required by law, holders of Series D Preferred Shares
shall not have any voting rights. Pursuant to the Certificate of
Designations, Preferences and Rights of the 0% Series D Convertible
Preferred Stock, the Preferred D Shares bear no interest and shall
rank senior to the Company’s other classes of capital
stock.
April 2016 Registered Common Stock and Warrant
Offering
On
April 13, 2016, the Company entered into a Securities Purchase
Agreement with certain institutional investors providing for the
issuance and sale by the Company of 250,000 shares of the
Company’s common stock, par value $0.001 per share at an
offering price of $6.00 per share, for net proceeds of $1.4
million after deducting placement agent fees and expenses. In
addition, the Company sold to purchasers of common stock in this
offering, warrants to purchase 187,500 shares of its common stock.
The common shares and the Warrant Shares were offered by the
Company pursuant to an effective shelf registration statement on
Form S-3, which was initially filed with the Securities and
Exchange Commission on October 22, 2015 and declared effective on
December 7, 2015. The closing of the offering occurred on April 19,
2016.
Each
Warrant is immediately exercisable for two years, but not
thereafter, at an exercise price of $6.90 per share. Subject to
limited exceptions, a holder of warrants will not have the right to
exercise any portion of its warrants if the holder, together with
its affiliates, would beneficially own in excess of 4.99% of the
number of shares of our common stock outstanding immediately after
giving effect to such exercise. The exercise price and
number of warrants are subject to adjustment in the event of
any stock dividends and splits, reverse stock split, stock
dividend, recapitalization, reorganization or similar transaction.
The Warrants were classified as liabilities and measured at fair
value, with changes in fair value recognized in the Condensed
Consolidated Statements of Operations in other expenses (income).
The initial recognition of the Warrants resulted in an allocation
of the net proceeds from the offering to a warrant liability of
approximately $318,000, with the remainder being attributable to
the common stock sold in the offering.
Preferred Share Conversion Activity
During
the quarter ended January 31, 2017, 1,213,851 shares of Convertible
Preferred Stock Series A, 6,092 shares of Convertible Preferred
Stock Series B, 1,148 shares of Convertible Preferred Stock Series
C and 61,666 shares of Convertible Preferred Stock Series D were
converted into 425,771 shares of common stock.
During
the quarter ended January 31, 2016, 529,903 shares of Convertible
Preferred Stock Series A and 3,667 shares of Convertible Preferred
Stock Series D were converted into 566,573 shares of common
stock.
Common Stock
On
January 4, 2016, the Company declared a special cash dividend of an
aggregate of $10.0 million to holders of record on January 14, 2016
of its outstanding shares of: (i) common stock (ii) Series A
Convertible Preferred Stock; (iii) Series B Convertible Preferred
Stock; (iv) Series C Convertible Preferred Stock and (v) Series D
Convertible Preferred Stock. The holders of record of
the Company’s outstanding preferred stock participated in the
dividend on an “as converted” basis. Approximately $6.0
million of the special cash dividend relates to preferred stock
shares.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
On
January 6, 2016, certain employees exercised their options at $4.08
in exchange for the Company’s common stock for an aggregated
amount of 31,657 shares.
On
December 16, 2016, the Company sold an aggregate of 759,333 shares
of its common stock to certain accredited investors pursuant to
separate subscription agreements at a price of $3.00 per share for
gross proceeds of $2.3 million.
On
January 18, 2017, the Company entered into separate exchange
agreements (each an “Exchange Agreement”) with certain
accredited investors (the “Investors”) who purchased
warrants to purchase shares of the Company’s common stock
(the “Warrants”) pursuant to the prospectus dated April
13, 2016. In 2016, the Company issued 250,000 shares of the
Company’s common stock and Warrants to purchase 187,500
shares of common stock (taking into account the reverse split of
the Company’s common stock on a 1 for 6 basis effective with
The NASDAQ Stock Market LLC on August 1, 2016). The common stock
and Warrants were offered by the Company pursuant to an effective
shelf registration statement. Under the terms of the Exchange
Agreement, each Investor exchanged each Warrant it purchased in the
Offering for 0.3 shares of common stock. Accordingly, the Company
issued an aggregate of 56,250 shares of common stock in exchange
for the return and cancellation of 187,500 Warrants.
7. FAIR VALUE MEASUREMENTS
In
accordance with ASC 820, Fair Value Measurements, 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.
|
In
connection with the April 19, 2016 common stock offering, the
Company issued warrants to purchase an aggregate of 187,500 shares
of common stock. These warrants are exercisable at $6.90
per share and expire on April 19, 2018. These warrants were
analyzed and it was determined that they require liability
treatment. Under ASC 815, registered common stock warrants that
require the issuance of registered shares upon exercise and do not
expressly preclude an implied right to cash settlement are
accounted for as derivative liabilities. The Company
classifies these derivative warrant liabilities on the condensed
consolidated balance sheet as a current liability.
The
fair value of these warrants at January 18, 2017 and October 31,
2016 was determined to be approximately $78,000 and $70,000,
respectively, as calculated using Black-Scholes with the following
assumptions: (1) stock price of $3.62 and $3.58, respectively; (2)
a risk-free rate of 0.97% and 0.75%, respectively; and (3) an
expected volatility of 68% and 61%, respectively.
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. At January 31, 2017, there was no warrant
liability balance.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
The
following table sets forth the changes in the estimated fair value
for our Level 3 classified derivative warrant liability (in
thousands):
|
|
Fair
value - October 31, 2016
|
$
70
|
Exchanged
- January 18, 2017 (see Note 6)
|
(78
)
|
Change
in fair value
|
8
|
Fair
value - January 31, 2017
|
$
-
|
8. STOCK BASED COMPENSATION ARRANGEMENTS
Stock-based
compensation expense during the three months ended January 31, 2017
and 2016 amounted to approximately $4.4 million and $547,000
respectively. Stock-based compensation expense is recorded in
general and administrative expenses in the accompanying
consolidated statements of operations.
A
summary of the Company’s stock option activity in the three
months ended January 31, 2017 is presented below:
|
|
Weighted-Average
Exercise Price
|
Outstanding
- October 31, 2016
|
382,020
|
$
5.73
|
Granted
|
2,540,000
|
$
3.15
|
Outstanding
- January 31, 2017
|
2,922,020
|
$
3.49
|
Options
exercisable - January 31, 2017
|
562,020
|
$
4.90
|
Weighted-average
fair value of options granted during the period
|
|
$
2.11
|
The
fair value of each option grant is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
weighted-average assumptions for the three months ended January 31,
2017:
Risk
free annual interest rate
|
|
1.78-2.28
%
|
Expected
volatility
|
|
71.65-82.86
%
|
Expected
life
|
|
5.04-6.00
|
Assumed
dividends
|
|
None
|
The
value of stock option grants is amortized over the vesting period
of, generally, one to three years. As of January 31, 2017,
there was approximately $4.0 million of unrecognized compensation
cost related to non-vested stock option awards, which is expected
to be recognized over a remaining weighted-average vesting period
of 2.0 years.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
A
summary of the Company’s restricted stock activity in the
three months ended January 31, 2017 is presented
below:
|
|
Weighted-Average
Grant-Date
Fair Value
|
Unvested
- October 31, 2016
|
274,829
|
$
6.00
|
Granted
|
733,000
|
$
3.16
|
Vested
|
(367,645
)
|
$
4.43
|
Unvested
- January 31, 2017
|
640,184
|
$
3.65
|
During
the three months ended January 31, 2017, the Company granted
733,000 restricted shares to employees and non-employees. 283,000
were issued to non-employees during the quarter, with the remaining
450,000 expected to be issue at a future date.
The
weighted-average fair value of restricted shares granted during the
three months ended January 31, 2017 was $3.16. The total fair value
of restricted stock granted during the three months ended
January 31, 2017 was approximately $2.3 million.
The
value of restricted stock grants are measured based on their fair
value on the date of grant and amortized over the vesting period
of, generally, six months to three years. As of January 31,
2017, there was approximately $539,000 of unrecognized compensation
cost related to unvested restricted stock awards, which is expected
to be recognized over a remaining weighted-average vesting period
of 0.3 years.
9. INCOME TAXES
Due
to the Company’s history of losses and uncertainty of future
taxable income, a valuation allowance sufficient to fully offset
net operating losses and other deferred tax assets has been
established. The valuation allowance will be maintained until
sufficient positive evidence exists to support a conclusion that a
valuation allowance is not necessary. The Company’s effective
tax rate for the three months ended January 31, 2017 and 2016
differed from the expected U.S. federal statutory rate primarily
due to the change in the valuation allowance. Full conversion of
the outstanding shares of Preferred Stock will likely result in
limitations on the utilization of the Company’s net operating
loss carryforwards under IRS section 382.
10. LOSS PER SHARE
Shares
of common stock issuable under convertible preferred stock,
warrants and options and shares subject to restricted stock grants
were not included in the calculation of diluted earnings per common
share for the three months ended January 31, 2017 and 2016, as the
effect of their inclusion would be anti-dilutive.
The
table below provides total potential shares outstanding, including
those that are anti-dilutive, on January 31, 2017 and
2016:
|
|
|
|
|
Shares
issuable upon conversion of preferred stock
|
2,357,232
|
2,981,688
|
Shares
issuable upon exercise of stock options
|
2,922,020
|
53,618
|
Non-vested
shares under restricted stock grants
|
640,184
|
193,680
|
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
11. COMMITMENTS AND CONTINGENCIES
Contingencies
On
February 26, 2015, a complaint for patent infringement was filed in
the United States District Court for the Eastern District of Texas
by Richard Baker, an individual residing in Australia, against
Microsoft, Nintendo, the Company and a number of other game
publisher defendants. The complaint alleges that the
Company’s Zumba Fitness Kinect game infringed
plaintiff’s patents in motion tracking technology. The
plaintiff is representing himself pro se in the litigation and is
seeking monetary damages in the amount of $1.3 million. The
Company, in conjunction with Microsoft, is defending itself against
the claim and has certain third party indemnity rights from
developers for costs incurred in the litigation. In August 2015,
the defendants jointly moved to transfer the case to the Western
District of Washington. On May 17, 2016, the Washington Court
issued a scheduling order that provides that defendants leave to
jointly file an early motion for summary judgement in June
2016. On June 17, 2016, the defendants jointly filed a motion
for summary judgment that stated that none of the defendants,
including the Company, infringed upon the asserted patent. On
July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016,
the defendants jointly filed a reply. The briefing on the
motion is now closed. The Court has not yet issued a decision
or indicated if or when there will be oral argument on the
motion.
Intelligent
Verification Systems, LLC ("IVS"), filed a patent infringement
complaint on September 20, 2012, in the United States District
Court for the Eastern District against the Company and Microsoft
Corporation. In March 2015, the court issued an order excluding the
evidence proffered by IVS in support of its alleged damages,
including the opinion of its damages expert. IVS appealed
that decision. On January 19, 2016, the Federal Circuit denied
IVS’ appeal and affirmed the district court’s
orders that excluded the plaintiff’s damages expert and
dismissed the case.
In
addition to the item above, the Company at times may be a party to
claims and suits in the ordinary course of business. We record a
liability when it is both probable that a liability has been
incurred and the amount of the loss or range of loss can be
reasonably estimated. The Company has not recorded a liability with
respect to the matter above. While the Company believes that it has
valid defenses with respect to the legal matter pending and intends
to vigorously defend the matter above, given the uncertainty
surrounding litigation and our inability to assess the likelihood
of a favorable or unfavorable outcome, it is possible that the
resolution of the matter could have a material adverse effect on
our consolidated financial position, cash flows or results of
operations.
Commitments
The
Company leases office space in South Plainfield, New Jersey at a
cost of approximately $1,613 per month under a lease agreement that
expires on March 31, 2017.
The
Company also leases space in Salt Lake City, Utah at a cost of
approximately $12,439 per month under a lease agreement that
expires in December 2017.
The
Company has entered into employment agreements with key executives
that contain severance terms and change of control
provisions.
12. RELATED PARTIES
In
January 2015, the Company entered into an agreement with Equity
Stock Transfer for transfer agent services. A Board member of the
Company is a co-founder and chief executive officer of Equity Stock
Transfer. Fees under the agreement were approximately $2,000 and
$0, in the three months ended January 31, 2017 and 2016,
respectively.
13. SEGMENT REPORTING
The
Company's operations involve dissimilar products which are managed
separately. Accordingly, it operates in two segments: 1) video
games and 2) regenerative medicine.
POLARITYTE, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Certain
information concerning our segments for the three months ended
January 31, 2017 and 2016 and as of January 31, 2017 and 2016 is
presented in the following table (in thousands):
|
|
|
Revenues:
|
|
|
Reportable
Segments:
|
|
|
Video
Games
|
$
156
|
$
591
|
Regenerative
Medicine
|
--
|
--
|
Total
consolidated revenues
|
$
156
|
$
591
|
|
|
|
Net
loss:
|
|
|
Reportable
Segments:
|
|
|
Video
Games
|
$
(4,996
)
|
$
(6,649
)
|
Regenerative
Medicine
|
(695
)
|
--
|
Total
net loss
|
$
(5,661
)
|
$
(6,649
)
|
|
|
|
Identifiable
assets employed:
|
|
|
Reportable
Segments:
|
|
|
Video
Games
|
$
7,283
|
$
6,751
|
Regenerative
Medicine
|
1,494
|
--
|
Total
assets
|
$
8,777
|
$
6,751
|
14. SUBSEQUENT EVENTS
Effective
February 8, 2017, Michael Brauser, a Class II director and Barry
Honig, a Class III director resigned as members of PolarityTE,
Inc.’s Board of Directors (the “Board”). Mr.
Brauser also resigned as a member of each of the Board’s
Audit, Compensation and Nominating and Corporate Governance
Committees. Each director resignation was not the result from any
disagreement with the Company, any matter related to the
Company’s operations, policies or practices, the
Company’s management or the Board.
On
February 8, 2017, the Board appointed Steve Gorlin as a Class II
director with a term expiring in 2019 and Dr. Jon Mogford as a
Class III director with a term expiring in 2017 to fill vacancies
created upon the resignations of Messrs. Brauser and Honig. In
addition, Mr. Gorlin was appointed as a member of each of the
Board’s Audit, Compensation and Nominating and Corporate
Governance Committees. Each of Mr. Gorlin and Dr. Mogford are
deemed an “independent” director as such term is
defined by the rules of The NASDAQ Stock Market LLC. There are no
family relationships between either of Mr. Gorlin and Dr. Mogford
and any of our other officers and directors. Mr. Gorlin and Dr.
Mogford were each granted (i) an option to purchase up to 50,000
shares of the Company’s common stock at an exercise price
equal to $4.72 per share (the “Options”) which Options
will vest in 24 equal monthly installments commencing on the one
month anniversary of the grant date and (ii) a restricted stock
award of 50,000 shares of common stock that will vest in 24 equal
monthly installments commencing on the one month anniversary of the
grant date (the “RSUs”). The Options and the RSUs were
granted pursuant to the Company’s 2017 Equity Incentive Plan
(the “2017 Plan”). The 2017 Plan, the vesting and the
exercise of the Options and the vesting of the RSUs are subject to
stockholder approval.
On
March 10, 2017, stockholders approved the asset acquisition of
PolarityTE, Inc., the 2017 Plan, the vesting and the exercise of
the Options and the vesting of the RSUs.