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PTE:Segments
If securities are registered pursuant to Section
12(b) of the Act, indicate by check mark whether the financial statements of the registrant included in the filing reflect the correction
of an error to previously issued financial statements.
Indicate by check mark whether any of those error
corrections are restatements that required a recovery analysis of incentive-based compensation received by any of the registrant’s
executive officers during the relevant recovery period pursuant to § 240.10D-1(b).
PART
I
Item
1. Business.
Overview
PolarityTE,
Inc., headquartered in Salt Lake City, Utah, is a biotechnology company developing regenerative tissue products and biomaterials. Our
first regenerative tissue product is SkinTE. On July 23, 2021, we submitted an investigational new drug application (“IND”)
for SkinTE to the U.S. Food and Drug Administration (the “FDA”) through our subsidiary, PolarityTE MD, Inc. (“PTE-MD”),
as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. FDA
approval of the IND was given in January 2022, which allowed us to commence the first of two pivotal studies needed to support a biologics
license application (“BLA”). Our first pivotal study under our IND is a multi-center, randomized controlled trial evaluating
SkinTE in the treatment of diabetic foot ulcers (“DFUs”) classified as Grade 2 in the Wagner classification system entitled
“Closure Obtained with Vascularized Epithelial Regeneration for DFUs with SkinTE,” or “COVER DFUs Trial.”
In
March 2022, we submitted to the FDA a request for a Regenerative Medicine Advanced Therapy (“RMAT”) designation for SkinTE
under our IND. Established under the 21st Century Cures Act, RMAT designation is a dedicated program designed to expedite the drug development
and review processes for promising regenerative medicine products, including human cellular and tissue-based therapies. A regenerative
medicine therapy is eligible for RMAT designation if it is intended to treat, modify, reverse, or cure a serious or life-threatening
disease or condition, and preliminary clinical evidence indicates that the drug or therapy has the potential to address unmet medical
needs for such disease or condition. RMAT designation provides the benefits of intensive FDA guidance on efficient drug development,
including the ability for early interactions with the FDA to discuss potential ways to support accelerated approval and satisfy post-approval
requirements, potential priority review of a BLA, and other opportunities to expedite development and review. In May 2022, we were advised
by the FDA that it concluded SkinTE meets the criteria for RMAT designation for the treatment of DFUs and venous leg ulcers (“VLUs”).
Since
the beginning of 2017, we have incurred substantial operating losses and our operations have been financed primarily by public equity
financings. The clinical trials for SkinTE and the regulatory process will likely result in an increase in our costs in the foreseeable
future, we expect we will continue to incur substantial operating losses as we pursue an IND and BLA, and we expect to seek financing
from external sources over the foreseeable future to fund our operations.
SkinTE
The
Importance of Skin
Skin
has several functions. It provides a barrier to water loss and pathogens, and protects against diverse forms of trauma, including
thermal, chemical, and ultraviolet radiation. Skin keeps us in touch with our environment through a host of nerve endings, regulates
body temperature, and enhances metabolic functions. Skin is an active immune organ functioning as a first line of defense against a wide
spectrum of common pathogens encountered on a regular basis. Biosynthesis of melanin in the skin reduces the harmful effects of ultraviolet
light. Skin is a ready source of vitamin D, which plays an important role in maintaining healthy levels of serum calcium and resorption
of bone.
The
clinical significance of skin is illustrated by the morbidity associated with chronic wounds, burns, and cutaneous defects. A 12-month
prospective observational study of diabetic foot ulcers first published in Diabetic medicine: a journal of the British Diabetic Association
in 2018 reported that out of a group of 299 patients, 17.4% had some sort of amputation of the foot and 6.0% of the 299 patients
underwent revascularization surgery. A report published on Medscape in June 2018 states that pressure injuries are listed as the direct
cause of death in 7-8% of all patients with paraplegia. And according to statistics collected by the National Burn Repository, the mortality
rate from 2008 to 2017 among burn patients treated at surveyed burn centers is approximately 3%. We believe that the regeneration of
full-thickness skin with all the processes and appendages that enable it to perform its vital functions is critical to long-term, positive
patient outcomes following serious skin injury.
Limitations
of Other Skin Treatment Therapies
Current
clinical standards and practice adhere to the concept that skin should be replaced with skin whenever possible in settings where patients
have suffered the loss of such tissue. Understanding this, medical professionals are left with a decision to attempt to temporize a wound
bed with an autograft (using the patient’s own skin in a skin graft), an allograft (using human skin from a donor), or a variety
of skin substitutes to provide a skin-like barrier while the margin of the wound heals through secondary intention and contraction. Historically,
harvest and placement of autologous full-thickness skin results in the best outcome within wound beds because it most closely resembles
the full-thickness skin that was lost. However, full-thickness harvest of skin also results in a full-thickness skin defect at the donor
site, which requires primary closure (skin edge approximation and suturing) so as not to leave a gaping wound behind. Because of this
absolute limit on how much autologous full-thickness donor skin can be harvested without leaving behind a non-closable wound, medical
professionals can only harvest small, elliptically shaped pieces of such skin from areas of redundancy, which is termed full-thickness
skin grafting (“FTSG”).
It
is because there remains only a finite supply of FTSG donor material and sites that medical professionals often rely on the harvest of
split-thickness skin grafts (“STSG”) for coverage of voids of the integument to get better coverage and more skin. STSGs,
however, do not represent the true anatomy or function of native skin because STSG harvest procedures commonly take the top 1/100th of
an inch of the patient’s own skin and therefore do not capture all the necessary cellular and tissue components and structures
required for the regeneration of normal skin. Because of the failure to harvest all the necessary skin structures and components from
the STSG donor site, the patient is left with an incomplete top layer of skin covering the initial defect (recipient site) and a remaining
bottom layer at the donor site. In this setting, both donor and recipient sites contain incomplete skin, which often results in dysfunctional,
painful scar tissues and lifelong morbidities.
Due
to the limits of STSG and FTSG and the type of procedures required for such harvests, the industry has continued to investigate skin
substitutes and skin alternatives that can be used in place of native skin. Among these alternatives or options are a cultured epithelial
autograft (a form of manipulated autograft), allograft (tissue grafts derived from a donor of the same species as the recipient but not
genetically identical), xenograft (a tissue graft or organ transplant from a donor of a different species from the recipient), and engineered
skin substitutes. To our knowledge, none of these substitutes have been able to regenerate the cutaneous appendages (e.g., hair follicle,
sweat gland, sebaceous glands, etc.), which are necessary for the development of full-thickness, normal skin.
Our
Solution - SkinTE
The
core technology of SkinTE is minimally polarized functional units (“MPFUs”). MPFUs are multi-cellular segments created from
a piece of the patient’s healthy skin. SkinTE allows the patient to regenerate full-thickness, three-dimensional skin (similar
to a FTSG) by contributing a much smaller skin sample, while reducing the scarring and morbidities associated with STSGs, and producing
results we believe to be superior to STSGs and synthetic skin substitutes. SkinTE can be utilized by a variety of health care providers
in an operating room, wound clinic, or doctor’s office. The process begins with the collection of a skin sample from the patient
and shipping the sample in a temperature-controlled shipping box to our FDA-regulated biomedical manufacturing facility. The harvested
skin is used to manufacture SkinTE, which is expeditiously returned for application to the patient’s wound. Processing of the skin
creates multi-cellular segments that are optimized for grafting, which retain the progenitor cells found throughout the skin, including
the hair follicles. The product is not cultured or expanded ex-vivo, and no enzymes, growth factors, or serum derivatives are utilized
during manufacturing. The final product, SkinTE, is delivered in a syringe and has the consistency of a paste. Following wound bed preparation,
SkinTE is spread evenly across the entire surface of the wound and engrafts within the wound in a similar manner to traditional skin
grafts. Once integrated with the wound bed, the product expands and regenerates full-thickness skin across the entire surface.
Given
our significant real-world experience with SkinTE in clinical settings for a variety of wounds and 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. Full-thickness DFUs that penetrate to deep structures
are best classified as University of Texas Grades 2 and 3, corresponding to Wagner Grades 2 through 4, and are at the highest risk for
progressing to amputation with very few treatment options and a paucity of high-level data related to current treatment options. Similarly,
Stage 3 pressure injuries involve the entire thickness of the skin and Stage 4 pressure injuries have exposed muscle, tendon, or bone.
Due to limited reliable solutions, these injuries affect a large number of people for extended periods of time. We believe that focusing
our efforts in these hard-to-treat wound types, where there are significant unmet needs, can deliver substantial positive impacts in
patients’ lives and value for the SkinTE franchise for several reasons.
|
● |
Although
these distinct wound types may occur in patients with different demographics and have different etiologies, they have common characteristics
including significant wound depth, significant wound volume, frequent presence of tunneling and undermining, and exposure of critical
structures. |
|
● |
Wounds
with these characteristics often require multiple treatment stages to fill volume and cover exposed structures before proceeding
to traditional skin grafts or more invasive reconstruction. There is a paucity of high-level data to guide the progression through
these treatment options. |
|
● |
In
our experience, wound care providers are focused on finding better treatments due to their unaddressed challenges and the seriousness
of their outcomes, where failure of treatments may result in both the acute occurrence and elevated lifetime risk of amputation,
long-term disability, and death. |
Clinically,
we believe SkinTE is highly differentiated from current treatment alternatives in these hard-to-treat wound types. In real-world experience
and data from preliminary studies conducted to date, we believe that SkinTE has covered exposed critical structures, completely filled
in wound depth including tunneling, and ultimately provided complete and durable wound closure with the regenerated tissue having many
of the important characteristics of native skin such as pliability, strength, sensation, ability to sweat, and hair growth. In contrast
to a multi-staged approach combining numerous treatments in an algorithm dictated by wound progression, SkinTE can be applied directly
into deep wounds with exposed structures, typically requires only a single application in the vast majority of cases and, unlike other
products in this space, may not require a skin graft to achieve final closure. In our experience, providers treating complex wounds are
most concerned with reliably covering deep structures, as this mitigates a substantial risk factor for the patient and converts the wound
to a lower grade that is more manageable. We believe that covering deep structures and filling wound volume with newly generated vascular
tissue is an important advantage of SkinTE and differentiates SkinTE from other treatments that have increased failure rates in these
hard-to-treat wound settings. Another valuable aspect of SkinTE clinically is that it is created from a relatively small skin harvest
that is well tolerated by the patient.
We
believe that patients with complex wounds face significant unmet needs, and that providers are motivated to better address them. If future
clinical trials conducted under our IND demonstrate outcomes similar to those observed in real-world experience and preliminary clinical
studies, we believe that SkinTE has the potential to shift practice patterns, accelerate adoption, and capture a significant portion
of these hard-to-treat wound markets.
Clinical
Trials
Under
the SkinTE IND
Our
IND for SkinTE was opened in January 2022. Our first pivotal study under the IND is the COVER DFUs Trial. We plan to enroll up to 100
subjects at up to 20 sites in the U.S. in the COVER DFUs Trial, which will compare treatment with SkinTE plus the standard-of-care to
the standard-of-care alone. The primary endpoint is the incidence of DFUs closed at 24 weeks. Secondary endpoints include percent area
reduction (“PAR”) at 4, 8, 12, 16, and 24 weeks, improved quality of life, and new onset of infection of the DFU being evaluated.
We have been enrolling subjects in the COVER DFUs Trial since the end of April 2022, and we expect the study will be fully enrolled sometime
in the first six months of 2024. Additionally, there is an interim analysis planned for the first 50 patients and we believe that data
will be available in late 2023 or early 2024.
As
a result of the RMAT designation received in May 2022, we were able to engage in an expedited dialogue with the FDA on the tasks that
are likely to be necessary to support a BLA submission for SkinTE as a treatment of DFUs. Based on that dialogue we plan to run a second
multi-center, randomized controlled trial under our current IND to support approval of a broad DFU indication for SkinTE in a BLA, and
we plan to engage in discussions with the FDA regarding the design and implementation of the second clinical trial. We believe this strategy
will be the fastest and least costly approach to achieving our first BLA submission for SkinTE, with DFUs representing the largest market
opportunity within the category of chronic cutaneous ulcers. We plan to further engage with the FDA to fully define our development plan
for other wound indications.
In
June 2021 we engaged a contract research organization (“CRO”) to provide services for the COVER DFUs Trial at a cost of approximately
$6.5 million consisting of $3.1 million of service fees and $3.4 million of estimated costs. In 2021 we prepaid $0.5 million, which will
be applied to payment of the final invoice under the work order. Over the approximately three-year term of the COVER DFUs Trial the service
provider will submit to us for payment monthly invoices for units of work stated in the work order that are completed and billable expenses
incurred.
Pre-IND
PolarityTE
conducted several clinical trials before it filed its IND for SkinTE, which were conducted on a post-marketing basis with SkinTE as a
361 HCT/P. These clinical trials include the following:
Burns
and Traumatic Wounds
We
initiated a head-to-head trial comparing SkinTE to the STSG, the clinical standard of care, in the first quarter of 2018. Eight patients
were enrolled in the trial and the primary endpoint for the trial was graft take. Data from the trial was published in the Journal
of Burn Care & Research in September 2020. Eight patients with deep-partial/full thickness burns had a portion of their wounds
treated with SkinTE and the remainder of their burn treated with split-thickness skin grafting. The SkinTE treated wounds had graft take
and achieved closure by their last follow-up with a single application. A single adverse event at a SkinTE harvest site secondary to
a dehiscence (technical error) occurred requiring secondary closure at the time of the patient’s definitive grafting procedure.
There were no other adverse events pertaining to the SkinTE applications in the trial.
Diabetic
Foot Ulcer (DFU) Trials
DFUs
are chronic wounds and represent one of the costliest, and medically significant, health related morbidities encountered during a patient’s
lifetime. The estimated annual U.S. payor burden of DFU ranges from $9.1 billion to $13.2 billion according to a 2014 article in Diabetes
Care, a publication of the American Diabetes Association. The outpatient management of DFUs represents the major contributing cost to
the health care system. Inadequate assessment and management with chronicity of treatment is one of the primary cost drivers and failures
of care.
SkinTE
was used to treat 10 patients (11 DFUs) in a pilot trial completed in June 2019, and first reported at the Symposium on Advanced Wound
Care Fall 2019. The following are the results as determined by independent review:
|
● |
10
of 11 (90.9%) DFUs healed within eight weeks of a single application of SkinTE |
|
● |
Median
time to closure was 25 days |
|
● |
DFU
sizes ranged from 1.0 to 21.7 cm2 |
|
● |
One
patient was removed from the study at week three due to adverse events not related to the study or SkinTE procedure |
|
● |
No
SkinTE-related adverse reactions were observed |
After
that trial, we conducted a multicenter, randomized controlled trial evaluating SkinTE plus standard of care (“SOC”) compared
to SOC alone in treatment of diabetic foot ulcers [NCT03881254] (the “DFU RCT”). In July 2021, we announced final data from
the DFU RCT. The size of the study was 100 patients who were evaluated across 13 sites, with 50 participants receiving SkinTE plus SOC
and 50 receiving SOC alone. The primary endpoint was percentage of ulcers closed at 12 weeks. A secondary endpoint was percent area reduction
(“PAR”) at 4, 6, 8, and 12 weeks.
The
trial met the primary endpoint of wound closure at 12 weeks and secondary endpoint of PAR assessed at 4, 6, 8, 10, and 12 weeks. Final
analysis of the DFU RCT shows the following:
|
● |
Primary
Endpoint: 70% (35/50) of participants receiving SkinTE plus SOC had wound closure at 12 weeks versus 34% (17/50) of participants
receiving SOC alone (p=0.00032) |
|
● |
Secondary
Endpoint: Percent Area Reduction (PAR) assessed at 4, 6, 8, 10, and 12 weeks was significantly greater for the SkinTE plus SOC treatment
group vs SOC alone (p=0.009) |
|
● |
90%
(45/50) of SkinTE plus SOC treated participants received a single application of SkinTE |
|
● |
Treatment
with SkinTE plus SOC increased the odds of wound closure by 5.37 times versus SOC alone (p=0.001) |
Mean
(SD) values for PAR at weeks 4, 6, 8, 10, and 12 by treatment group were:
Week | |
SkinTE | | |
SOC | |
4 | |
| 74.0 (27.63) | | |
| 22.0 (149.92) | |
6 | |
| 82.9 (26.35) | | |
| 21.2 (160.60) | |
8 | |
| 80.7 (35.16) | | |
| 26.8 (147.42) | |
10 | |
| 79.7 (54.07) | | |
| 45.6 (114.18) | |
12 | |
| 84.3 (39.46) | | |
| 50.5 (92.24) | |
Venous
Leg Ulcer (“VLU”) Trials
VLUs
are a type of chronic wound and constitute a significant burden on the worldwide health care system and are often refractory to treatment.
Up to one-third of treated patients experience four or more episodes of recurrence. Delivering all the elements of native skin can potentially
reduce the recurrence rate.
SkinTE
was used to treat 10 patients in a pilot trial completed in September 2019, and first reported at the Symposium on Advanced Wound Care
Fall 2019, where PolarityTE received recognition as Best Abstract. The following are the results as determined by independent review:
|
● |
8
of 10 (80%) VLUs closed within 12 weeks of a single application of SkinTE; |
|
● |
Of
the two VLUs not deemed closed within 12 weeks: one VLU was the largest in the study (12.2cm2), and closed within 13.5 weeks post
a single application of SkinTE; one VLU was previously deemed closed, and reopened prior to the two-week durability visit as a result
of external factors unrelated to the SkinTE procedure; |
|
● |
Median
time to closure was 21 days; and |
|
● |
No
SkinTE-related adverse reactions were observed |
We
started a multicenter, randomized controlled trial evaluating SkinTE versus standard of care in treatment of VLU [NCT03881267] (“the
“VLU-RCT”), but decided in the first quarter of 2021 to suspend that trial after 29 patients were enrolled because we believed
that our resources would be better used in future clinical trials conducted under an IND that can be used in our eventual planned BLA
submission. In February 2022, we announced final data from the VLU RCT. The 29 patients who were evaluated across 10 sites, with 14 participants
receiving SkinTE plus SOC and 15 receiving SOC alone. The primary endpoint was percentage of ulcers closed at 12 weeks. A secondary endpoint
was PAR at 4, 6, 8, and 12 weeks.
The
trial met the primary endpoint of wound closure at 12 weeks and secondary endpoint of PAR assessed at 4, 6, 8, 10, and 12 weeks. Final
analysis of the VLU RCT shows the following:
|
● |
Primary
Endpoint: 71% (10/14) of participants receiving SkinTE plus SOC had wound closure at 12 weeks versus 33% (5/15) of participants receiving
SOC alone (p=0.046) |
|
● |
Secondary
Endpoint: PAR assessed at 4, 6, 8, 10, and 12 weeks was significantly greater for the SkinTE plus SOC treatment group vs SOC alone
(p=0.000035) |
|
● |
93%
(13/14) of SkinTE plus SOC treated participants received a single application of SkinTE |
Mean
(SD) values for PAR at weeks 4, 6, 8, 10, and 12 by treatment group were:
Week |
|
SkinTE |
|
SOC |
4 |
|
|
61.7
(53.13) |
|
|
|
19.7
(77.03) |
|
6 |
|
|
70.1
(52.43) |
|
|
|
21.4
(96.36) |
|
8 |
|
|
79.1
(51.97) |
|
|
|
33.5
(89.10) |
|
10 |
|
|
82.0
(50.81) |
|
|
|
42.8
(68.60) |
|
12 |
|
|
82.6
(50.52) |
|
|
|
65.4
(43.98) |
|
Market
Opportunity
The
primary markets for SkinTE are wounds from traumatic injury, chronic wounds (including DFUs, VLUs, and pressure ulcers), burn wounds,
and acute wounds, such as traumatic wounds, and wounds from surgical procedures. The following is some information on potential markets
for SkinTE.
|
● |
We
believe SkinTE is suitable for treating a number of acute wounds. An analysis of the Medicare 5% dataset for 2014 of all wound categories,
including acute and chronic wounds, showed that about 8.2 million Medicare beneficiaries had at least one type of wound or related
infection, Medicare cost projections for all wounds ranged from $28.1 billion to $96.8 billion, surgical wounds and diabetic ulcers
were the most expensive to treat, and outpatient costs ($9.9–$35.8 billion) were higher than inpatient costs ($5.0–$24.3
billion). |
|
● |
The
National Diabetes Statistics Report published in 2020 by the Centers for Disease Control stated that there are approximately 34.2
million diabetes sufferers in the United States. A 2005 article estimated the number of DFUs at between 1.2 and 3.0 million, and
a 2020 article estimates the prevalence of unhealed DFUs after 12 weeks of conventional treatment at approximately 41%. The estimated
annual US payor burden of DFU ranges from $9.0 billion to $13.0 billion according to a 2014 article in Diabetes Care. |
|
● |
A
2010 article reports the prevalence of venous ulcers at approximately 600,000 annually, and a subsequent 2014 article reports that
on average between 33% and 66% of these ulcers persist for six weeks and are, therefore, referred to as chronic, resulting in approximately
200,000 to 360,000 patients per year that we believe would be potential candidates for treatment with SkinTE. |
|
● |
Pressure
Ulcers are common in hospital systems, increase patient morbidity and mortality, and are costly for patients and the healthcare system.
In 2012 the Agency for Healthcare Research & Quality (AHRQ) reported that there are more than 2.5 million individuals that develop
pressure ulcers annually, the aggregate annual cost in the U.S. of individual care for pressure ulcers ranges between $9.1 billion
and $11.6 billion, and the cost of individual patient care ranges from $20,900 to $151,700. |
|
● |
The
American Burn Association estimates that every year over 450,000 serious burn injuries occur in the United States that require medical
treatment and that approximately 40,000 of these result in hospitalization. |
Potential
Product Enhancements or Additions
SkinTE
Point-of-Care Device
Our
SkinTE point-of-care device is intended to permit the processing and deployment of SkinTE immediately following the initial harvest at
the point-of-care. This device is in the development stage.
SkinTE
Cryo
SkinTE
Cryo allows PolarityTE to offer multiple deployments from one original harvest through a cryopreservation process. Using one harvest
for multiple deployments may improve patient treatment when a patient is susceptible to multiple chronic wounds, the provider suspects
a patient might require a second deployment of SkinTE due to past non-compliance with rehab protocols, or the provider elects to use
a staged deployment on a patient with a large wound due to wound location or other therapeutic circumstances. SkinTE Cryo is in the development
stage and is a long-term development project.
Other
Tissue Regeneration Products
We
believe our innovative technologies may be platforms for developing therapies that address a variety of indications, including bone,
cartilage, muscle, blood vessels, and neural elements, as well as solid and hollow organ composite tissue systems.
For
the foreseeable future we intend to apply our business and financial resources to the SkinTE IND and BLA and development work on SkinTE
POC, and we have at this time put on hold further work on other product development.
Manufacturing
PolarityTE
maintains at its facility in Salt Lake City, Utah, manufacturing processes and quality systems that allow it to receive a skin specimen,
qualify the incoming tissue, process and manufacture the SkinTE tissue product, and perform outgoing quality control and quality assurance
work prior to shipping. PolarityTE validated its manufacturing process as being aseptic. All SkinTE is manufactured within an ISO 5 certified
isolator located within an ISO 7 certified cleanroom. PolarityTE’s processes are designed and validated to prevent the spread of
communicable disease, and to prevent cross-contamination between samples, and its quality systems comply with current Good Tissue Practices
(“cGTP”) under 21 C.F.R. Part 1271.
PolarityTE
is modifying its operational and quality management systems to comply with cGMP under requirements of the Federal Food, Drug and Cosmetic
Act, as well as under 21 C.F.R. Parts 210 and 211, and other applicable regulations, which are in addition to cGTP referenced above.
Suppliers
As
part of PolarityTE’s strategy of ensuring timely delivery of its products, it has avoided relying on any third-party supplier as
a sole source vendor for any element of its production process. PolarityTE has identified alternate suppliers and, where appropriate,
supply alternatives for any sourcing need.
Intellectual
Property
As
we advance our technologies, product, and pipeline developments, we seek to apply a multilayered approach for protecting intellectual
property relating to our innovation with patents (utility and design), copyrights, trademarks, as well as know-how and trade secret protection.
We are actively seeking U.S. and foreign patent protection in selected jurisdictions for our MPFU technology. We have a number of patents
issued and pending applications allowed in the United States and abroad related to our MPFU technology, including U.S. Patent No. 10,926,001
issued on February 23, 2021; U.S. Patent No. 11,000,629 issued on May 11, 2021; U.S. Patent No. 11,266,765 issued on March 8, 2022; U.S.
Patent No. 11,338,060 issued on May 24, 2022, and U.S. Patent Application No. 17/723,748 filed April 19, 2022. Each of U.S. Patent Nos.
10,926,001; 11,000,629; 11,266,765; and 11,338,060 have an estimated expiration date of November 30, 2035.
Patent
terms extend for varying periods of time according to the date of patent filing or grant and the pertinent law in the various countries
where patent protection is obtained. The actual protection afforded by a patent, which can vary from country to country, depends upon
the type of patent, the scope of its coverage, and the availability of legal remedies in the country. Further, patent term extension
may be available in certain countries to compensate for a regulatory delay in approval of certain products.
The
U.S. healthcare legislation enacted in 2010 created an approval pathway for biosimilar versions of innovative biological products that
did not previously exist. Prior to that time, innovative biologics had essentially unlimited regulatory exclusivity. Under the new regulatory
mechanism, the FDA can approve products that are similar to (but not generic copies of) innovative biologics on the basis of less extensive
data than is required by a full BLA. After an innovator has marketed its product for four years, any manufacturer may file an application
for approval of a “biosimilar” version of the innovator product. However, although an application for approval of a biosimilar
may be filed four years after approval of the innovator product, qualified innovative biological products will receive 12 years of regulatory
exclusivity, meaning that the FDA may not approve a biosimilar version until 12 years after the innovative biological product was first
approved by the FDA. The law also provides a mechanism for innovators to enforce the patents that protect innovative biological products
and for biosimilar applicants to challenge the patents. Such patent litigation may begin as early as four years after the innovative
biological product is first approved by the FDA.
In
the United States, the increased likelihood of generic and biosimilar challenges to innovators’ intellectual property has increased
the risk of loss of innovators’ market exclusivity. First, generic companies have increasingly sought to challenge innovators’
basic patents covering major pharmaceutical products. Second, statutory and regulatory provisions in the United States limit the ability
of an innovator company to prevent generic and biosimilar drugs from being approved and launched while patent litigation is ongoing.
As a result of all these developments, it is not possible to predict the length of market exclusivity for a particular product with certainty
based solely on the expiration of the relevant patent(s) or the current forms of regulatory exclusivity.
In
striving to protect the proprietary technology, inventions, and improvements that are commercially important to the development of our
business, we also rely heavily on trade secrets relating to our proprietary technology and on know-how. We enter into confidentiality
agreements with our employees, consultants, scientific advisors, and contractors. We also seek to preserve the integrity and confidentiality
of our data and trade secrets by maintaining physical security of our premises and physical and electronic security of our information
technology systems.
We
previously filed patent applications in 2018 and 2019 for our Complex Living Interface Coordinated Self-Assembling Materials technology,
our Composite-Interfacing, Biomaterial Accelerant Substrate technology, and our Biological Sample Harvest and Deployment Kits. In 2022
we made the decision to abandon pursuing the applications for these technologies based on our evaluation of the difficulties and costs
of obtaining allowance of the applications and our view of the value of patent protection for the technologies in the context of our
operations.
We
seek to complement the protection of our innovation with a portfolio of trademarks and service marks in the United States and around
the world. The POLARITYTE trademark has been registered in the United States and in other countries throughout the world. Additional
registered trademarks in the United States include our logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, and SKINTE.
Competition
The
regenerative medicine industry is characterized by rapidly advancing technologies, intense competition, and a strong emphasis on intellectual
property. We face substantial competition from companies developing and selling regenerative medicine products, as well as academic research
institutions, governmental agencies, and public and private research institutions. Many of our current or potential competitors, either
alone or with their collaboration partners, have significantly greater financial resources and expertise in research and development,
manufacturing, preclinical testing, conducting clinical trials, and marketing approved products than we do. Smaller or early-stage companies
may also prove to be significant competitors, particularly through collaborative arrangements with large and established companies. These
competitors also compete with us in recruiting and retaining qualified scientific and management personnel and establishing clinical
trial sites and patient registration for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our
programs.
Our
commercial opportunity could be reduced or eliminated if our competitors develop and commercialize products that are safer, more effective,
have fewer or less severe side effects, are more convenient, or are less expensive than products that we develop. Our competitors also
may obtain FDA or other regulatory approval for their products more rapidly than we may obtain approval for ours, which could result
in our competitors establishing a strong market position before we are able to enter the market. The key competitive factors affecting
the success of our programs are likely to be their efficacy, safety, convenience, price, and the availability of reimbursement from government
and other third-party payers.
Government
Regulation
FDA
and Marketing Approval
In
the U.S., the FDA regulates biological products under the Federal Food, Drug, and Cosmetic Act (“FDCA”), the Public Health
Service Act, and various federal regulations. These FDA-regulated products are also subject to state and local statutes and regulations,
as well as applicable laws or regulations in foreign countries. The FDA, and comparable regulatory agencies in state and local jurisdictions
and in foreign countries, impose substantial requirements on the research, development, testing, manufacture, quality control, labeling,
packaging, storage, distribution, record-keeping, approval, post-approval monitoring, advertising, promotion, marketing, sampling, and
import and export of FDA-regulated products. Failure to comply with the applicable requirements at any time during the development process,
approval process, or after approval may subject an applicant to administrative or judicial sanctions, suspension of development or marketing,
or non-approval of product candidates. These sanctions could include a clinical hold on clinical trials, FDA’s refusal to approve
pending applications or related supplements, withdrawal of or restrictions on an existing approval or licensure, untitled or warning
letters, product recalls, product seizures, import detentions or export restrictions, total or partial suspension of production or distribution,
injunctions, fines, restitution, disgorgement, civil penalties, or criminal prosecution. Such actions by government agencies could also
require us to expend a large number of resources to respond to the actions. Any agency or judicial enforcement action could have a material
adverse effect on us. We are not sure whether legislative changes will be enacted, or whether the FDA regulations, guidance, or interpretations
will be changed, or what the impact of any such changes may be on the marketing approvals or licensures, or the prospects thereof, for
our products.
IND
and Clinical Trials of Drug and Biological Products
Prior
to commencing a human clinical trial of a drug or biological product, an IND application, which contains the results of preclinical studies
and relevant clinical studies or other human experience along with other information, such as information about product chemistry, manufacturing,
and controls and a proposed protocol, must be submitted to the FDA. An IND is a request for authorization from the FDA to administer
an investigational drug or biological product to humans. The IND automatically becomes effective 30 days after receipt by the FDA, unless
the FDA within the 30-day period raises concerns or questions about the conduct of the clinical trial. In such a case, the IND sponsor
must resolve any outstanding concerns with the FDA before the clinical trial may begin. A separate submission to the existing IND must
be made for each successive clinical trial to be conducted during development of the drug or biologic.
An
independent Institutional Review Board (“IRB”) must review and approve the investigational plan for the trial before it commences
at each site. Informed written consent must be obtained from each trial subject.
Human
clinical trials for drug and biological products typically are conducted in sequential phases that may overlap:
|
● |
Phase
1 - the investigational drug/biologic is given initially to healthy human subjects with the target disease or condition to
determine metabolism and pharmacologic actions of the drug in humans, side effects and, if possible, to gain early evidence on effectiveness.
During Phase 1 clinical trials, sufficient information about the investigational drug/biologic’s pharmacokinetics and pharmacologic
effects may be obtained to permit the design of well-controlled and scientifically valid Phase 2 clinical trials. |
|
● |
Phase
2 - clinical trials are conducted to evaluate the effectiveness of the drug/biologic for a particular indication or in a limited
number of trial subjects in the target population to identify possible adverse effects and safety risks, to determine the efficacy
of the drug/biologic for specific targeted diseases and to determine dosage tolerance and optimal dosage. Multiple Phase 2 clinical
trials may be conducted by the sponsor to obtain information prior to beginning larger and more expensive Phase 3 clinical trials. |
|
● |
Phase
3 - clinical trials are conducted in an expanded trial subject population to further evaluate dosage, effectiveness, and safety,
to establish the overall benefit-risk relationship of the investigational drug/biologic, and to provide an adequate basis for product
labeling and approval by the FDA. In most cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate
the efficacy of the drug or biologic in an expanded trial subject population at multiple clinical trial sites. |
All
clinical trials must be conducted in accordance with FDA regulations, including good clinical practice (“GCP”) requirements,
which are intended to protect the rights, safety, and well-being of trial participants, define the roles of clinical trial sponsors,
investigators, administrators, and monitors, and ensure clinical trial data integrity and reliability. Regulatory authorities, including
the FDA, an IRB, a data safety monitoring board, or the sponsor, may suspend or terminate a clinical trial at any time on various grounds,
including, among other reasons, a finding that the participants are being exposed to an unacceptable health risk or that the clinical
trial is not being conducted in accordance with FDA requirements.
During
the development of a new drug or biologic, sponsors are given opportunities to meet with the FDA at certain points. These points may
be prior to submission of an IND, at the end of Phase 2 clinical trials, and before a New Drug Application (“NDA”) or BLA
is submitted. Meetings at other times may be requested. These meetings can provide an opportunity for the sponsor to share information
about the data gathered to date, for the FDA to provide advice, and for the sponsor and the FDA to reach agreement on the next phase
of development. Sponsors typically use the end-of-Phase 2 clinical trials meetings to discuss their Phase 2 clinical trials results and
present their plans for the pivotal Phase 3 registration trial that they believe will support approval of the new drug/biologic.
Disclosure
of Clinical Trial Information
Sponsors
of certain clinical trials of FDA-regulated products, including drugs, biologics, and devices, are required to register and disclose
certain clinical trial information on clinicaltrials.gov. Information related to the product, trial subject population, phase of investigation,
study sites and investigators, and other aspects of the clinical trial, is made public as part of the registration. Sponsors also are
obligated to disclose the results of their clinical trials, including the study protocol and statistical analysis plan, after completion.
Disclosure of the clinical trial results can be delayed until the new product or new indication being studied has been approved, as long
as approval occurs within a certain timeframe. Competitors may use this publicly available information to gain knowledge regarding our
development programs.
The
BLA Approval Process
SkinTE
is an autologous product, meaning it is derived from the cells and tissues of the individual to be treated with the product. The Company’s
current plan is not to market SkinTE in the U.S. until it is licensed by the FDA through the BLA approval process. The process required
by the FDA to obtain licensure generally involves the following:
|
● |
completion
of non-clinical laboratory tests, animal studies and formulation studies conducted according to good laboratory practice or other
applicable regulations; |
|
● |
submission
of an IND application; |
|
● |
performance
of adequate and well-controlled human clinical trials to establish the safety, purity, and potency of the proposed biologic for its
intended use or uses conducted in accordance with GCP; |
|
● |
submission
to the FDA of a BLA after completion of Phase 3 pivotal clinical trials; |
|
● |
FDA
pre-license inspection of manufacturing facilities and audit of clinical trial sites; and |
|
● |
FDA
approval of a BLA. |
The
FDA has 60 days from its receipt of a BLA to determine whether the application will be accepted for filing based on the agency’s
threshold determination that it is sufficiently complete to permit substantive review. Once the submission is accepted for filing, the
FDA begins an in- depth review. The FDA has agreed to certain performance goals in the review of BLAs. Most applications for standard
review BLA products are reviewed within ten months of submission, and most applications for priority review BLA products are reviewed
within six months of submission. The review process may be extended by the FDA for three additional months to consider certain late-submitted
information, or information intended to clarify information already provided in the submission. Even if such additional information is
submitted, the FDA may ultimately decide that the BLA does not satisfy the criteria for approval.
The
FDA may also refer applications for novel BLA products or products that present difficult questions of safety, purity, or potency, to
an advisory committee, typically a panel that includes clinicians and other experts, for review, evaluation, and a recommendation as
to whether the application should be approved. The FDA is not bound by the recommendation of an advisory committee, but it generally
follows such recommendations.
Before
approving a BLA, the FDA will typically inspect one or more clinical sites to assure compliance with GCP. The FDA may also inspect preclinical
study sites to verify compliance with Good Laboratory Practice (“GLP”) requirements prior to approval. Additionally, the
FDA will inspect the facility or the facilities at which the BLA product is manufactured. The FDA will not approve the BLA unless compliance
with cGMP requirements is satisfactory, and the BLA contains data that provide substantial evidence that the product is safe, pure, and
potent for the indication studied.
After
the FDA evaluates the BLA and the manufacturing facilities, it issues either an approval letter or a complete response letter. A complete
response letter outlines the deficiencies in the submission and may require substantial additional testing, including additional large-scale
clinical testing or other information in order for the FDA to reconsider the application. If, or when, those deficiencies have been addressed
to the FDA’s satisfaction in a resubmission of the BLA, the FDA will issue an approval letter. The FDA has committed to reviewing
such resubmissions in two or six months depending on the type of information included.
The
cost of preparing and submitting a BLA is substantial. Furthermore, each BLA submission requires a user fee payment (approximately $3.1
million in fiscal year 2022), unless a waiver or exemption applies. Waiver of the fee may be sought on several grounds, including that
the applicant is a small business submitting its first human drug application to the FDA for review, but there is no assurance we will
qualify or receive a waiver if and when we file a BLA in the future. The manufacturer or sponsor of an approved BLA is also subject to
annual establishment fees.
An
approval letter authorizes commercial marketing and distribution of the licensed product with specific prescribing information for specific
indications. As a condition of BLA approval, the FDA may require substantial post-approval testing and surveillance to monitor the product’s
safety, purity, and potency and may impose other conditions, including post-market studies, labeling restrictions, or other risk evaluation
and mitigation strategies, which can materially affect the product’s potential market and profitability. Once granted, product
approvals may be withdrawn if compliance with regulatory standards is not maintained, or problems or safety issues are identified following
initial marketing.
Changes
to some of the conditions established in an approved application, including changes in indications, labeling, device components, or manufacturing
processes or facilities, require submission and FDA approval of a new BLA or BLA supplement before the change can be implemented. A BLA
supplement for a new indication typically requires clinical data similar to that in the original application, and the FDA uses the same
procedures and actions in reviewing BLA supplements as it does in reviewing BLAs.
Biosimilar
Exclusivity
The
Biologics Price Competition and Innovation Act of 2009 (BPCIA) creates an abbreviated approval pathway for biosimilar products. A biosimilar
is a biological product that is highly similar to, and has no clinically meaningful differences from, an existing FDA-licensed reference
product. Biosimilarity must be shown through analytical studies, animal studies, and at least one clinical study, absent a waiver. A
biosimilar product may be deemed interchangeable with a prior licensed product if it is biosimilar and meets additional requirements
under the BPCIA, including that it can be expected to produce the same clinical results as the reference product and, for products administered
multiple times, the biologic and the reference biologic may be switched after one has been previously administered without increasing
safety risks or risks of diminished efficacy relative to exclusive use of the reference biologic. Where permitted by state law, an interchangeable
product may be substituted for the reference product without the involvement of the prescriber.
A
reference biologic is granted twelve years of exclusivity from the time of first licensure of the reference product, and no application
for a biosimilar may be submitted for four years from the date of licensure of the reference product. The first biologic product submitted
under the abbreviated approval pathway that is determined to be interchangeable with the reference product may obtain exclusivity against
a finding of interchangeability for other biosimilars for the same condition or use for the lesser of (i) one year after the first commercial
marketing of the first interchangeable biosimilar; (ii) eighteen months after the first interchangeable biosimilar is approved if there
is no patent challenge; (iii) eighteen months after resolution of a lawsuit over the patents of the reference biologic in favor of the
first interchangeable biosimilar applicant; or (iv) 42 months after the first interchangeable biosimilar’s application has been
approved if a patent lawsuit is ongoing within the 42-month period.
Post-Marketing
Requirements for FDA Regulated Products
Following
licensure of a new product, the company and the licensed products are subject to continuing regulation by the FDA, state, and foreign
regulatory authorities including, among other things, monitoring and record-keeping activities, reporting adverse experiences to the
applicable regulatory authorities, providing regulatory authorities with updated safety and efficacy information, manufacturing products
in accordance with cGMP requirements, product sampling and distribution requirements, and complying with promotion and advertising requirements,
which include, among others, standards for direct-to-consumer advertising and restrictions on promoting products for uses or in patient
populations that are not consistent with the product’s approved labeling (known as “off-label use”), limitations on
industry-sponsored scientific and educational activities, and requirements for promotional activities involving the internet, including
social media. Although physicians may prescribe products for off-label uses, manufacturers may not market or promote such off-label uses.
Modifications or enhancements to the product or its labeling or changes of the site of manufacture are often subject to the approval
of the FDA and other regulators, who may or may not grant approval, or may engage in a lengthy review process.
The
FDA, state, and foreign regulatory authorities have broad enforcement powers. Failure to comply with applicable regulatory requirements
could result in enforcement action by the FDA, state, or foreign regulatory authorities, which may include the following:
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untitled
letters or warning letters; |
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fines,
disgorgement, restitution, or civil penalties; |
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injunctions
(e.g., total or partial suspension of production) or consent decrees; |
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product
recalls, administrative detention, or seizure; |
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customer
notifications or repair, replacement, or refunds; |
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operating
restrictions or partial suspension or total shutdown of production; |
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delays
in or refusal to grant requests for future product licenses or approvals or foreign regulatory approvals of new products, new intended
uses, or modifications to existing products; |
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withdrawals
or suspensions of FDA product licenses or marketing approvals or foreign regulatory approvals, resulting in prohibitions on product
sales; |
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clinical
holds on clinical trials; |
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FDA
refusal to review pending or new applications in the event of issues concerning the integrity or reliability of supporting data; |
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FDA
refusal to issue certificates to foreign governments needed to export products for sale in other countries; and |
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criminal
prosecution. |
Any
of these sanctions could result in higher than anticipated costs or lower than anticipated sales and have a material adverse effect on
our reputation, business, financial condition, and results of operations. Such actions by government agencies could also require us to
expend a large amount of managerial and financial resources to respond to the actions. Any agency or judicial enforcement action could
have a material adverse effect on us.
In
the U.S., after a product is approved, its manufacture is subject to comprehensive and continuing regulation by the FDA. The FDA regulations
require that products be manufactured in registered facilities and in accordance with cGMP. We have a facility for the production of
clinical and commercial quantities of SkinTE. Effectuating compliance to cGMP requirements is currently underway. cGMP regulations require,
among other things, quality control and quality assurance as well as the corresponding maintenance of records and documentation and the
obligation to investigate and correct deviations from cGMP. For human cellular or tissue-based products like ours, cGMP also includes
current good tissue practices to prevent the transmission of communicable diseases. These regulations also impose certain organizational,
procedural, and documentation requirements with respect to manufacturing and quality assurance activities. Manufacturers and other entities
involved in the manufacture and distribution of approved drugs, biologics, and medical devices are required to register their establishments
with the FDA and certain state agencies and are subject to periodic unannounced inspections by the FDA and state agencies for compliance
with cGMP and other laws. Accordingly, as a manufacturer we must continue to expend time, money, and effort in the area of production
and quality control to maintain cGMP compliance.
If
in the future we elect to use a contract manufacturer, we will be responsible for the selection and monitoring of qualified firms and,
in certain circumstances, suppliers to these firms. These firms and, where applicable, their suppliers are subject to inspections by
the FDA at any time, and the discovery of violative conditions, including failure to conform to cGMP, could result in enforcement actions
that can interrupt the operation of any such firm or result in restrictions on product supply, including, among other things, recall
or withdrawal of the product from the market.
Newly
discovered or developed data on safety, purity, or potency may require changes to a product’s approved labeling, including the
addition of new warnings and contraindications, and may require the implementation of other risk management measures.
Reimbursement,
Anti-Kickback and False Claims Laws, and Other Regulatory Matters
In
the U.S., the research, manufacturing, distribution, sale, and promotion of drug and biological products are potentially subject to regulation
by various federal, state, and local authorities in addition to the FDA, including the Centers for Medicare & Medicaid Services (“CMS”),
other divisions of the U.S. Department of Health and Human Services (e.g., the Office of Inspector General), the Drug Enforcement Administration,
the Consumer Product Safety Commission, the Federal Trade Commission, the Occupational Safety & Health Administration, the Environmental
Protection Agency, state Attorneys General, and other state and local government agencies. For example, sales, marketing, and scientific/educational
grant programs must comply, when applicable, with the federal Anti-Kickback Statute, the federal False Claims Act, the privacy regulations
promulgated under HIPAA, and similar state laws. Pricing and rebate programs must comply with the Medicaid Drug Rebate Program requirements
of the Omnibus Budget Reconciliation Act of 1990, as amended, and the Veterans Health Care Act of 1992, as amended. If products are made
available to authorized users of the Federal Supply Schedule of the General Services Administration, additional laws and requirements
apply. All these activities are also potentially subject to federal and state consumer protection and unfair competition laws.
The
Medicare Prescription Drug, Improvement, and Modernization Act of 2003 (“MMA”) established the Medicare Part D program to
provide a voluntary prescription drug benefit to Medicare beneficiaries. Under Part D, Medicare beneficiaries may enroll in prescription
drug plans offered by private entities that will provide coverage of outpatient prescription drugs. Unlike Medicare Part A and B, Part
D coverage is not standardized. Part D prescription drug plan sponsors are not required to pay for all covered Part D drugs, and each
drug plan can develop its own drug formulary that identifies which drugs it will cover and at what tier or level. However, Part D prescription
drug formularies must include drugs within each therapeutic category and class of covered Part D drugs, though not necessarily all the
drugs in each category or class. Any formulary used by a Part D prescription drug plan must be developed and reviewed by a pharmacy and
therapeutic committee. Government payment for some of the costs of prescription drugs may increase demand for products for which we receive
regulatory approval. However, any negotiated prices for our products covered by a Part D prescription drug plan will likely be lower
than the prices we might otherwise obtain. Moreover, while the MMA applies only to drug benefits for Medicare beneficiaries, private
payors often follow Medicare coverage policy and payment limitations in setting their own payment rates. Any reduction in payment that
results from the MMA may result in a similar reduction in payments from non-government payors.
The
American Recovery and Reinvestment Act of 2009 provides funding for the federal government to compare the effectiveness of different
treatments for the same illness. A plan for the research will be developed by the Department of Health and Human Services, the Agency
for Healthcare Research and Quality, and the National Institutes for Health, and periodic reports on the status of the research and related
expenditures will be made to Congress. Although the results of the comparative effectiveness studies are not intended to mandate coverage
policies for public or private payors, it is not clear what effect, if any, the research will have on the sale of SkinTE in the future.
It is also possible that comparative effectiveness research demonstrating benefits in a competitor’s product could adversely affect
the sale of our product. If third-party payors do not consider SkinTE to be cost-effective compared to other available therapies, they
may not cover our product after approval as a benefit under their plans or, if they do, the level of payment may not be sufficient to
allow us to sell our product on a profitable basis.
In
addition, in some foreign countries, the proposed pricing for a drug must be approved before it may be lawfully marketed. The requirements
governing drug and biologics pricing vary widely from country to country. For example, the European Union provides options for its member
states to restrict the range of medicinal products for which their national health insurance systems provide reimbursement and to control
the prices of medicinal products for human use. A member state may approve a specific price for the medicinal product, or it may instead
adopt a system of direct or indirect controls on the profitability of the company placing the medicinal product on the market. There
can be no assurance that any country that has price controls or reimbursement limitations for pharmaceutical products will allow favorable
reimbursement and pricing arrangements for our product. Historically, products launched in the European Union do not follow price structures
of the U.S. and generally tend to be priced significantly lower than in the U.S.
In
the U.S. we are subject to complex laws and regulations pertaining to healthcare “fraud and abuse,” including, but not limited
to, the federal Anti-Kickback Statute, the federal False Claims Act, and other state and federal laws and regulations. The federal Anti-Kickback
Statute makes it illegal for any person, or a party acting on its behalf, to knowingly and willfully solicit, receive, offer, or pay
any remuneration that is intended to induce the referral of business, including the purchase, order, or prescription of a particular
drug, or other good or service for which payment in whole or in part may be made under a federal healthcare program, such as Medicare
or Medicaid. Violations of this law are punishable by up to five years in prison, criminal fines, administrative civil money penalties,
and exclusion from participation in federal healthcare programs. In addition, many states have adopted laws similar to the federal Anti-Kickback
Statute. Some of these state prohibitions apply to the referral of patients for healthcare services reimbursed by any insurer, not just
federal healthcare programs such as Medicare and Medicaid. Due to the breadth of these federal and state anti-kickback laws, the absence
of guidance in the form of regulations or court decisions and the potential for additional legal or regulatory change in this area, it
is possible that PolarityTE’s future sales and marketing practices or its future relationships with medical professionals might
be challenged under fraud and abuse laws, which could harm PolarityTE.
The
federal False Claims Act prohibits anyone from knowingly presenting, or causing to be presented, for payment to federal programs (including
Medicare and Medicaid) claims for items or services, including drugs and biologics, that are false or fraudulent, claims for items or
services not provided as claimed, or claims for medically unnecessary items or services. Although we would not submit claims directly
to payors, manufacturers can be held liable under these laws if they are deemed to “cause” the submission of false or fraudulent
claims by, for example, providing inaccurate billing or coding information to customers or promoting a product off-label. In addition,
our future activities relating to the reporting of estimated prices for SkinTE, the reporting of prices used to calculate Medicaid rebate
information, and other information affecting federal, state, and third-party reimbursement for our product, and the sale and marketing
of SkinTE, are subject to scrutiny under this law. Penalties for a federal False Claims Act violation include three times the actual
damages sustained by the government, plus mandatory civil penalties of between $12,537 and $25,076 for each separate false claim, and
the potential for exclusion from participation in federal healthcare programs. Although the federal False Claims Act is a civil statute,
conduct resulting in a federal False Claims Act violation may also implicate various federal criminal statutes. If the government were
to allege that we were, or convict us of, violating these false claims laws, we could be subject to a substantial fine. In addition,
private individuals have the ability to bring actions under the federal False Claims Act and certain states have enacted laws modeled
after the federal False Claims Act.
There
are also an increasing number of state laws that require manufacturers to make reports to states on pricing and marketing information.
Many of these laws contain ambiguities as to what is required to comply with the laws. In addition, as discussed below, a similar federal
requirement requires manufacturers to track and report to the federal government certain payments made to physicians and teaching hospitals
in the previous calendar year. These laws may affect our sales, marketing, and other promotional activities by imposing administrative
and compliance burdens on us. In addition, given the lack of clarity with respect to these laws and their implementation, our reporting
actions could be subject to the penalty provisions of the pertinent state, and some federal, authorities.
The
failure to comply with regulatory requirements exposes companies to possible legal or regulatory action. Depending on the circumstances,
failure to meet applicable regulatory requirements can result in criminal prosecution, fines or other penalties, injunctions, recall
or seizure of products, total or partial suspension of production, denial or withdrawal of product approvals, or refusal to allow a company
to enter into supply contracts, including government contracts.
Changes
in regulations, statutes, or the interpretation of existing regulations could impact our business in the future by requiring, for example:
(i) changes to our manufacturing facility; (ii) additions or modifications to product labeling; (iii) the recall or discontinuation of
our product; or (iv) additional record-keeping requirements. If any such changes were to be imposed, they could adversely affect the
operation of our business.
Patient
Protection and Affordable Care Act
In
March 2010, the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010, collectively
the PPACA, was enacted, which includes measures that have or will significantly change the way healthcare is financed by both governmental
and private insurers. Among the provisions of the PPACA of greatest importance to the drug industry are the following:
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The
Medicaid Drug Rebate Program requires pharmaceutical manufacturers to enter into and have in effect a national rebate agreement with
the Secretary of the Department of Health and Human Services as a condition for states to receive federal matching funds for the
manufacturer’s covered outpatient drugs furnished to Medicaid patients. Effective in 2010, the PPACA made several changes to
the Medicaid Drug Rebate Program, including increasing pharmaceutical manufacturers’ rebate liability by raising the minimum
basic Medicaid rebate on most branded prescription drugs and biologic agents to 23.1% of the Average Manufacturer Price (“AMP”)
and adding a new rebate calculation for “line extensions” (i.e., new formulations, such as extended release formulations)
of solid oral dosage forms of branded products, as well as potentially impacting their rebate liability by modifying the statutory
definition of AMP. The PPACA also expanded the universe of Medicaid utilization subject to drug rebates by requiring pharmaceutical
manufacturers to pay rebates on Medicaid managed care utilization and by expanding the population potentially eligible for Medicaid
drug benefits. The CMS have proposed to expand Medicaid rebate liability to the territories of the U.S. as well. In addition, the
PPACA provides for the public availability of retail survey prices and certain weighted average AMPs under the Medicaid program.
The implementation of this requirement by the CMS may also provide for the public availability of pharmacy acquisition of cost data,
which could negatively impact our sales. |
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In
order for a pharmaceutical product to receive federal reimbursement under the Medicare Part B and Medicaid programs or to be sold
directly to U.S. government agencies, the manufacturer must extend discounts to entities eligible to participate in the 340B drug
pricing program. The required 340B discount on a given product is calculated based on the AMP and Medicaid rebate amounts reported
by the manufacturer. The PPACA expanded the types of entities eligible to receive discounted 340B pricing, although, under the current
state of the law, with the exception of children’s hospitals, these newly eligible entities will not be eligible to receive
discounted 340B pricing on orphan drugs when used for the orphan indication. In addition, as 340B drug pricing is determined based
on AMP and Medicaid rebate data, the revisions to the Medicaid rebate formula and AMP definition described above could cause the
required 340B discount to increase. |
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The
PPACA imposes a requirement on manufacturers of branded drugs and biologic agents to provide a 50% discount off the negotiated price
of branded drugs dispensed to Medicare Part D patients in the coverage gap (i.e., “donut hole”). |
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The
PPACA imposes an annual, nondeductible fee on any entity that manufactures or imports certain branded prescription drugs and biologic
agents, apportioned among these entities according to their market share in certain government healthcare programs, although this
fee would not apply to sales of certain products approved exclusively for orphan indications. |
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The
PPACA requires pharmaceutical manufacturers to track certain financial arrangements with physicians and teaching hospitals, including
any “transfer of value” made or distributed to such entities, as well as any investment interests held by physicians
and their immediate family members. Manufacturers are required to track this information and were required to make their first reports
in March 2014. The information reported is publicly available on a searchable website. |
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As
of 2010, a new Patient-Centered Outcomes Research Institute was established pursuant to the PPACA to oversee, identify priorities
in, and conduct comparative clinical effectiveness research, along with funding for such research. The research conducted by the
Patient-Centered Outcomes Research Institute may affect the market for certain pharmaceutical products. |
There
have been prior public announcements by members of the federal government regarding their plans to repeal and replace the PPACA and Medicare.
For example, the Tax Cuts and Jobs Act of 2017 eliminated the individual mandate requiring most Americans (other than those who qualify
for a hardship exemption) to carry a minimum level of health coverage, effective January 1, 2019. We are not sure whether additional
legislative changes will be enacted and are unable to predict what impact changes in the law may have on the pricing and distribution
of our product.
Employees
We
had approximately 42 full-time employees and two part-time employees as of December 31, 2022, all of whom are in the U.S. None of our
employees are represented by a labor union or covered by a collective bargaining agreement.
Corporate
History
The
Parent Company – PolarityTE, Inc.
Majesco
Entertainment Company, a Delaware corporation (“Majesco DE”), was incorporated in the state of Delaware on May 8, 1998. On
December 1, 2016, Majesco Acquisition Corp., a Nevada corporation and wholly owned subsidiary of Majesco DE, entered into an Agreement
and Plan of Reorganization with PolarityTE, Inc., a Nevada corporation (“PolarityTE NV”) and the sole stockholder of PolarityTE
NV. The asset acquisition was subject to stockholder approval, which was received on March 10, 2017, and the transaction closed on April
7, 2017. In January 2017, Majesco DE changed its name to “PolarityTE, Inc.” (“PolarityTE”). Majesco Acquisition
Corp. was then merged with PolarityTE NV, which remains a subsidiary of PolarityTE. Majesco Acquisition Corp. II, formed in November
2016 under Majesco Entertainment Company, changed its name to “PolarityTE MD, Inc.,” and remains a wholly owned subsidiary
of PolarityTE.
Contract
Research Services
At
the beginning of May 2018, we acquired a preclinical research and veterinary sciences business, which we operated through our indirect
subsidiary, IBEX Preclinical Research, Inc. (“IBEX”). Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”),
is our direct subsidiary and held all the outstanding capital stock of IBEX (the “IBEX Shares”). Utah CRO also held all the
member interest of IBEX Property LLC, a Nevada limited liability company (“IBEX Property”), that owned two unencumbered parcels
of real property in Logan, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures,
fixtures, and personal property (the “Property”), which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical
research and veterinary sciences business. The aggregate purchase price for the business was $3.8 million, of which $2.3 million was
paid at closing and the balance satisfied by a promissory note payable to the seller with an initial fair value of $1.22 million and
contingent consideration with an initial fair value of approximately $0.3 million.
On
April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (the
“Buyer”), pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to the Buyer in exchange for an unsecured
promissory note in the principal amount of $400,000 bearing simple interest at the rate of 10% per annum payable interest only on a quarterly
basis and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares
to the Buyer. Furthermore, on April 14, 2022, IBEX Property entered into that certain Real Estate Purchase and Sale Agreement (the “Real
Estate Agreement”) with another unrelated third party (the “Purchaser”) pursuant to which IBEX Property agreed to sell
to the Purchaser the Property at a gross purchase price of $2.8 million payable in cash at closing of the transaction. The Buyer and
Purchaser are affiliates due to common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed
the transactions contemplated thereby and on April 29, 2022, we received the promissory note described above in the principal amount
of $0.4 million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the Property under
the Real Estate Agreement. We recognized an insignificant net gain on sale of the IBEX Shares and IBEX Property and as a result of the
transaction we were no longer engaged in any revenue generating business activity.
Our
subsidiary, Arches Research, Inc. (“Arches”), offered prior to 2022 research services to third parties consisting of experimental
planning, histology, and in vivo and in vitro imaging, including micro-ct. There was a substantial surge in COVID-19 testing throughout
the United States as a result of the COVID-19 pandemic, which began in the spring of 2020. In 2020 and 2021, Arches had equipment and
staff capable of performing polymerase chain reaction testing for COVID-19. Arches had the opportunity to use its research facilities
to offer laboratory testing services for COVID-19, and to that end registered under the Clinical Laboratory Improvement Amendments (“CLIA”)
in May 2020, and it began providing COVID-19 testing services on May 27, 2020. Arches’ primary customer for testing services was
an organization controlling multiple long-term care and laboratory facilities in New York State and surrounding areas. Beginning in April
2021 there was a significant loss of COVID-19 testing revenues due to the loss of Arches’ major testing customer in the first quarter
of 2021. Subsequent efforts to find new business to replace the lost testing business were not successful and we made the decision to
cease COVID-19 testing in August 2021. At the same time, Arches ceased offering research services to outside third parties.
Contact
and Available Information
Our
principal executive offices are located at 1960 S. 4250 West, Salt Lake City, UT 84104, and our telephone number is (800) 560-3983.
We
file annual, quarterly, and current reports, proxy statements, and other information with the Securities and Exchange Commission (“SEC”).
Our SEC filings are available to the public at the SEC’s website at www.sec.gov. We also maintain a website located at www.polarityte.com,
where these SEC filings and other information about us can be accessed, free of charge, as soon as reasonably practicable after we electronically
file the information with, or furnish it to, the SEC.
Item
1A. Risk Factors.
Our
business and operations are subject to many risks and uncertainties as described below. However, the risks and uncertainties described
below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we may currently deem immaterial,
may become important factors that could harm our business, financial condition, or results of operations. If any of the following risks
should occur in the future, our financial condition or results of operations could suffer.
Risks
Related to Our Financial Condition
We
will need additional funding to pursue the regulatory process for SkinTE and sustain our operations, and we may be unable to raise capital
when needed, which would force us to delay, reduce, eliminate, or abandon our product development program.
We
reported an operating loss of $22.4 million for the year ended December 31, 2022, and on that date we had an accumulated deficit of $516.2
million. We believe our cash and cash equivalents at December 31, 2022, will fund our current business plan including related operating
expenses and capital expenditure requirements through the end of the second calendar quarter of 2023. Accordingly, there is substantial
doubt about our ability to continue as a going concern beyond that time unless we can raise additional capital from external sources.
We
expect to incur significant operating costs in the near term as we pursue the regulatory process for SkinTE with the FDA, conduct clinical
trials and studies, and pursue product research, all while operating our business and incurring continuing fixed costs related to the
maintenance of our assets and business. We expect to incur significant losses in the future, and those losses could be more severe due
to unforeseen expenses, difficulties, complications, delays, and other unknown events. As a result of the disposition of IBEX in April
2022, we are no longer engaged in any revenue generating activity that would contribute to defraying our operating costs in future periods,
which will make us entirely dependent on capital obtained from external sources to fund our operations. The impact of pandemics, inflation,
armed conflicts overseas, and other macroeconomic issues have and may continue to adversely affect capital markets and could limit our
ability to obtain the capital we need to operate our business.
We
may not be able to obtain necessary capital in sufficient amounts, on terms favorable to us, or at all. If adequate funds are not available
for our business in the future, we may be required to delay, reduce the scope of, or eliminate the plans for obtaining regulatory licensure
or approval for SkinTE or be unable to continue operations over a longer term, any of which would have a material adverse effect on our
business, financial condition, results of operation, and prospects.
Our
wholly owned subsidiary accepted a loan under the CARES Act pursuant to the Paycheck Protection Program (“PPP”), and the
loan may subject us to challenges, audits, or investigations regarding qualification for the loan, any of which could reduce our liquidity
and have a material adverse effect on our business, financial condition, and results of operations.
On
April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “PTE-MD”) entered into a promissory note offered by a bank (the “Lender”)
evidencing an unsecured loan in the amount of $3,576,145 made to PTE-MD under the PPP (the “Loan”). On October 15, 2020,
PTE-MD applied to the Lender for forgiveness of the PPP Loan in its entirety (as provided for in the CARES Act) based on PTE-MD’s
use of the PPP Loan for payroll costs, rent, and utilities. On October 26, 2020, PTE-MD was advised that the Lender approved the application,
and that the Lender was submitting the application to the Small Business Administration (“SBA”) for a final decision. The
SBA subsequently approved PTE-MD’s application for forgiveness of the PPP Loan, and the principal and interest of $3,612,376 was
fully paid by the SBA on June 12, 2021.
Pursuant
to the requirements under the CARES Act, in connection with the PPP Loan PTE-MD certified that current economic uncertainty made the
Loan request necessary to support the ongoing operations of PTE-MD. We believe that certification was made in a manner consistent with
SBA guidance that borrowers must make the certification in good faith, taking into account their current business activity and their
ability to access other sources of liquidity sufficient to support their ongoing operations in a manner that is not significantly detrimental
to the business. In connection with PTE-MD’s application for forgiveness of the PPP Loan, it provided information on the use of
the PPP Loan proceeds for payroll costs, rent, and utilities, which are permitted uses to qualify for forgiveness of the loan.
Under
the CARES Act, the SBA may review any PPP loan of any size at any time at its discretion. On September 17, 2021, PTE-MD received notice
from the Lender that the SBA is continuing to review the PPP Loan. As part of this review, the SBA requested that PTE-MD provide documents
that it is required to maintain but may not have been required to submit with its application for the PPP Loan. These documents included
an affiliation worksheet showing the relationship between PolarityTE and PTE-MD and affiliated subsidiaries, documents showing the use
of the PPP Loan proceeds, documents showing PTE-MD’s calculation of the loan amount it requested in its loan application, its federal
tax returns, and documents showing employee compensation information. PTE-MD submitted the documents to the SBA through the Lender on
September 28, 2021.
There
is no assurance the SBA could not in the future make an adverse finding with respect to our qualification for the Loan or the validity
of the certifications we made in connection with the PPP Loan and its forgiveness. If an adverse finding arises, PTE-MD could be required
to return the full amount of the Loan, which would reduce its liquidity, and could subject it to fines and penalties, and exclusion from
government contracts. In particular, PTE-MD may become subject to actions under the FCA, including its qui tam provisions, which, among
other things, prohibits persons from knowingly filing, or knowingly causing to be filed, a false statement, or knowingly using a false
statement, to obtain payment from the federal government. Violations of the FCA are subject to treble damages and penalties. In the case
of an SBA loan, the government could allege that single damages are the amount of the loan and interest thereon (or more), which under
the FCA could then be trebled. Substantial penalties must also be imposed for each submitted false statement when a defendant loses an
FCA trial. FCA cases may be initiated by the U.S. Department of Justice or by private persons or entities, often called “whistleblowers,”
who bring the action on behalf of the U.S. PTE-MD may also face enforcement arising under other federal statutes, including criminal
laws, and administrative actions and investigations initiated by SBA or other governmental entities. Furthermore, if PTE-MD is identified
as an entity that the media, government officials, or others seek to portray as a business that should not have availed itself of PPP
funding, PTE-MD may face negative publicity, which could have a materially adverse impact on its business and operations and on PolarityTE’s
business and operations as its parent. Generally, the cost of defending claims under the FCA, regardless of merit, could be substantial,
even as much as the PPP loan proceeds.
Risks
Related to our Research & Development, Clinical, and Commercialization Activities
Our
product is subject to extensive regulation by the FDA or comparable foreign regulatory authorities, which can be costly and time consuming,
cause unanticipated delays or prevent the receipt of the required licensures and approvals to commercialize our product.
The
preclinical and clinical development, manufacturing, labeling, storage, record-keeping, advertising, promotion, export, marketing, and
distribution of SkinTE is subject to extensive regulation by the FDA and other U.S. regulatory agencies, or comparable authorities in
foreign markets. In the U.S., we are not permitted, directly or through others, to market our product until the FDA approves a BLA for
SkinTE and licenses the product. Similar approval is required in foreign jurisdictions. The process of obtaining these approvals is uncertain,
dependent on future clinical trial results, expensive, often takes many years, and can vary substantially based upon the type, complexity,
and novelty of the product candidate involved. Approval policies or regulations may change and may be influenced by the results of other
similar or competitive products, making it more difficult for us to achieve such approval in a timely manner or at all. Any guidance
that may result from FDA advisory committee discussions may make it more difficult or expensive to develop and commercialize SkinTE.
In addition, as a company, we have not previously filed a BLA with the FDA or filed a similar application with other foreign regulatory
agencies. This lack of experience may impede our ability to obtain FDA or other foreign regulatory agency licensure or approval in a
timely manner, if at all, for our product.
Despite
the time and expense invested, regulatory approval is never guaranteed. The FDA or comparable foreign authorities can delay, limit, or
deny approval or licensure of a product candidate for many reasons, including:
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a
product candidate for a BLA may not be deemed safe, pure, and potent; |
|
● |
agency
officials of the FDA or comparable foreign regulatory authorities may not find the data from non-clinical or preclinical studies
and clinical trials generated during development to be sufficient; |
|
● |
the
FDA or comparable foreign regulatory authorities may not approve manufacturing processes or may determine that the manufacturing
facilities are not compliant with cGMP; or |
|
● |
the
FDA or a comparable foreign regulatory authority may change its approval policies or adopt new regulations. |
Our
inability to obtain these approvals would prevent us from commercializing our product.
The
FDA regulatory approval process is lengthy and time-consuming, and we could experience significant delays or other challenges in the
clinical development and regulatory licensures or approval of its product.
We
may experience delays or other challenges in commencing and completing clinical trials for SkinTE that would be necessary for product
licensure or approval. We do not know whether planned clinical trials will begin on time, need to be redesigned, enroll trial subjects
on time or in sufficient numbers, or be completed on schedule, if at all. Any of our future clinical trials may be delayed or precluded
for a variety of reasons, including issues related to:
|
● |
the
availability of financial resources for commencing and completing planned clinical trials; |
|
● |
reaching
agreement on acceptable terms with prospective CROs and clinical trial sites, the terms of which can be subject to extensive negotiation
and may vary significantly among different CROs and clinical trial sites; |
|
● |
obtaining
and maintaining approval of each reviewing institutional review board (“IRB”); |
|
● |
obtaining
and maintaining regulatory approval for clinical trials in each country; |
|
● |
recruiting
sufficient numbers of suitable trial subjects to participate in clinical trials; |
|
● |
competing
priorities at clinical trial sites or departures of study investigators or personnel; |
|
● |
having
trial subjects complete a clinical trial or return for post-treatment follow-up; |
|
● |
clinical
trial sites deviating from trial protocol or dropping out of a trial; |
|
● |
adding
new clinical trial sites; |
|
● |
developing
one or more new formulations or routes of administration; or |
|
● |
manufacturing
sufficient quantities of our product candidate for use in clinical trials. |
Trial
subject enrollment, a significant factor in the timing and success of clinical trials, is affected by many factors including the size
and nature of the trial subject population, the proximity of trial subjects to clinical sites, the eligibility criteria for the clinical
trial, the potential impact of COVID-19 or other pandemic, the design of the clinical trial, competing clinical trials and clinicians,
and trial subjects’ perceptions as to the potential advantages of the product candidate being studied in relation to other available
therapies, including any therapies that may be approved for the indications we are investigating. In addition, significant numbers of
trial subjects who enroll in our clinical trials may drop out during the clinical trials for various reasons. We endeavor to account
for dropout rates in our trials when determining expected clinical trial timelines, but we cannot assure you that our assumptions are
correct, or that trials will not experience higher numbers of dropouts than anticipated, which would result in the delay of completion
of such trials beyond our expected timelines, if at all.
We
could encounter delays if physicians encounter unresolved ethical issues associated with enrolling trial subjects in clinical trials
of our product candidate in lieu of prescribing existing treatments that have established safety and efficacy profiles. Further, a clinical
trial may be delayed, suspended, or terminated by us, any reviewing IRB, the institutions in which such trial is conducted, the data
monitoring committee for such trial, or by the FDA or other regulatory authorities due to a number of factors, including inadequate protocols
or other information supporting an IND, failure to conduct the clinical trial in accordance with regulatory requirements, GCP, or our
clinical protocols, inspection of the clinical trial operations or trial site by the FDA or other regulatory authorities resulting in
the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using a product
candidate, changes in governmental regulations, or administrative actions or lack of adequate funding to continue the clinical trial.
Furthermore, many of the factors that cause, or lead to, a termination or delay in the commencement or completion of clinical trials
may also ultimately lead to the denial of regulatory licensure or approval of a product. In connection with clinical trials, we face
additional risks that:
|
● |
there
may be slower than expected rates of trial subject recruitment and enrollment; |
|
● |
trial
subjects may fail to complete the clinical trials; |
|
● |
there
may be an inability or unwillingness of trial subjects or medical investigators to follow our clinical trial protocols; |
|
● |
there
may be an inability to monitor trial subjects adequately during or after treatment; |
|
● |
conditions
of trial subjects may deteriorate rapidly or unexpectedly, which may cause the trial subjects to become ineligible for a clinical
trial or may prevent our product from demonstrating the regulatory standard of safety, purity, and potency; |
|
● |
trial
subjects may die or suffer other adverse effects for reasons that may or may not be related to our product being tested; |
|
● |
we
may not be able to sufficiently standardize certain of the tests and procedures that are part of our clinical trials because such
tests and procedures are highly specialized and involve a high degree of expertise; |
|
● |
the
clinical trials may not be able to commence, or to proceed, because of problems with compliance with cGMP at the manufacturing facilities; |
|
● |
a
product candidate may not prove to be efficacious in all or some trial subject populations; |
|
● |
the
results of the clinical trials may not confirm the results of earlier trials; |
|
● |
the
results of the clinical trials may not meet the level of statistical significance required by the FDA or other regulatory agencies; |
|
● |
there
may be data discrepancies or documentation issues in the clinical trials that raise questions about data integrity or reliability;
and |
|
● |
a
product candidate may not have a favorable risk/benefit assessment in the disease areas studied. |
We
cannot assure you that any future clinical trial for our product will be started or completed successfully, on schedule, or at all. If
we experience suspension or termination of, or delays in the completion of, any clinical trial for our product, the commercial prospects
for the product will be harmed, and our ability to generate product revenues will be delayed or diminished. In addition, any delays in
initiating or completing our clinical trials will increase our costs, slow down our product development and approval process, and jeopardize
our ability to commence product sales and generate revenues. Any of these occurrences may harm our business, prospects, financial condition,
and results of operations significantly.
Changes
in funding for the FDA and other government agencies could hinder their ability to hire and retain key leadership and other personnel,
or otherwise prevent new products and services from being developed or commercialized in a timely manner, which could negatively impact
our business.
The
ability of the FDA to review and approve or license new products can be affected by a variety of factors, including (i) government budget
and funding levels, as well as government shutdowns, (ii) the ability to hire and retain key personnel and accept the payment of user
fees, and (iii) statutory, regulatory, and policy changes. Average review times at the agency have fluctuated in recent years as a result.
In addition, government funding of other government agencies that fund research and development activities is subject to the political
process, which is inherently fluid and unpredictable.
Disruptions
at the FDA and other agencies may also slow the time necessary for new products to be reviewed or licensed or approved by necessary government
agencies, which would adversely affect our business. For example, over the last several years, the U.S. government has shut down several
times and certain regulatory agencies, such as the FDA, have had to furlough critical FDA employees and stop critical activities. If
a prolonged government shutdown occurs, it could significantly impact the ability of the FDA to timely review and process our regulatory
submissions, which could have a material adverse effect on our business. Additionally, over the last several years, the COVID-19 pandemic
has caused unexpected increases in the FDA’s workload and has degraded the timeliness of many agency activities, including pre-submission
interactions, product reviews, and pre-license inspections.
Even
if we obtain and maintain regulatory licensure or approval for our product in one jurisdiction, we may never obtain regulatory licensure
or approval for the product in any other jurisdiction, which would limit our market opportunities and adversely affect our business.
Obtaining
and maintaining regulatory licensure or approval for our product in one jurisdiction does not guarantee that we will be able to obtain
or maintain regulatory licensure or approval in other jurisdictions. For example, even if the FDA grants marketing approval for SkinTE,
comparable regulatory authorities in foreign countries must also approve the manufacturing, marketing, and promotion of the product in
those countries. Approval procedures vary amongst jurisdictions and can involve requirements and administrative review periods different
from, and greater than, those in the U.S., including additional preclinical studies or clinical trials. Obtaining foreign regulatory
approvals and compliance with foreign regulatory requirements could result in significant delays, difficulties, and costs for us and
could delay or prevent the introduction of our product in certain countries. In many countries outside the U.S., a product candidate
must be approved for reimbursement before it can be approved for sale in that country. In some cases, the price that we intend to charge
for our product is also subject to approval. If we fail to comply with the regulatory requirements in international markets or fail to
receive applicable marketing approvals, our target market will be reduced and our ability to realize the full market potential of our
product will be harmed, which would adversely affect our business, prospects, financial condition, and results of operations.
Even
if our product candidate receives regulatory licensure or approval, our product candidate may still face future development and regulatory
difficulties.
If
our product receives regulatory approval, the FDA or comparable foreign regulatory authorities may still impose significant restrictions
on the indicated uses or marketing of the product or impose ongoing requirements for potentially costly post-approval studies and trials
or other risk mitigation measures. In addition, regulatory agencies subject a product, its manufacturer, and the manufacturer’s
facilities to continual review and periodic inspections. If a regulatory agency discovers previously unknown problems with a product,
including adverse events of unanticipated nature, severity, or frequency, or problems with the facility where the product is manufactured,
stored, tested, or released, a regulatory agency may impose restrictions on that product or PolarityTE, including narrowing product indications,
requiring labeled warnings, or requiring withdrawal of the product from the market. Our product candidate will also be subject to ongoing
FDA or comparable foreign regulatory authorities’ requirements for labeling, packaging, storage, advertising, promotion, record-keeping,
import, export, clinical trial registration and results disclosure for post-market as well as pre-market trials, and submission of safety
and other post-market information. If our product fails to comply with applicable regulatory requirements, a regulatory agency may:
|
● |
issue
warning letters or other notices of possible violations; |
|
● |
impose
civil or criminal penalties or fines or seek disgorgement of revenue or profits; |
|
● |
suspend
or terminate any ongoing clinical trials; |
|
● |
refuse
to approve pending applications or supplements to approved applications filed by us or our licensees; |
|
● |
withdraw
any regulatory licensures or approvals; |
|
● |
impose
restrictions on operations, including costly new manufacturing requirements, or shut down our manufacturing operations; or |
|
● |
seize
or detain product or require a product recall. |
The
FDA and comparable foreign authorities actively enforce the laws and regulations prohibiting the promotion of off-label uses and other
unlawful promotion.
The
FDA and comparable foreign authorities strictly regulate the promotional claims that may be made about products, such as SkinTE, if licensed
or approved. In particular, a product may not be promoted for uses that are not approved by the FDA or comparable foreign authorities
as reflected in the product’s approved labeling and may not be promoted with claims that are false, misleading, or inadequately
substantiated. If we receive marketing approval for our product for its proposed indications, physicians may nevertheless use our product
for their patients in a manner that is inconsistent with the approved label, if the physicians believe in their professional medical
judgment that our product could be used in such manner.
However,
if we are found to have promoted our product for any off-label uses, or with claims that are false, misleading, or not adequately substantiated,
the federal government could levy civil, criminal, or administrative penalties, and seek to impose fines on us. Such enforcement has
become more common in the industry. The FDA or comparable foreign authorities could also request that we enter into a consent decree
or a corporate integrity agreement or seek a permanent injunction against us under which specified promotional conduct is monitored,
changed, or curtailed. If we cannot successfully manage the promotion of our product, if licensed or approved, we could become subject
to significant liability, which would materially adversely affect our business, financial condition, and results of operations.
We,
and any contract manufacturer we may engage in the future, are subject to significant regulation with respect to manufacturing our product.
Even once cGMP compliance is initially achieved, the manufacturing facility on which we rely may not continue to meet regulatory requirements.
Entities
involved in the preparation of products subject to BLA approval for clinical trials or commercial sale, including us and any contract
manufacturer we may engage in the future, are subject to extensive regulation. Products sold commercially after BLA approval or used
in clinical trials must be manufactured in accordance with cGMP. cGMP laws and regulations govern manufacturing facilities, processes,
and procedures and the implementation and operation of quality systems to control and assure the quality of investigational products
and products approved for sale. Poor control of production processes or facilities can lead to the introduction of contaminants or to
inadvertent changes in the properties or stability of our product candidate that may not be detectable in final product testing. We,
or our contract manufacturers, must supply all necessary documentation on a timely basis in support of a BLA or a change in manufacturing
site after a BLA is issued on a timely basis and must adhere to cGMP statutory requirements and regulations enforced by the FDA or comparable
foreign authorities through their facilities inspection program. The facilities and quality systems of our facility where we will manufacture
SkinTE must pass a pre-license inspection for compliance with the applicable statutory and regulatory requirements as a condition of
regulatory licensure or approval of our product. In addition, the regulatory authorities may, at any time, with or without cause, audit,
inspect, or conduct a remote review of records or information about a manufacturing facility involved with the preparation of our product
or the associated quality systems for compliance with the statute or regulations applicable to the activities being conducted. If our
facility does not pass a pre-license plant inspection, regulatory licensure or approval of our product may not be granted or may be substantially
delayed until any deficiencies are corrected to the satisfaction of the regulatory authority, if ever. If we engage contract manufacturers
in the future, we intend to oversee the contract manufacturers, but we cannot control the manufacturing process and will be completely
dependent on our contract manufacturing partners for compliance with the regulatory requirements.
The
regulatory authorities also may, at any time following approval of a product for sale, audit, inspect, or remotely review records regarding
our facility or the manufacturing facilities of our third-party contractors. If any such inspection, audit, or review identifies a failure
to comply with applicable statute or regulations or if a violation of our product specifications or applicable statute or regulations
occurs independent of such an inspection, audit, or review, we or the relevant regulatory authority may require remedial measures that
may be costly or time consuming for us or a third party to implement, and may include the temporary or permanent suspension of a clinical
trial or commercial sales or the temporary or permanent closure of a facility. Any such remedial measures imposed upon us or third parties
with whom we contract could materially harm our business, financial condition, and results of operations.
If
we or any of our third-party manufacturers fail to maintain regulatory compliance, the FDA or comparable foreign authorities can impose
regulatory sanctions including, among other things, refusal to approve a pending application for a product candidate, withdrawal of an
approval, or suspension of production. As a result, our business, financial condition, and results of operations may be materially and
adversely affected.
Additionally,
if supply from our facility or the facility of a future contract manufacturer is interrupted, an alternative manufacturer would need
to be qualified through a BLA supplement, or equivalent foreign regulatory filing, which could result in further delay. The regulatory
agencies may also require additional studies or trials if a new manufacturer is relied upon for commercial production. Switching manufacturing
facilities may involve substantial costs and is likely to result in a delay in our desired clinical and commercial timelines.
These
factors could cause us to incur higher costs and could cause the delay or termination of clinical trials, regulatory submissions, required
approvals, or commercialization of our product. Furthermore, if our facility or future contract manufacturers fail to meet production
requirements and we are unable to secure one or more replacement manufacturing facilities capable of production at a substantially equivalent
cost or at all, our clinical trials may be delayed, or we could lose potential revenue.
If
we fail to obtain and sustain an adequate level of reimbursement for our product by third-party payors, potential future sales would
be materially adversely affected.
There
will be no viable commercial market for our product, if approved, without reimbursement from third-party payors. Reimbursement policies
may be affected by future healthcare reform measures. We cannot be certain that reimbursement will be available for our product. Additionally,
even if there is a viable commercial market, if the level of reimbursement is below our expectations, our anticipated revenue and gross
margins will be adversely affected. Third-party payors, such as government or private healthcare insurers, carefully review and increasingly
question and challenge the coverage of and the prices charged for drugs. Reimbursement rates from private health insurance companies
vary depending on the company, the insurance plan, and other factors. Reimbursement rates may be based on reimbursement levels already
set for lower cost drugs and may be incorporated into existing payments for other services. There is a current trend in the U.S. healthcare
industry toward cost containment.
Large
public and private payors, managed care organizations, group purchasing organizations, and similar organizations are exerting increasing
influence on decisions regarding the use of, and reimbursement levels for, particular treatments. Such third-party payors, including
Medicare, may question the coverage of, and challenge the prices charged for, medical products and services, and many third-party payors
limit coverage of or reimbursement for newly approved healthcare products. In particular, third-party payors may limit the covered indications.
Cost-control initiatives could decrease the price we might establish for products, which could result in product revenues being lower
than anticipated. If we are unable to show a significant benefit relative to existing therapies, Medicare, Medicaid, and private payors
may not be willing to provide reimbursement for our product, which would significantly reduce the likelihood of our product gaining market
acceptance.
We
expect that private insurers will consider the efficacy, cost-effectiveness, safety, and tolerability of our product in determining whether
to approve reimbursement and at what level. Obtaining these approvals can be a time consuming and expensive process. Our business, financial
condition, and results of operations would be materially adversely affected if we do not receive approval for reimbursement of our product
from private insurers on a timely or satisfactory basis. Limitations on coverage could also be imposed at the local Medicare carrier
level or by fiscal intermediaries. Medicare Part D, which provides a pharmacy benefit to Medicare patients as discussed below, does not
require participating prescription drug plans to cover all drugs within a class of products. Our business, financial condition, and results
of operations could be materially adversely affected if Part D prescription drug plans were to limit access to, or deny or limit reimbursement
of, our product.
Reimbursement
systems in international markets vary significantly by country and by region, and reimbursement approvals must be obtained on a country-by-country
basis. In many countries, the product cannot be commercially launched until reimbursement is approved. In some foreign markets, prescription
drug pricing remains subject to continuing governmental control even after initial approval is granted. The negotiation process in some
countries can be very long. To obtain reimbursement or pricing approval in some countries, we may be required to conduct a clinical trial
that compares the cost-effectiveness of our products to other available therapies.
If
the prices for our product are reduced or if governmental and other third-party payors do not provide adequate coverage and reimbursement
of our product, our future revenue, cash flows, and prospects for profitability will suffer.
Current
and future legislation may increase the difficulty and cost of commercializing our product and may affect the prices we may obtain if
our product is approved for commercialization.
In
the U.S. and some foreign jurisdictions, there have been a number of adopted and proposed legislative and regulatory changes regarding
the healthcare system that could prevent or delay regulatory licensure or approval of our product, restrict or regulate post-marketing
activities, and affect our ability to profitably sell our product.
In
the U.S., the Medicare Modernization Act of 2003 (“MMA”) changed the way Medicare covers and pays for pharmaceutical products.
Cost reduction initiatives and other provisions of this legislation could limit the coverage and reimbursement rate that we receive for
our product. While the MMA only applies to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy
and payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the MMA
may result in a similar reduction in payments from private payors.
The
Patient Protection and Affordable Care Act (“PPACA”) was intended to broaden access to health insurance, reduce or constrain
the growth of healthcare spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for healthcare
and health insurance industries, impose new taxes and fees on the health industry, and impose additional health policy reforms. The PPACA
increased manufacturers’ rebate liability under the Medicaid Drug Rebate Program by increasing the minimum rebate amount for both
branded and generic drugs and revised the definition of Average Manufacturer Price, which may also increase the amount of Medicaid drug
rebates manufacturers are required to pay to states. The legislation also expanded Medicaid drug rebates and created an alternative rebate
formula for certain new formulations of certain existing products that is intended to increase the rebates due on those drugs. The Centers
for Medicare & Medicaid Services, which administer the Medicaid Drug Rebate Program, also proposed to expand Medicaid rebates to
the utilization that occurs in the territories of the U.S., such as Puerto Rico and the Virgin Islands. Further, beginning in 2011, the
PPACA imposed a significant annual fee on companies that manufacture or import branded prescription drug products and required manufacturers
to provide a 50% discount off the negotiated price of prescriptions filled by beneficiaries in the Medicare Part D coverage gap, referred
to as the “donut hole.” Legislative and regulatory proposals have been introduced at both the state and federal level to
expand post-approval requirements and restrict sales and promotional activities for pharmaceutical products.
There
have been prior public announcements by members of the federal government regarding their plans to repeal and replace the PPACA and Medicare.
For example, the Tax Cuts and Jobs Act of 2017 eliminated the individual mandate requiring most Americans (other than those who qualify
for a hardship exemption) to carry a minimum level of health coverage, effective January 1, 2019. We are not sure whether additional
legislative changes will be enacted, or whether the FDA regulations, guidance, or interpretations will be changed, or what the impact
of such changes on the marketing approvals of our product may be. In addition, increased scrutiny by the U.S. Congress of the FDA’s
approval process may significantly delay or prevent marketing approval, as well as subject us to more stringent product labeling and
post-marketing approval testing and other requirements.
We
are subject to “fraud and abuse” and similar laws and regulations, and a failure to comply with such regulations or prevail
in any adverse claim or proceeding related to noncompliance could harm our business, financial condition, and results of operations.
In
the U.S., we are subject to various federal and state healthcare “fraud and abuse” laws, including anti-kickback laws, false
claims laws, and other laws intended, among other things, to reduce fraud and abuse in federal and state healthcare programs. The federal
Anti-Kickback Statute makes it illegal for any person, including a drug or biologics manufacturer, or a party acting on its behalf, to
knowingly and willfully solicit, receive, offer, or pay any remuneration that is intended to induce the referral of business, including
the purchase, order, or prescription of a particular drug or biologic, or other good or service, for which payment in whole or in part
may be made under a federal healthcare program, such as Medicare or Medicaid. Although we seek to structure our business arrangements
in compliance with all applicable requirements, these laws are broadly written, and it is often difficult to determine precisely how
the law will be applied in specific circumstances. Accordingly, it is possible that our practices may be challenged under the federal
Anti-Kickback Statute.
The
federal False Claims Act prohibits anyone from, among other things, knowingly presenting or causing to be presented for payment to the
government, including the federal healthcare programs, claims for reimbursed drugs or services that are false or fraudulent, claims for
items or services that were not provided as claimed, or claims for medically unnecessary items or services. Under the Health Insurance
Portability and Accountability Act of 1996, we are prohibited from knowingly and willfully executing a scheme to defraud any healthcare
benefit program, including private payors, or knowingly and willfully falsifying, concealing or covering up a material fact, or making
any materially false, fictitious, or fraudulent statement in connection with the delivery of or payment for healthcare benefits, items,
or services to obtain money or property of any healthcare benefit program. Violations of fraud and abuse laws may be punishable by criminal
or civil sanctions, including penalties, fines, or exclusion or suspension from federal and state healthcare programs such as Medicare
and Medicaid, and debarment from contracting with the U.S. government. In addition, private individuals have the ability to bring actions
on behalf of the government under the federal False Claims Act as well as under the false claims laws of several states.
Many
states have adopted laws similar to the federal Anti-Kickback Statute, some of which apply to the referral of patients for healthcare
services reimbursed by any source, not just governmental payors. In addition, some states have passed laws that require pharmaceutical
companies to comply with the April 2003 Office of Inspector General Compliance Program Guidance for Pharmaceutical Manufacturers or the
Pharmaceutical Research and Manufacturers of America’s Code on Interactions with Healthcare Professionals. Several states also
impose other marketing restrictions or require pharmaceutical companies to make marketing or price disclosures to the state. There are
ambiguities as to what is required to comply with these state requirements and if we fail to comply with an applicable state law requirement,
we could be subject to penalties.
Law
enforcement authorities are increasingly focused on enforcing these laws, and it is possible that as we pursue our business we may be
challenged under these laws. Efforts to ensure that our business arrangements with third parties will comply with applicable healthcare
laws and regulations will involve substantial costs. If we are found in violation of one of these laws, we could be subject to significant
civil, criminal, and administrative penalties, damages, fines, exclusion from governmental funded federal or state healthcare programs,
and the curtailment or restructuring of our operations. If this occurs, our business, financial condition, and results of operations
may be materially adversely affected.
If
we face allegations of noncompliance with the law and encounter sanctions, our reputation, revenues, and liquidity may suffer, and our
product, if approved for commercialization, could be subject to restrictions or withdrawal from the market.
Any
government investigation of alleged violations of law could require us to expend significant time and resources in response and could
generate negative publicity. Any failure to comply with ongoing regulatory requirements may significantly and adversely affect our ability
to generate revenues from our product, if approved. If regulatory sanctions are applied or if regulatory licensure or approval is not
granted or is withdrawn, our business, financial condition, and results of operations will be adversely affected. Additionally, if we
are unable to generate revenues from product sales, our potential for achieving profitability will be diminished and our need to raise
capital to fund our operations will increase.
Risks
Related to Intellectual Property
Our
ability to protect our intellectual property and proprietary technology through patents and other means is uncertain and may be inadequate,
which could have a material and adverse effect on us.
Our
success depends significantly on our ability to protect our proprietary rights in technologies that presently consist of trade secrets,
patents, and patent applications. We currently have four issued patents and one allowed patent application in the U.S. relating to our
minimally polarized functional unit (“MPFU”) technology. We intend to continue our patenting activities and rely on patent
protection, as well as a combination of copyright, trade secret, and trademark laws and nondisclosure, confidentiality, and other contractual
restrictions to protect our proprietary technology, and there can be no assurance these methods of protection will be effective. These
legal means afford only limited protection and may not adequately protect our rights or permit us to gain or keep any competitive benefit.
The patent application process can be time consuming and expensive. We cannot ensure that any of the pending patent applications already
filed or that may be filed or acquired will result in issued patents. Competitors may be able to design around our patents or develop
procedures that provide outcomes that are comparable or even superior to ours. There is no assurance that the inventors of the patents
and applications were the first-to-invent or the first-inventor-to-file on the inventions, or that a third party will not claim ownership
in one of our patents or patent applications. We cannot assure you that a third party does not have or will not obtain patents that could
preclude us from practicing the patents we own or license now or in the future.
The
failure to obtain and maintain patents or protect our intellectual property rights could have a material and adverse effect on our business,
results of operations, and financial condition. We cannot be certain that, if challenged, any patents we have obtained or ultimately
obtain would be upheld because a determination of the validity and enforceability of a patent involves complex issues of fact and law.
If one or more of any patents we have obtained or ultimately obtain is invalidated or held unenforceable, such an outcome could reduce
or eliminate any competitive benefit we might otherwise have had.
In
the event a competitor infringes upon any patent we have obtained or ultimately obtain, or a third party including but not limited to
a university or other research institution, makes a claim of ownership over our patents or other intellectual property rights, confirming,
defending, or enforcing those rights may be costly, uncertain, difficult, and time consuming.
There
can be no assurance that a third party, including, but not limited to, a university or other research institution that our founders were
associated with in the past, will not make claims to ownership or other claims related to our technology.
There
can be no assurance that a third party, including but not limited to, a university or other research institution that our founders were
associated with in the past, will not make claims to ownership or other claims related to our technology. We believe we have developed
our technology outside of any institutions, but we cannot guarantee such institutions would not assert a claim to the contrary. Even
if successful, litigation to enforce or defend our intellectual property rights could be expensive and time consuming and could divert
our management’s attention. Further, bringing litigation for patent enforcement subjects us to the potential for counterclaims.
If one or more of our current or future patents is challenged in U.S. or foreign courts or the U.S. Patent and Trademark Office or foreign
patent offices, the patent(s) may be found invalid or unenforceable, which could harm our competitive position. If any court or any patent
office ultimately cancels or narrows the claims in any of our patents through any pre- or post-grant patent proceedings, such an outcome
could prevent or hinder us from being able to enforce the patent against competitors. Such adverse decisions could negatively affect
our future revenue and results of operations.
We
may be subject to claims that our employees have wrongfully appropriated, used, or disclosed intellectual property of their former employers.
We
employ individuals who were previously employed by other companies, universities, or academic institutions. We may be subject to claims
that we or our employees have inadvertently or otherwise used or disclosed intellectual property, including trade secrets or other proprietary
information, of a prior employer. Litigation may be necessary to defend against these claims. If we fail in defending any such claims,
in addition to paying monetary damages, we may lose valuable intellectual property rights or personnel, which could adversely impact
our business. Even if we are successful in defending against such claims, litigation could result in substantial costs and be a distraction
to management and other employees. Any of the foregoing could have an adverse impact on our business, financial condition, results of
operations, and cash flows.
We
may be subject to claims that former or current employees, collaborators, or other third parties have an interest in our patents, patent
applications, or other intellectual property as an inventor or co-inventor. Litigation may be necessary to defend against any claims
challenging inventorship. If we fail in defending any such claims, in addition to paying monetary damages, we may lose valuable intellectual
property rights, such as exclusive ownership of, or right to use, valuable intellectual property. Such an outcome could have a material
adverse effect on our business. Even if we are successful in defending against such claims, litigation could result in substantial costs
and be a distraction to management and other employees.
If
we are unable to protect the confidentiality of our proprietary information and know-how related to SkinTE or any of our product candidates,
our competitive position would be impaired and our business, financial condition, and results of operations could be adversely affected.
Some
of our technology, including our knowledge regarding certain aspects of the manufacture of SkinTE and potential product candidates, is
unpatented and is maintained by us as trade secrets. To protect these trade secrets, the information is restricted to our employees,
consultants, collaborators, and advisors on a need-to-know basis. In addition, we require our employees, consultants, collaborators,
and advisors to execute confidentiality agreements upon the commencement of their relationships with us. These agreements require that
all confidential information developed by the individual or made known to the individual by us during the individual’s relationship
with us be kept confidential and not disclosed to third parties. These agreements, however, do not ensure protection against improper
use or disclosure of confidential information, and these agreements may be breached. A breach of confidentiality could affect our competitive
position. In addition, in some situations, these agreements and other obligations of our employees to assign intellectual property to
us may conflict with, or be subject to, the rights of third parties with whom our employees, consultants, collaborators, or advisors
have previous employment or consulting relationships. Also, others may independently develop substantially equivalent proprietary information
and techniques or otherwise gain access to our trade secrets.
Adequate
remedies may not exist in the event of unauthorized use or disclosure of our confidential information. The disclosure of our trade secrets
could impair our competitive position and have a material adverse effect on our business, financial condition, and results of operations.
We
may become subject to claims of infringement of the intellectual property rights of others, which could prohibit us from developing our
product, require us to obtain licenses from third parties, require us to develop non-infringing alternatives, or subject us to substantial
monetary damages.
Third
parties could assert that our processes, SkinTE, product candidates, or technology infringe their patents or other intellectual property
rights. Whether a process, product, or technology infringes a patent or other intellectual property involves complex legal and factual
issues, the determination of which is often uncertain. We cannot be certain that we will not be found to have infringed the intellectual
property rights of others. Because patent applications may remain unpublished for certain periods of time and may take years to be issued
as patents, there may be applications now pending of which we are unaware or that do not currently contain claims of concern that may
later result in issued patents that SkinTE, our product candidates, procedures, or processes will infringe. There may be existing patents
that SkinTE, our product candidates, procedures, or processes infringe, of which infringement we are not aware. Third parties could also
assert ownership over our intellectual property. Such an ownership claim could cause us to incur significant costs to litigate the ownership
issues. If an ownership claim by a third party were upheld as valid, we may be unable to obtain a license from the third party on acceptable
terms to continue to make, use, or sell technology free from claims by that third party of infringement of the third party’s intellectual
property. We have not obtained, and do not have a present intention to obtain, any legal opinion regarding our freedom to practice our
technology.
If
we are unsuccessful in actions we bring against the patents of other parties, and it is determined that we infringe upon the patents
of third parties, we may be subject to injunctions, or otherwise prevented from commercializing potential products or services in the
relevant jurisdiction or may be required to obtain licenses to those patents or develop or obtain alternative technologies, any of which
could harm our business. Furthermore, if such challenges to our patent rights are not resolved in our favor, we could be delayed or prevented
from entering into new collaborations or from commercializing certain product candidates, which could adversely affect our business and
results of operations.
We
may not be able to protect our intellectual property in countries outside of the U.S.
Intellectual
property law outside the U.S. is uncertain and, in many countries, is currently undergoing review and revisions. The laws of some countries
do not protect patent and other intellectual property rights to the same extent as U.S. laws. Third parties may challenge our patents
or applications in foreign countries by initiating pre- and post-grant oppositions or invalidation proceedings. Developments during opposition
or invalidation proceedings in one country may directly or indirectly affect a corresponding patent or patent application in another
country in an adverse manner. It may be necessary or useful for us to participate in proceedings to determine the validity of our patents
or our competitors’ patents that have been issued in countries other than the U.S. This could result in substantial costs, divert
our efforts and attention from other aspects of our business, and could have a material adverse effect on our results of operations and
financial condition.
General
Risks
We
have one facility for the production of SkinTE for our clinical trials, so if this facility is destroyed or it experiences any manufacturing
or laboratory difficulties, disruptions, or delays, this could adversely affect our ability to conduct our clinical trials.
Manufacturing
of SkinTE takes place at our single U.S. facility. If regulatory, manufacturing, or other problems cause us to discontinue production
operations at this facility, we would not be able to supply SkinTE for clinical trials, which would adversely impact our business. If
this facility or the equipment in it is significantly damaged or destroyed by fire, flood, power loss, or similar events, we may not
be able to replace our manufacturing capacity quickly or inexpensively, or at all. In the event of a temporary or protracted loss of
this facility or equipment, we might not be able to quickly transfer manufacturing to a third party. Even if we could transfer manufacturing,
the shift would likely be expensive and time-consuming, particularly since an alternative facility would need to comply with applicable
FDA manufacturing and quality requirements and, if applicable, FDA approval would be required before any products manufactured at that
facility could be used.
Our
success depends on members of our senior management team and the loss of one or more key employees or an inability to attract and retain
skilled employees will negatively affect our business, financial condition, and results of operations.
Our
success depends in part on our continued ability to attract, retain and motivate highly qualified management, clinical, and other personnel.
We are highly dependent upon certain members of senior management and other key personnel. Although we have entered into employment agreements
with our senior management, each of them may terminate employment with us at any time. The replacement of any of our key personnel likely
would involve significant time and costs and may significantly delay or prevent the achievement of our business objectives and could,
therefore, negatively affect our business, financial condition, and results of operations. We do not carry any key person insurance policies
that could offset potential loss of service under applicable circumstances.
We
have from time to time experienced, and we expect to continue to experience, difficulty in hiring and retaining employees with appropriate
qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we do. If we hire employees
from competitors or other companies, their former employers may attempt to assert that these employees have or we have breached legal
obligations, resulting in a diversion of our time and resources to disputes and litigation and, potentially, result in liability.
Job
candidates and existing employees often consider the value of the stock awards they receive in connection with their employment. If the
perceived value of our stock awards decline, it may harm our ability to recruit and retain highly skilled employees.
A
resurgence of COVID-19 or another pandemic in the future could materially affect our operations, as well as the business or operations
of third parties with whom we conduct business.
The
impact of a resurgence of COVID-19 or another pandemic in the future, including the impact of restrictions imposed to combat its spread,
could result in businesses shutting down, work restrictions, and reduced capacity and access to healthcare facilities. Depending upon
the length of COVID-19 surges or another pandemic and resulting work restrictions and limitations on healthcare facilities, our future
clinical trials for SkinTE may be adversely affected by: (i) delays or difficulties in enrolling patients in our clinical trials approved
under our IND; (ii) delays or difficulties in clinical site activation, including difficulties in recruiting clinical site investigators
and clinical site personnel; (iii) delays in clinical sites receiving the supplies and materials needed to conduct the clinical trials,
including interruption in shipping that may affect the transport of our clinical trial product; (iv) changes in local regulations as
part of a response to a pandemic that may require us to change the ways in which our clinical trials are to be conducted, which may result
in unexpected costs or discontinuance of the clinical trials altogether; (v) diversion of healthcare resources away from the conduct
of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct
of our clinical trials; (vi) interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations
on travel imposed or recommended by federal or state governments, employers, and others, or interruption of clinical trial subject visits
and study procedures, the occurrence of which could affect the integrity or reliability of clinical trial data; (vii) risk that participants
enrolled in our clinical trials will acquire COVID-19 or other pandemic disease while clinical trials are ongoing, which could impact
the results of the clinical trials, including by increasing the number of observed adverse events; (viii) risk that clinical trial investigators
or other site staff will acquire COVID-19 or other pandemic disease while the clinical trial is ongoing, which could impede the conduct
or progress of the clinical trials; (ix) delays in necessary interactions with local regulators, ethics committees, and other important
agencies and contractors due to limitations in employee resources or forced furlough of government employees; (x) limitations in employee
resources that would otherwise be focused on the conduct of our clinical trial because of sickness of employees or their families or
the desire of employees to avoid contact with large groups of people; (xi) and interruption or delays to our clinical trial activities.
We
may not be able to enforce our patent or intellectual property rights against third parties, which could adversely affect the trading
price for our common stock.
Successful
challenge of any patents or future patents or patent applications such as through opposition, re-examination, inter partes review, interference,
or derivation proceedings could result in a loss of patent rights in the relevant jurisdiction. Unauthorized disclosure of our claims
to our trade secrets could result in loss of those intellectual property rights. Furthermore, because of the substantial amount of discovery
required relating to intellectual property litigation, there is a risk that some of our confidential or sensitive information could be
compromised by disclosure in the event of litigation. In addition, during litigation there could be public announcements of the results
of hearings, motions, or other interim proceedings or developments. If securities analysts or investors perceive that we have lost rights
to our intellectual property or the results of these disputes are negative, it could have a substantial adverse effect on the price of
our common stock.
In
the event that we fail to satisfy any of the listing requirements of the Nasdaq Capital Market, our common stock may be delisted, which
could affect our market price and liquidity.
Our
common stock is listed on the Nasdaq Capital Market. For continued listing on the Nasdaq Capital Market, we will be required to comply
with the continued listing requirements, including the minimum market capitalization standard, the minimum stockholders’ equity
requirement, the corporate governance requirements, and the minimum closing bid price requirement, among other requirements. On October
26, 2022, we received a deficiency letter from the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market
(“Nasdaq”) notifying us that, for the preceding 30 consecutive business days, the bid price for our common stock had closed
below the minimum $1.00 per share requirement for continued inclusion on The Nasdaq Capital Market pursuant to Nasdaq Listing Rule 5550(a)(2)
(the “Minimum Bid Price Requirement”). In accordance with Nasdaq Listing Rule 5810(c)(3)(A) (the “Compliance Period
Rule”), the Company has been provided an initial period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement,
which ends April 24, 2023 (the “Compliance Date”). If, at any time before the Compliance Date, the bid price for our common
stock closes at $1.00 or more for a minimum of 10 consecutive business days as required under the Compliance Period Rule, the Staff will
provide written notification to the Company that it complies with the Bid Price Rule, unless the Staff exercises its discretion to extend
this 10-day period pursuant to Nasdaq Listing Rule 5810(c)(3)(H).
The
notice also provides that, if we do not regain compliance with the Minimum Bid Price Requirement by April 24, 2023, we may be eligible
for additional time to regain compliance. To qualify for additional time, we are required to meet the continued listing requirement for
market value of publicly held shares and all other initial listing standards for The Nasdaq Capital Market, with the exception of the
Minimum Bid Price Requirement and provide written notice of its intention to cure the minimum bid price deficiency during the second
compliance period by effectuating a reverse split, if necessary. If we meet these requirements, we will be granted an additional compliance
period of 180 calendar days to regain compliance with the Minimum Bid Price Requirement. If the Staff determines that the Company will
not be able to cure the deficiency, or if the Company is otherwise not eligible for such additional compliance period, Nasdaq will provide
notice that the Company’s Common Stock will be subject to delisting.
To
resolve the noncompliance, we may consider available options, including effecting a reverse stock split, which may not result in a permanent
increase in the market price of our common stock and is dependent on many factors, including general economic, market, and industry conditions,
the timing and results of our clinical trials, regulatory developments, and other factors detailed from time to time in the reports we
file with the SEC. It is not uncommon for the market price of a company’s shares to decline in the period following a reverse stock
split. Furthermore, implementation of a reverse stock split requires approval of a majority of the outstanding voting power of our capital
stock, and there is no assurance we can obtain that approval.
In
the event that we fail to satisfy any of the listing requirements of the Nasdaq Capital Market our common stock may be delisted. If our
securities are delisted from trading on the Nasdaq Stock Market, and we are not able to list our securities on another exchange or to
have them quoted on the Nasdaq Stock Market, our common stock could be quoted on the OTC Markets or on the Pink Open Market. As a result,
we could face significant adverse consequences including:
|
● |
a
limited availability of market quotations for our securities; |
|
● |
a
determination that our common stock is a “penny stock,” which would require brokers trading in our common stock to adhere
to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities; |
|
● |
a
limited amount of news and analyst coverage; |
|
● |
a
decreased ability to obtain additional financing because we would be limited to seeking capital from investors willing to invest
in securities not listed on a national exchange; and |
|
● |
the
inability to use short-form registration statements on Form S-3, including the registration statement on Form S-3 we filed in February
2022, to facilitate offerings of our securities. |
We
will need to issue additional equity securities in the future, which may result in dilution to existing investors.
We
expect to seek the additional capital necessary to fund our future operations through public or private equity offerings, debt financings,
and collaborative and licensing arrangements. To the extent we raise additional capital by issuing equity securities, including in a
debt financing where we issue convertible notes or notes with warrants and any shares of our common stock to be issued in a private placement,
our stockholders may experience substantial dilution. We expect to sell additional equity securities from time to time in one or more
transactions at prices and in a manner we determine. If we sell additional equity securities, existing stockholders may be materially
diluted. In addition, new investors could gain rights superior to existing stockholders, such as liquidation and other preferences.
In
addition, the exercise or conversion of outstanding options or warrants
to purchase shares of capital stock may result in dilution to our stockholders upon any such exercise or conversion. As of March 20, 2023,
we had a significant number of securities convertible into, or allowing the purchase of, our common stock, including 4,787,824 warrants
to purchase shares of our common stock, 370,037 options and rights to acquire shares of our common stock that are outstanding under our
equity incentive plans, and 17,535 shares of common stock reserved for future issuance under our equity incentive plans.
Because
we do not expect to declare cash dividends on our common stock in the foreseeable future, stockholders must rely on appreciation of the
value of our common stock for any return on their investment.
While
we have in the past declared and paid cash dividends on our capital stock, we currently anticipate that we will retain future earnings
for the development, operation, and expansion of our business and do not expect to declare or pay any additional cash dividends in the
foreseeable future. As a result, only appreciation of the public trading price of our common stock, if any, will provide a return to
investors.
Item
1B. Unresolved Staff Comments.
None.
Item
2. Properties.
Our
Current Lease
We
entered into a lease agreement on November 30, 2022 (the “Lease”) with 1960 South 4250 West LLC (the “Landlord”)
pursuant to which we lease approximately 63,156 square feet of space in a building located at 1960 South 4250 West, Salt Lake City, Utah
84104, for a term of five years beginning December 1, 2022, with an option to renew for an additional five years. The initial basic rent
is $0.95 per rentable square foot per month, or a total of $59,998 per month, and the monthly basic rent in effect at the end of each
year during the Lease term will increase by 4%. In addition, we are obligated to pay the Landlord our proportionate share of operating
costs and other expenses based on the portion of the building we occupy, which is approximately 41%. Under the Lease the Landlord is
obligated to construct a demising wall between the area rented to us and the rest of the building, which the Landlord intends to lease
to other parties. From the date construction begins until completion of the demising wall and related reconstruction items, our rent
is reduced by 50%.
Our
Prior Lease
Our
current Lease described above is the end result of two transactions that closed concurrently on November 30, 2022. On December 27, 2017,
we entered into a commercial lease agreement (the “Adcomp Lease”) with Adcomp LLC (“Adcomp”) pursuant to which
we leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space at 1960 South 4250 West, Salt
Lake City, Utah (the “Real Property”) from Adcomp. The initial term of the Adcomp Lease was five years and it expired on
November 30, 2022. We had a one-time option to renew for an additional five years and an option to purchase the Property at a purchase
price of $17.5 million. The initial base rent under the Adcomp Lease was $98,190 per month ($0.55 per sq. ft.) for the first year of
the initial lease term and increased 3.0% per annum thereafter. On December 16, 2021, we gave written notice to Adcomp of our election
to exercise the option to purchase the Real Property, and on March 14, 2022, we entered into a definitive purchase and sale agreement
with Adcomp (the “Purchase Agreement”). In connection with exercising the option to purchase the Real Property, we made an
earnest money deposit of $150,000.
On
October 25, 2021, we signed a Purchase and Sale Agreement, the terms of which were finalized on December 10, 2021, and subsequently amended
by Amendment No. 1 thereto dated March 15, 2022 (the “BCG Agreement”), with BCG Acquisitions LLC (“BCG”). Under
the BCG Agreement we agreed to sell the Real Property to BCG or its assigns for $17.5 million after we purchased the Real Property from
Adcomp, and then lease a portion of the building located on the Real Property. Under the BCG Agreement, BCG made an earnest money deposit
totaling $150,000.
The
Purchase Agreement and BCG Agreement provided for closing of the transactions described above on November 15, 2022, and also provided
for an option to extend the closing to November 30, 2022. On November 9, 2022, BCG and we entered into an Addendum to the BCG Agreement
(the “Addendum”) providing, in part, for BCG exercising its right to extend the closing to November 30, 2022, in consideration
of making an extension deposit with the escrow holder of $50,000, and the exercise of our right under the Purchase Agreement with Adcomp
to extend the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000. The Addendum
also stated that we would form a single member limited liability company owned by us, which would be used as the vehicle to effectuate
purchase of the Real Property from Adcomp at closing, effectuate a change in ownership of the limited liability company to BCG or its
assigns, and lease a portion of the building on the Real Property to us to house our operations. Pursuant thereto we formed the Landlord,
1960 South 4250 West LLC, and we assigned to the Landlord all of our rights and obligations under the Purchase Agreement with Adcomp
and under the BCG Agreement and Addendum. Also, BCG assigned all of its rights and obligations under the BCG Agreement and Addendum to
BC 1960 South Industrial, LLC, a Delaware limited liability company (“BC1960”), which is unaffiliated with the Company.
The
addendum also provided that BCG would arrange financing from a third-party lender for the Landlord to apply to the purchase of the Real
Property under the Purchase Agreement with Adcomp and that BCG would provide such credit enhancements and accommodations necessary to
obtain such financing in consideration of the terms of the Addendum that contemplated BCG or its assigns acquiring ownership of the Landlord
concurrently with the Landlord’s acquisition of the Real Property from Adcomp.
The
following transactions occurred concurrently on November 30, 2022:
|
● |
BC1960
made an unsecured loan of $9,421,993 to the Company in cash pursuant to the terms of the Addendum, a portion of which we contributed
to the capital of the Landlord and was applied by the Landlord, together with deposits made under the Purchase Agreement with Adcomp
and a security deposit held by Adcomp under the Adcomp Lease, to the purchase of the Real Property; |
|
● |
A
third-party lender made available cash in the amount of $10,976,470 under a trust deed note and trust deed made by the Landlord,
which was applied to purchase of the Real Property; |
|
● |
Upon
payment of the purchase price for the Real Property and closing costs, Adcomp transferred title to the Property and related fixtures,
equipment, and personal property appurtenant thereto to the Landlord; |
|
● |
We
assigned and transferred to BC1960 all of the membership interest of the Landlord as payment in full of the unsecured loan of $9,421,993
described above and, as a result, we were reimbursed for the deposits we made under the Purchase Agreement with Adcomp and our security
deposit held by Adcomp under the Adcomp Lease, as described above; and |
|
● |
The
Landlord and the Company entered into the Lease. |
Item
3. Legal Proceedings.
On
September 24, 2021, a class action complaint alleging violations of the Federal securities laws was filed in the United States District
Court, District of Utah, by Marc Richfield against the Company and certain officers of the Company, Case No. 2:21-cv-00561-BSJ. The Court
subsequently appointed a Lead Plaintiff and ordered the Lead Plaintiff to file an amended Complaint by February 7, 2022, which was extended
to February 21, 2022. The Lead Plaintiff filed an amended complaint on February 21, 2022, against the Company, two current officers of
the Company, and three former officers of the Company (the “Complaint”). The Complaint alleges that during the period from
January 30, 2018, through November 9, 2021, the defendants made or were responsible for, disseminating information to the public through
reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation
of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically,
the Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the Company’s product, SkinTE, was improperly
registered as a 361 HCT/P under Section 361 of the Public Health Service Act and that, as a result, the Company’s ability to commercialize
SkinTE as a 361 HCT/P was not sustainable because it was inevitable SkinTE would need to be registered under Section 351 of the Public
Health Service Act; (ii) the Company characterized itself as a commercial stage company when it knew sales of SkinTE as a 361 HCT/P were
unsustainable and that, as a result, it would need to file an IND and become a development stage company; (iii) issues arising from an
FDA inspection of the Company’s facility in July 2018, were not resolved even though the Company stated they were resolved; and
(iv) the IND for SkinTE was deficient with respect to certain chemistry, manufacturing, and control items, including items identified
by the FDA in July 2018, and as a result it was unlikely that the FDA would approve the IND in the form it was originally filed. The
Company filed a motion to dismiss the complaint for failure to state a claim, on April 22, 2022. The Lead Plaintiff filed its memorandum
in opposition to the Company’s motion to dismiss on July 18, 2022. The Company filed its reply memorandum to the Lead Plaintiff’s
opposition memorandum on August 11, 2022, and oral argument on the motion to dismiss was held September 8, 2022. At the hearing the judge
issued a ruling from the bench dismissing the Complaint without prejudice and granting the Lead Plaintiff leave to file an amended complaint.
The Lead Plaintiff filed an amended complaint (the “Amended Complaint”) on October 3, 2022, alleging additional facts. The
Company filed a motion to dismiss the Amended Complaint for failure to state a claim on November 2, 2022, Lead Plaintiff filed its brief
in opposition to the Company’s motion on December 2, 2022, and the Company filed its reply brief to the Lead Plaintiff brief in
opposition on December 23, 2022. Oral argument on the Company’s motion to dismiss the Amended Complaint was held March 6, 2023.
Following oral argument, the judge ruled that the Amended Complaint be dismissed with prejudice and requested that we, through our counsel,
submit a proposed opinion and order. Once the judge enters the order, the Lead Plaintiff will have 30 days to file a notice of appeal.
We are unable to predict at this time whether the Lead Plaintiff will file an appeal.
On
October 25, 2021, a stockholder derivative complaint alleging violations of the Federal securities laws was filed in the United States
District Court, District of Utah, by Steven Battams against the Company, each member of the Board of directors, and two officers of the
Company, Case No. 2:21-cv-00632-DBB (the “Stockholder Derivative Complaint”). The Stockholder Derivative Complaint alleges
that the defendants made, or were responsible for, disseminating information to the public through reports filed with the Securities
and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a)
of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Stockholder Derivative Complaint
alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with
the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the
FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE
IND would obtain FDA approval; and (iv) as a result, the public statements regarding the IND were materially false and misleading. The
parties have stipulated to stay the Stockholder Derivative Complaint until (1) the dismissal of the Complaint (including any amendment)
described above, (2) denial of a motion to dismiss the Complaint, or (3) notice is given that any party is withdrawing its consent to
the stipulated stay of the Stockholder Derivative Complaint proceeding. After the order of dismissal with prejudice of the class action
lawsuit described above and exhaustion of all appeals by the Lead Plaintiff, the stay of the Stockholder Derivative Complaint will expire.
We believe the allegations in the Stockholder Derivative Complaint are without merit and we intend to defend the litigation vigorously
after the stay expires. At this early stage of the proceedings we are unable to make any prediction regarding the outcome of the litigation.
In
the ordinary course of business, we 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 described above, at
December 31, 2022, we were not party to any legal or arbitration proceedings that may have significant effects on our financial position
or results of operations. No governmental proceedings are pending or, to our knowledge, contemplated against us. We are not a party to
any material proceedings in which any director, member of senior management, or affiliate of ours is either a party adverse to us or
our subsidiaries or has a material interest adverse to us or our subsidiaries.
Item
4. Mine Safety Disclosures.
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1.
PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE,
Inc. (together with its subsidiaries, the “Company”) is a clinical stage biotechnology company developing regenerative tissue
products and biomaterials. The Company also operated a laboratory testing and clinical research business until the end of April 2022.
The
Company’s first regenerative tissue product is SkinTE. In July 2021, the Company submitted an investigational new drug application
(“IND”) for SkinTE to the United States Food and Drug Administration (the “FDA”) through its subsidiary, PolarityTE
MD, Inc. Prior to June 1, 2021, the Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and,
after the Company’s decision to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the
FDA in a regenerative medicine policy framework to help facilitate regenerative medicine therapies. The FDA’s stated period of
enforcement discretion ended May 31, 2021. Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, and ceased
its SkinTE commercial operations, and has transitioned to a clinical stage company pursuing an IND for SkinTE. As a result, there are
no product sales from commercial SkinTE after June 2021. The only revenues recognized subsequent to June 2021 for SkinTE were nominal
amounts collected on accounts for product shipped prior to the end of May 2021 that were not previously recognized because of concerns
with collectability. No revenue for SkinTE was recognized during the year ended December 31, 2022.
At
the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which had been used for preclinical
studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on
a contract basis. The Company sold the business at the end of April 2022 and ceased to recognize services revenues after the sale. Consequently,
the Company is no longer engaged in any revenue generating business activity and its operations are now focused on advancing the IND
for SkinTE.
2.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation. The accompanying financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Principles
of Consolidation. The accompanying 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 with customers, stock-based compensation, the
valuation allowances for deferred tax assets, the valuation of common stock warrant liabilities, and impairment of assets. Actual results
could differ from those estimates.
Segments.
The Company’s operations are based in the United States and involve products and services which were managed separately in
two segments prior to April 2022: 1) regenerative medicine products and 2) contract services. The Chief Operating Decision Maker (CODM),
is the Company’s Chief Executive Officer (CEO), who allocates resources to and assesses the performance of each operating segment
using information about its revenue and operating income (loss).
The
contract services reporting segment operated primarily through IBEX Preclinical Research, Inc. (“IBEX”). Utah CRO Services,
Inc., a Nevada corporation (“Utah CRO”), is the Company’s direct subsidiary and held all the outstanding capital stock of IBEX (the
“IBEX Shares”). Utah CRO also held all the member interest of IBEX Property LLC, a Nevada limited liability company (“IBEX
Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately 1.75 combined gross
acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”), which was leased
by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business. In April 2022, the Company sold
IBEX and the Property. Consequently, the remaining contract services business is no longer a reportable segment due to immateriality.
Contract services ceased to be a reportable segment upon disposal of IBEX and historical information from prior to the disposal date
is reported in Note 19. See Note 5 for detail on management’s disposal of IBEX.
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 December 31, 2022, the Company did not hold any cash equivalents.
Concentration of Credit Risk. Balances
are maintained at U.S. financial institutions and may exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance
limit of $250,000 per depositor, per insured bank for each account ownership category. Although the Company currently believes that the
financial institutions with whom it does business, will be able to fulfill their commitments to the Company, there is no assurance that
those institutions will be able to continue to do so. The Company has not experienced any credit losses associated with its balances in
such accounts for the years ended December 31, 2022 and 2021.
Accounts
Receivable. Accounts receivable at December 31, 2021 are due from the Company’s contract services customers. There are no accounts
receivable at December 31, 2022. Accounts that are outstanding longer than the contractual payment terms are considered past due. The
Company determines its allowance for doubtful accounts by considering a number of factors, including the length of time trade accounts
receivable are past due and the customer’s current ability to pay its obligation to the Company. The Company writes off accounts
receivable when they become uncollectible. As of December 31, 2021, the Company recorded an allowance of approximately $0.2 million.
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 valuation adjustment. The Company recorded inventory
write-offs of $0.7 million for the year ended December 31, 2021, of which $0.3 million and $0.4 million were recorded in research and
development and cost of sales, respectively, within the accompanying consolidated statement of operations. No inventory was recorded
as of December 31, 2022 or 2021.
Assets
Held for Sale. Assets to be disposed (“disposal group”) of by sale are reclassified into assets held for sale on the
Company’s consolidated balance sheet. The reclassification occurs when an agreement to sell exists, or management has committed
to a plan to sell the assets within one year. Disposal groups are measured at the lower of carrying value or fair value less costs to
sell and are not depreciated or amortized. The fair value of a disposal group, less any costs to sell, is assessed each reporting period
it remains classified as held for sale and any remeasurement to the lower of carrying value or fair value less costs to sell is reported
as an adjustment to the carrying value of the disposal group. During the reporting periods, the Company has committed to plans to sell
a variety of lab equipment within the regenerative medicine products reporting segment. The lab equipment for which the Company has a
committed plan to sell but has not yet been sold has been designated as held for sale and is presented as such within the consolidated
balance sheet as of December 31, 2022 and December 31, 2021.
Property
and Equipment. Property and equipment are stated at cost less accumulated depreciation and amortization. Depreciation is computed
on the straight-line basis over the estimated useful lives of the related assets, generally ranging from three to eight years. Leasehold
improvements are amortized using the straight-line method over the shorter of the assets’ estimated useful lives or the remaining
term of the lease. Maintenance and repairs are charged to operations as incurred. Upon sale or retirement of assets, the cost and related
accumulated depreciation are removed from the balance sheet and the resulting gain or loss is reflected in operations.
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 consolidated balance sheet in property and equipment and other current and
long-term liabilities. The current portion of operating lease obligations are included in other current liabilities. The classification
of the 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 lease
is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing
rate.
The
Company has lease agreements with lease and non-lease components. As allowed under 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.
Goodwill
and Intangible Assets. Goodwill represents the excess purchase price over the fair value of net tangible and intangible assets acquired.
Goodwill is not amortized, rather the carrying amount of goodwill is assessed for impairment at least annually, or more frequently if
impairment indicators exist.
Goodwill
is tested for impairment at a reporting unit level by performing either a qualitative or quantitative analysis. The qualitative analysis
is an assessment of factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its
carrying amount. If the Company concludes that it is not more likely than not that the fair value of a reporting unit is less than its
carrying amount, then no further testing is necessary.
If
the Company concludes otherwise, a quantitative analysis is performed by comparing the fair value of a reporting unit to its carrying
amount. If the fair value exceeds the carrying value, there is no impairment. If the fair value is less than the carrying value, an impairment
charge is recorded for the difference between the fair value and the carrying value. For the year ended December 31, 2021, the Company
performed a qualitative assessment and concluded that it is more likely than not that the fair value of the IBEX reporting unit was less
than its carrying value which resulted in the Company also performing a quantitative analysis. The results of the quantitative analysis
showed the carrying value of the reporting unit exceeding its fair value.
Intangible
assets deemed to have finite lives are amortized on a straight-line basis over their estimated useful lives, which generally range from
one to eleven years. The useful life is the period over which the asset is expected to contribute directly, or indirectly, to its future
cash flows. Intangible assets are reviewed for impairment when certain events or circumstances exist. For amortizable intangible assets,
impairment exists when the undiscounted cash flows exceed its carrying value and an impairment charge would be recorded for the excess
of the carrying value over its fair value. At least annually, the remaining useful life is evaluated. For the year ended December 31,
2021, the Company identified indicators of impairment which led the Company to perform an assessment that resulted in carrying values
of the intangible assets exceeding the undiscounted cash flows.
As
a result of the goodwill and intangible assets impairment analyses, the Company determined that goodwill and intangible assets of the
IBEX reporting unit were fully impaired and recorded impairment charges of $0.6 million for the year ended December 31, 2021 within
the Company’s contract services business segment and are included in impairment of goodwill and intangible assets within the accompanying
consolidated statement of operations. No goodwill or intangibles were recorded as of December 31, 2022 or December 31, 2021.
Impairment
of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment, for impairment whenever events or
changes in business circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company
considers in deciding when to perform an impairment review include significant underperformance of the business in relation to expectations,
significant negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment
review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected
to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss is required to be measured
when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The measurement
of 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.
Offering
Costs. The Company capitalizes direct and incremental costs (i.e., consisting of legal, accounting, and other fees and costs) associated
with equity financings until such financings are consummated, at which time such costs are recorded in additional paid-in capital against
the gross proceeds of the equity financings. If the related equity financing is abandoned, the previously deferred offering costs will
be charged to expense in the period in which the offering is abandoned.
Capitalized
Software. The Company capitalizes certain internal and external costs incurred to acquire or create internal use software. Costs
to create internal software are capitalized during the application development period. Capitalized software is included in property and
equipment and is depreciated over three years once development is complete.
Revenue
Recognition. Under ASC 606, revenue is recognized when a customer obtains control of promised goods or services, in an amount that
reflects the consideration that the Company expects to receive in exchange for those goods or services. To determine revenue recognition
for arrangements that an entity determines are within the scope of ASC 606, the Company performs the following five steps: (i) identify
the contract(s) with a customer; (ii) identify the performance obligations in the contract; (iii) determine the transaction price; (iv)
allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity satisfies
a performance obligation.
The
Company recorded product revenues primarily from the sale of SkinTE, its regenerative tissue products. When the Company marketed its
SkinTE product, it was sold to healthcare providers (customers), primarily through direct sales representatives. Product revenues consisted
of a single performance obligation that the Company satisfies at a point in time. In general, the Company recognized product revenue
upon delivery to the customer.
In
the contract services segment, the Company recorded service revenues from the sale of its preclinical research services, which included
delivery of preclinical studies and other research services to unrelated third parties. Service revenues generally consisted of a single
performance obligation that the Company satisfied 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 required the Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled
receivables and deferred revenue were recognized based on payment timing and work completed. Generally, a portion of the payment was
due upfront and the remainder upon completion of the contract, with most contracts completing in less than a year. Contract services
also included research and laboratory testing services to unrelated third parties on a contract basis. Due to the short-term nature of
the services, these customer contracts generally consisted of a single performance obligation that the Company satisfied at a point in
time. The Company satisfied the single performance obligation and recognized revenue upon delivery of testing results to the customer.
As of December 31, 2022 and December 31, 2021, the Company had unbilled receivables of zero and $0.5 million, respectively, and deferred
revenue of zero and $0.1 million, respectively. Revenue of $0.1 million was recognized during the year ended December 31, 2022 that was
included in the deferred revenue balance as of December 31, 2021.
Any
costs incurred to obtain a contract would be recognized as product is shipped.
The
Company considers a significant customer to be one that comprises more than 10% of net revenues or accounts receivable. The Company did
not have revenue in 2022 other than the revenue related to its IBEX business that was sold during 2022.
The
following table contains revenues as presented in the consolidated statements of operations disaggregated by services and products.
SCHEDULE
OF REVENUE DISAGGREGATED BY SERVICES AND PRODUCTS
| |
For the Year Ended December 31, 2022 | | |
For the Year Ended December 31, 2021 | |
Regenerative Medicine Products | |
| | | |
| | |
SkinTE Products | |
$ | – | | |
$ | 3,076 | |
| |
| | | |
| | |
Contract Services | |
| | | |
| | |
Lab Testing Services | |
| – | | |
| 1,877 | |
Preclinical Research Services | |
| 814 | | |
| 4,451 | |
| |
| 814 | | |
| 6,328 | |
Total Net Revenues | |
$ | 814 | | |
$ | 9,404 | |
Research
and Development Expenses. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for
goods or services that will be used or rendered for future research and development activities pursuant to executory contractual arrangements
with third party research organizations are deferred and recognized as an expense as the related goods are delivered or the related services
are performed.
Accruals
for Clinical Trials. As part of the process of preparing its financial statements, the Company is required to estimate its expenses
resulting from its obligations under contracts with vendors, clinical research organizations and consultants and under clinical site
agreements in connection with conducting clinical trials. The financial terms of these contracts are subject to negotiations, which vary
from contract to contract and may result in payment terms that do not match the periods over which materials or services are provided
under such contracts. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those
expenses with the period in which services are performed and efforts are expended. The Company accounts for these expenses according
to the timing of various aspects of the expenses. The Company determines accrual estimates by taking into account discussion with applicable
personnel and outside service providers as to the progress of clinical trials, or the services completed. During the course of a clinical
trial, the Company adjusts its clinical expense recognition if actual results differ from its estimates. The Company makes estimates
of its accrued expenses as of each balance sheet date based on the facts and circumstances known to it at that time. The Company’s
clinical trial accruals are dependent upon the timely and accurate reporting of contract research organizations and other third-party
vendors. Although the Company does not expect its estimates to be materially different from amounts actually incurred, its understanding
of the status and timing of services performed relative to the actual status and timing of services performed may vary and may result
in it reporting amounts that are too high or too low for any particular period.
Common
Stock Warrant Liability. The Company accounts for common stock warrants issued as freestanding instruments in accordance with applicable
accounting guidance as either liabilities or as equity instruments depending on the specific terms of the warrant agreement. Under certain
change of control provisions, some warrants issued by the Company could require cash settlement which necessitates such warrants to be
recorded as liabilities. Warrants classified as liabilities are remeasured at fair value 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.
The
fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived
from the U.S. Treasury yield curve in effect at the time of the grant commensurate with the expected
term of the option. The volatility factor is determined based on 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 recognized as compensation expense over the vesting period of, generally, six months to three years.
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 balance sheet date and records
a valuation allowance for assets for which realization is not more likely than not. The Company recognizes interest and penalties as
a component of income tax expense.
Reverse
Stock Split. On May 12, 2022, the Company’s Board of Directors approved a reverse stock split in the ratio of 1-for-25 (“Reverse
Stock Split”). The Reverse Stock Split became effective as of May 16, 2022. Fractional shares resulting from the reverse stock
split were rounded up to the nearest whole share, which resulted in the issuance of a total of 17,024 shares of common stock to implement
the reverse stock split.
The
Company accounted for the reverse stock split on a retrospective basis pursuant to ASC 260, Earnings Per Share. All issued
and outstanding common stock, common stock warrants, stock option awards, exercise prices and per share data have been adjusted in these
consolidated financial statements, on a retrospective basis, to reflect the reverse stock split for all periods presented. The number
of authorized shares and par value of the preferred stock and common stock were not adjusted because of the reverse stock split.
Net
Loss Per Share. Basic net loss per share of common stock is computed by dividing net loss attributable to common stockholders by
the weighted average number of shares of common stock outstanding for the period. Gains on warrant
liabilities are only considered dilutive when the average market price of the common stock during the period exceeds the exercise price
of the warrants. All common stock warrants issued participate on a one-for-one basis with common stock in the distribution of dividends,
if and when declared by the Board of Directors, on the Company’s common stock. For purposes of computing earnings per share (EPS),
these warrants are considered to participate with common stock in earnings of the Company. Therefore, the Company calculates basic and
diluted EPS using the two-class method. Under the two-class method, net income for the period is allocated between common stockholders
and participating securities according to dividends declared and participation rights in undistributed earnings. No loss was allocated
to the warrants for the years ended December 31, 2022 and December 31, 2021 as results of operations were a loss for each period and
the warrant holders are not required to absorb losses. The Company has issued pre-funded warrants from time to time at an exercise price
of $0.025 per share. The shares of common stock into which the pre-funded warrants may be exercised are considered outstanding for the
purposes of computing basic earnings per share because the shares may be issued for little or no consideration, are fully vested, and
are exercisable after the original issuance date.
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 was 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 adopted this ASU beginning January 1, 2023. The Company does not expect the adoption of the new guidance to have a significant
impact on its consolidated financial statements and related disclosures.
Recently
Adopted Accounting Pronouncements
In
August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an
Entity’s Own Equity (ASU 2020-06). ASU 2020-06 simplifies the accounting for certain financial instruments with characteristics
of liabilities and equity, including convertible instruments and contracts in an entity’s own equity. Those instruments that do
not have a separately recognized embedded conversion feature will no longer recognize a debt issuance discount related to such a conversion
feature and would recognize less interest expense on a periodic basis. It also removes from ASC 815-40-25-10 certain conditions for equity
classification and amends certain guidance in ASC Topic 260 on the computation of EPS for convertible instruments and contracts in an
entity’s own equity. An entity can use either a full or modified retrospective approach to adopt the ASU’s guidance. The
Company early adopted this ASU for the fiscal year beginning January 1, 2022. The adoption of this ASU did not have a material impact
on the Company’s consolidated financial statements and related disclosures.
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 adopted this ASU prospectively
for the fiscal year beginning January 1, 2022. The adoption of this ASU did not have a material impact on the Company’s consolidated
financial statements and related disclosures.
3.
LIQUIDITY AND GOING CONCERN
The
Company is a clinical stage biotechnology company that has incurred recurring losses and negative cash flows from operations since commencing
its biotechnology business in 2017. As of December 31, 2022, the Company had an accumulated deficit of $516.2 million. As of December
31, 2022, the Company had cash and cash equivalents of $11.4 million. The Company has been funded historically through sales of equity
and debt.
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’s significant operating losses raise substantial doubt regarding
the Company’s ability to continue as a going concern for at least one year from the date of issuance of these consolidated financial
statements. The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset
amounts or amounts of liabilities that might result from the outcome of this uncertainty. Consequently, the future success of the Company
depends on its ability to attract additional capital and, ultimately, on its ability to successfully complete the regulatory approval
process for its product, SkinTE, and develop future profitable operations. 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.
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.
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 ASSETS AND LIABILITIES MEASURED ON RECURRING BASIS
| |
December 31, 2022 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Liabilities | |
| | |
| | |
| | |
| |
Common stock warrant liability | |
$ | – | | |
$ | – | | |
$ | 1,489 | | |
$ | 1,489 | |
Total | |
$ | – | | |
$ | – | | |
$ | 1,489 | | |
$ | 1,489 | |
| |
December 31, 2021 | |
| |
Level 1 | | |
Level 2 | | |
Level 3 | | |
Total | |
Liabilities | |
| | | |
| | | |
| | | |
| | |
Common stock warrant liability | |
$ | – | | |
$ | – | | |
$ | 6,844 | | |
$ | 6,844 | |
Total | |
$ | – | | |
$ | – | | |
$ | 6,844 | | |
$ | 6,844 | |
The
Company assesses its assets held for sale, long-lived assets, including property, equipment, ROU assets, intangible assets, and goodwill,
at their estimated fair value on a non-recurring basis. The Company reviews the carrying amounts of such assets when events indicate
that their carrying amounts may not be recoverable. Any resulting impairment would require that the asset be recorded at its fair value.
During the year ended December 31, 2022, the Company recognized an impairment charge of $0.4 million related to equipment classified
in assets held for sale. During the year ended December 31, 2021, the Company recognized an impairment charge of $0.6 million related
to definite-lived intangible assets and goodwill and $0.4 million related to property and equipment. As of each measurement date, the
fair values of assets held for sale, property and equipment, goodwill and intangibles were determined utilizing Level 3 inputs and were
based on a market approach and income approach. See Note 9 and Note 16 for additional details.
The
following table presents the change in fair value of the liability classified common stock warrants for the year ended December 31, 2022
(in thousands):
SCHEDULE
OF FAIR VALUE OF LIABILITY CLASSIFIED COMMON STOCK WARRANTS
| |
Fair Value at December 31, 2021 | | |
Initial Fair Value at Issuance | | |
(Gain) Loss Upon Change in Fair Value | | |
Fair Value at December 31, 2022 | |
Warrant liabilities | |
| | | |
| | | |
| | | |
| | |
February 14, 2020 issuance | |
$ | 291 | | |
$ | – | | |
$ | (283 | ) | |
$ | 8 | |
December 23, 2020 issuance | |
| 239 | | |
| – | | |
| (237 | ) | |
| 2 | |
January 14, 2021 issuance | |
| 3,345 | | |
| – | | |
| (3,273 | ) | |
| 72 | |
January 25, 2021 issuance | |
| 2,969 | | |
| – | | |
| (2,905 | ) | |
| 64 | |
March 16, 2022 issuance | |
| – | | |
| 3,129 | | |
| (3,103 | ) | |
| 26 | |
June 8, 2022 issuance | |
| – | | |
| 5,984 | | |
| (4,667 | ) | |
| 1,317 | |
Total | |
$ | 6,844 | | |
$ | 9,113 | | |
$ | (14,468 | ) | |
$ | 1,489 | |
The
following table presents the change in fair value of the liability classified common stock warrants for the year ended December 31, 2021
(in thousands):
| |
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 at December 31, 2021 | |
Warrant liabilities | |
| | | |
| | | |
| | | |
| | | |
| | |
February 14, 2020 issuance | |
$ | 328 | | |
$ | – | | |
$ | (37 | ) | |
$ | – | | |
$ | 291 | |
December 23, 2020 issuance | |
| 5,647 | | |
| – | | |
| 3,556 | | |
| (8,964 | ) | |
| 239 | |
January 14, 2021 issuance | |
| – | | |
| 8,629 | | |
| (5,284 | ) | |
| – | | |
| 3,345 | |
January 25, 2021 issuance(1) | |
| – | | |
| 6,199 | | |
| (3,230 | ) | |
| – | | |
| 2,969 | |
Inducement loss on initial fair value(1) | |
| – | | |
| – | | |
| 5,197 | | |
| – | | |
| – | |
Total | |
$ | 5,975 | | |
$ | 14,828 | | |
$ | 202 | | |
$ | (8,964 | ) | |
$ | 6,844 | |
|
(1) |
Concurrent with the issuance of the January 25,
2021 warrants, upon the exercise of the December 23, 2020 warrants, an inducement loss of $5.2 million was recorded as the fair value
of the initial warrant liability for the new warrants of $6.2 million exceeded the gross proceeds received upon sale of the new warrants
of approximately $1.0 million |
The
Company uses the Monte Carlo valuation model to determine the fair value of the liability classified warrants outstanding during 2022
and 2021. Input assumptions for these freestanding instruments
are as follows:
SCHEDULE
OF FAIR VALUE ASSUMPTIONS OF WARRANTS LIABILITY
| |
| For the Year Ended December 31, 2022 | |
Stock price | |
$ | 0.66 – 8.55 | |
Exercise price | |
$ | 2.40
– 34.50 | |
Risk-free rate | |
| 1.95
– 4.66 | % |
Volatility | |
| 98.4
– 127.7 | % |
Remaining term (years) | |
| 1.21 – 5.00 | |
| |
| For the Year Ended December 31, 2021 | |
Stock price | |
$ | 14.75 – 30.25 | |
Exercise price | |
$ | 2.50
– 34.50 | |
Risk-free rate | |
| 0.42
- 1.27 | % |
Volatility | |
| 99.0
– 103.9 | % |
Remaining term (years) | |
| 4.00 – 5.90 | |
5.
ASSET AND LIABILITIES HELD FOR SALE
Equipment
In
November 2021, the Company committed to a plan to sell a variety of lab equipment within the regenerative medicine products reporting
segment. The lab equipment has been designated as held for sale and is presented as such within the consolidated balance sheets as of
December 31, 2022, and December 31, 2021.
In
September 2022, the Company committed to a plan to sell a variety of additional lab equipment. The lab equipment has been designated
as held for sale and is presented as such within the consolidated balance sheet as of December 31, 2022.
During
the year ended December 31, 2022, the Company recorded an impairment of $0.4 million related to the lab equipment designated as held
for sale.
IBEX
Sale
At
the beginning of May 2018, the Company acquired a preclinical research and veterinary sciences business, which has been used for preclinical
studies on the Company’s regenerative tissue products and to offer preclinical research services to unrelated third parties on
a contract basis. The Company operated this business through its indirect subsidiary, IBEX Preclinical Research, Inc. (“IBEX”).
Utah CRO Services, Inc., a Nevada corporation (“Utah CRO”), is a direct subsidiary of the Company and held all the outstanding
capital stock of IBEX (the “IBEX Shares”). Utah CRO also holds all the member interest of IBEX Property LLC, a Nevada limited
liability company (“IBEX Property”), that owned two unencumbered parcels of real property in Logan, Utah, consisting of approximately
1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal property (the “Property”),
which was leased by IBEX Property to IBEX for IBEX to conduct its preclinical research and veterinary sciences business.
In
March 2022, the Company reached a nonbinding understanding with an unrelated third party that contemplated the sale of IBEX, which operates
within the contract services reporting segment, along with IBEX Property. The assets and liabilities related to IBEX were designated
as held for sale. The Company measured the assets and liabilities held for sale at the lower of their carrying value or fair value less
costs to sell. The operating results of IBEX did not qualify for reporting as discontinued operations.
On
April 14, 2022, Utah CRO entered into a Stock Purchase Agreement (the “Stock Agreement”) with an unrelated third party (“Buyer”),
pursuant to which Utah CRO agreed to sell all the outstanding IBEX Shares to Buyer in exchange for an unsecured promissory note in the
principal amount of $0.4 million bearing simple interest at the rate of 10% per annum with interest only payable on a quarterly basis
and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares to Buyer.
Furthermore, on April 14, 2022, IBEX Property entered into a Real Estate Purchase and Sale Agreement (the “Real Estate Agreement”)
with another unrelated third party (“Purchaser”) pursuant to which IBEX Property agreed to sell to Purchaser the Property
at a gross purchase price of $2.8 million payable in cash at closing of the transaction. The Buyer and Purchaser are affiliates of each
other as a result of common ownership. On April 28, 2022, the parties to the Stock Agreement and Real Estate Agreement closed the transactions
contemplated thereby and on April 29, 2022, the Company received the promissory note described above in the principal amount of $0.4
million and net cash proceeds of $2.3 million, after deducting closing costs and advisory fees, from sale of the Property under the Real
Estate Agreement. As of a result of this transaction, the Company recorded $0.4 million as a long-term note receivable in other assets
within the accompanying consolidated balance sheets as of December 31, 2022. As the sale price less cost to sell was greater than the
carrying value of these assets the Company recognized an insignificant net gain on sale in the second quarter of fiscal year 2022 in
other income, net within the accompanying consolidated statement of operations for the year ended December 31, 2022.
6.
PREPAID EXPENSES AND OTHER CURRENT ASSETS
The
following table presents the major components of prepaid expenses and other current assets (in thousands):
SCHEDULE
OF PREPAID EXPENSE AND OTHER CURRENT ASSETS
| |
December 31, 2022 | | |
December 31, 2021 | |
Other current receivable | |
$ | 332 | | |
$ | 67 | |
Short term deposit | |
| – | | |
| 150 | |
Prepaid insurance | |
| 239 | | |
| 239 | |
Prepaid expenses | |
| 440 | | |
| 445 | |
Deferred offering costs | |
| 98 | | |
| 694 | |
Total prepaid expenses and other current assets | |
$ | 1,109 | | |
$ | 1,595 | |
7.
PROPERTY AND EQUIPMENT, NET
The
following table presents the components of property and equipment, net (in thousands):
SCHEDULE OF PROPERTY AND EQUIPMENT, NET
| |
December 31, 2022 | | |
December 31, 2021 | |
Machinery and equipment | |
$ | 4,436 | | |
$ | 8,502 | |
Land and buildings | |
| – | | |
| 2,000 | |
Computers and software | |
| 570 | | |
| 1,129 | |
Leasehold improvements | |
| 1,808 | | |
| 2,107 | |
Construction in progress | |
| – | | |
| 133 | |
Furniture and equipment | |
| 100 | | |
| 123 | |
Total property and equipment, gross | |
| 6,914 | | |
| 13,994 | |
Accumulated depreciation | |
| (5,139 | ) | |
| (7,071 | ) |
Total property and equipment, net | |
$ | 1,775 | | |
$ | 6,923 | |
The
Company sold SkinTE under Section 361 of the Public Health Service Act in 2020 and into 2021 and, after the Company’s decision
to file an IND under Section 351 of that Act, under an enforcement discretion position stated by the FDA in a regenerative medicine policy
framework to help facilitate regenerative medicine therapies. The FDA’s stated period of enforcement discretion ended May 31, 2021.
Consequently, the Company terminated commercial sales of SkinTE on May 31, 2021, and ceased its SkinTE commercial operations. As a result,
there are no product sales from commercial SkinTE after June 2021 and the Company has eliminated or reduced costs associated with commercial
sales of SkinTE. The Company evaluated the future use of its commercial property and equipment and recorded an impairment charge of approximately
$0.4 million during the year ended December 31, 2021, which was included in restructuring and other charges within the accompanying consolidated
statement of operations. See Note 16.
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
| |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
General and administrative expense | |
$ | 82 | | |
$ | 739 | |
Research and development expense | |
| 1,425 | | |
| 1,913 | |
Total depreciation and amortization expense | |
$ | 1,507 | | |
$ | 2,652 | |
8.
LEASES
The
Company leases facilities and certain equipment under noncancelable leases that expire at various dates through November 2027. 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 ROU 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 (the “Adcomp Lease”) with Adcomp LLC (“Adcomp”)
pursuant to which the Company leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in
Salt Lake City, Utah (the “Property”) from the landlord. The initial term of the lease is five years and was set to expire
on November 30, 2022. The Company had a one-time option to renew for an additional five years and
an option to purchase the Property at a purchase price of $17.5 million, which was not reasonably certain to be exercised. The
initial base rent under this lease was $98,190 per month ($0.55 per sq. ft.) for the first year of the initial lease term and increased
3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable,
the Company used an incremental borrowing rate of 10% to determine the present value of the lease payments.
On
October 25, 2021, the Company signed a Purchase and Sale Agreement, the terms of which were finalized on December 10, 2021, and subsequently
amended by Amendment No. 1 thereto dated March 15, 2022 (the “BCG Agreement”), with an unrelated third-party BCG Acquisitions
LLC (“BCG”). Under the BCG Agreement the Company agreed to sell the Property to BCG or its assigns for $17.5 million after
the Company purchased the Property from Adcomp, and subsequently lease back a portion of the building located on the Property. Under
the BCG Agreement, BCG made an earnest money deposit totaling $150,000.
On
December 16, 2021, the Company gave written notice to Adcomp of its election to exercise the option to purchase the Property, and on
March 14, 2022, the Company entered into a definitive purchase and sale agreement with Adcomp (the “Purchase Agreement”).
In connection with exercising the option to purchase the Property, the Company made an earnest money deposit of $150,000.
The
Purchase Agreement and BCG Agreement provided for closing of the transactions described above on November 15, 2022, and also provided
for an option to extend the closing to November 30, 2022. On November 9, 2022, BCG and the Company entered into an Addendum to the BCG
Agreement providing, in part, for BCG exercising its right to extend the closing to November 30, 2022, in consideration of making an
extension deposit with the escrow holder of $50,000, and the exercise of our right under the Purchase Agreement with Adcomp to extend
the closing to November 30, 2022, in consideration of making an extension deposit with the escrow holder of $50,000. The Addendum also
stated that the Company would form a single member limited liability company wholly-owned by the Company, which would be used as the
vehicle to effectuate purchase of the Property from Adcomp at closing, effectuate a change in ownership of the limited liability company
to BCG or its assigns, and lease a portion of the building on the Property to the Company to house its operations. Pursuant thereto the
Company formed 1960 South 4250 West LLC (the “Subsidiary”), and assigned to the Subsidiary all of the Company’s rights
and obligations under the Purchase Agreement with Adcomp and under the BCG Agreement and Addendum. Also, BCG assigned all of its rights
and obligations under the BCG Agreement and Addendum to BC 1960 South Industrial, LLC, a Delaware limited liability company (“BC1960”),
which is unaffiliated with the Company.
The
Addendum also provided that BCG would arrange financing from a third-party lender for the Subsidiary to apply to the purchase of the
Property under the Purchase Agreement with Adcomp and that BCG would provide such credit enhancements and accommodations necessary to
obtain such financing in consideration of the terms of the Addendum that contemplated BCG or its assigns acquiring ownership of the Subsidiary
concurrently with the Subsidiary’s acquisition of the Property from Adcomp.
The
following transactions occurred concurrently on November 30, 2022:
|
● |
BC1960
made an unsecured loan of $9.4
million to the Company in cash pursuant to the terms of the Addendum, $9
million of which the Company contributed to the capital of the Subsidiary and was applied by the Subsidiary, together with $200,000
in deposits made under the Purchase Agreement with Adcomp and a $200,000
security deposit held by Adcomp under the Adcomp Lease, to the purchase of the Property; |
|
● |
A third-party lender made
available cash in the amount of $11.0 million under a trust deed note and trust deed made by the Subsidiary, $8.1 million of which
was applied to the purchase of the Property; |
|
● |
Upon payment of the purchase
price for the Property and closing costs, Adcomp transferred title to the Property and related fixtures, equipment, and personal
property appurtenant thereto to the Subsidiary; |
|
● |
The Company assigned and
transferred to BC1960 all of the membership interest of the Subsidiary as payment in full of the unsecured loan of $9.4 million described
above and, as a result, the Company was reimbursed for the deposits it made under the Purchase Agreement with Adcomp and its security
deposit held by Adcomp under the Adcomp Lease, as described above; and |
|
● |
The Subsidiary and the
Company entered into a lease for a portion of the Property. |
The
execution of the purchase option became reasonably certain of exercise on November 30, 2022 and the Company reassessed the lease classification
and remeasured the lease liability immediately prior to the execution of the purchase option. The lease was reclassified to a finance
lease and the lease liability remeasured to include the purchase option amount. In connection with the transaction, the Company recognized
a gain on sale of $4.0 million, which is the
difference between the fair value of the property sold and the sale price recorded within operating
expenses on the consolidated statement of operations.
Under
the lease between the Company and Subsidiary that was effectuated November 30, 2022, the Company is leasing approximately 63,156 rentable
square feet of warehouse, manufacturing, office, and lab space. The initial term of the lease is five years, and it expires on November
30, 2027. The Company has a one-time option to renew for an additional five years. The initial base rent under this lease is $59,998
per month ($0.95 per sq. ft.) for the first year of the initial lease term and increases 4.0% per annum thereafter. Because the rate
implicit in the lease is not readily determinable, the Company used an incremental borrowing rate of approximately 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 provided for monthly lease payments subject to annual increases and had an expiration date in April 2024. During 2020, the Company
initiated a business analysis to determine the long-term strategy of the remote facility and cost to remain operational. It was determined
that the Company would cease operations and vacate the facility. The Company terminated the lease on June 30, 2021 and recorded a net
gain on termination of $0.3 million which was included in restructuring and other charges on the consolidated statement of operations.
In
November 2021, the Company entered into an operating lease to obtain office equipment with Pacific Office Automation, Inc. The initial
term of the lease is three years and it expires on November 2024. The initial base rent under this lease is $3,983 per month for the
entire lease term and includes a cash incentive of $0.1 million. Because the rate implicit in the lease is not readily determinable,
the Company has used an incremental borrowing rate of 7.42% to determine the present value of the lease payments.
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 6 to 16 months as of December 31, 2022 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 10% to determine the present value of the lease payments for these leases.
In
the fourth quarter of 2021, management recorded $0.2 million in charges related to the abandonment of finance lease right of use assets.
Additionally, in the fourth quarter of 2022, management recorded $0.3 million in charges related to the abandonment of finance lease
right of use assets. The charges were recorded within the Company’s regenerative medicine products business segment and are included
in general and administrative expenses within the accompanying consolidated statement of operations.
As
of December 31, 2022, the maturities of operating and finance lease liabilities were as follows (in thousands):
SCHEDULE OF OPERATING AND FINANCE LEASE LIABILITIES
| |
Operating leases* | | |
Finance leases | |
2023 | |
$ | 670 | | |
$ | 312 | |
2024 | |
| 793 | | |
| 42 | |
2025 | |
| 781 | | |
| – | |
2026 | |
| 813 | | |
| – | |
2027 | |
| 772 | | |
| – | |
Total lease payments | |
| 3,829 | | |
| 354 | |
Less: | |
| | | |
| | |
Imputed interest | |
| (803 | ) | |
| (20 | ) |
Total | |
$ | 3,026 | | |
$ | 334 | |
* | 2023 amounts as
shown above are net of cash inflows for tenant improvement allowances expected to be received during the year. |
Supplemental
balance sheet information related to leases was as follows (in thousands):
SCHEDULE OF SUPPLEMENTAL BALANCE SHEET INFORMATION RELATED TO FINANCE AND OPERATING LEASES
Finance
leases
| |
December 31, 2022 | | |
December 31, 2021 | |
Finance lease right-of-use assets included within property and equipment, net | |
$ | 4 | | |
$ | 461 | |
| |
| | | |
| | |
Current finance lease liabilities included within other current liabilities | |
$ | 293 | | |
$ | 329 | |
Non-current finance lease liabilities included within other long-term liabilities | |
| 41 | | |
| 338 | |
Total | |
$ | 334 | | |
$ | 667 | |
Total finance lease liabilities | |
$ | 334 | | |
$ | 667 | |
Operating
leases
| |
December 31, 2022 | | |
December 31, 2021 | |
Current operating lease liabilities included within other current liabilities | |
$ | 394 | | |
$ | 1,169 | |
Operating lease liabilities – non-current | |
| 2,632 | | |
| 43 | |
Total | |
$ | 3,026 | | |
$ | 1,212 | |
Total operating lease liabilities | |
$ | 3,026 | | |
$ | 1,212 | |
The
components of lease expense were as follows (in thousands):
SUMMARY OF COMPONENTS OF LEASE EXPENSE
| |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
Operating lease costs included within operating costs and expenses | |
$ | 1,298 | | |
$ | 1,511 | |
Finance lease costs: | |
| | | |
| | |
Amortization of right of use assets | |
$ | 185 | | |
$ | 617 | |
Interest on lease liabilities | |
| 47 | | |
| 99 | |
Total | |
$ | 232 | | |
$ | 716 | |
Supplemental
cash flow information related to leases was as follows (in thousands):
SCHEDULE OF SUPPLEMENTAL CASH FLOW INFORMATION RELATED TO LEASES
| |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
Cash paid for amounts included in the measurement of lease liabilities: | |
| | |
| |
Operating cash out flows from operating leases | |
$ | 1,245 | | |
$ | 1,596 | |
Operating cash out flows from finance leases | |
$ | 47 | | |
$ | 99 | |
Financing cash out flows from finance leases | |
$ | 17,823 | | |
$ | 555 | |
Lease liabilities arising from obtaining right-of-use assets: | |
| | | |
| | |
Operating leases | |
$ | 2,978 | | |
$ | 42 | |
Remeasurement of operating lease liability due to lease modification/termination | |
$ | – | | |
$ | 386 | |
As
of December 31, 2022, the weighted average remaining operating lease term is 4.8 years and the weighted average discount rate used to
determine the operating lease liability was 9.69%. The weighted average remaining finance lease term is 1.2 years and the weighted average
discount rate used to determine the finance lease liability was 9.67%.
9.
INTANGIBLE ASSETS AND GOODWILL
As
of December 31, 2021 the Company was exploring options with respect to IBEX, which was likely to result in curtailed operation of the
business or some other disposition in 2022. For the year ended December 31, 2021, the Company performed an impairment review and concluded
that goodwill and intangible assets were impaired. This resulted in the Company writing off the goodwill and intangible assets of $0.6
million in 2021 and no balances are recorded in the consolidated balance sheets as of December 31, 2022 and 2021, respectively. As noted
in Note 5, in March 2022, the Company reached a non-binding understanding with an unrelated third party that contemplated the sale of
IBEX and the real property used in the operation of IBEX and the sale was completed in April 2022.
Amortization
expense for intangible assets for the years ended December 31, 2022 and December 31, 2021 was approximately zero and $0.2 million, respectively.
Changes
to goodwill during the year ended December 31, 2021 were as follows:
SCHEDULE OF CHANGES GOODWILL
| |
Total | |
Balance – December 31, 2020 | |
$ | 278 | |
Impairment charge to goodwill | |
| (278 | ) |
Balance – December 31, 2021 | |
$ | – | |
10.
ACCOUNTS PAYABLE AND ACCRUED EXPENSES
The
following table presents the major components of accounts payable and accrued expenses (in thousands):
SCHEDULE OF ACCOUNTS PAYABLE AND ACCRUED EXPENSES
| |
December 31, 2022 | | |
December 31, 2021 | |
Accounts payable | |
$ | 459 | | |
$ | 173 | |
Salaries and other compensation | |
| 463 | | |
| 722 | |
Legal and accounting | |
| 71 | | |
| 1,082 | |
Accrued severance | |
| 16 | | |
| 111 | |
Benefit plan accrual | |
| 66 | | |
| 102 | |
Clinical trials | |
| 131 | | |
| 161 | |
Accrued offering costs | |
| – | | |
| 400 | |
Other | |
| 174 | | |
| 364 | |
Total accounts payable and accrued expenses | |
$ | 1,380 | | |
$ | 3,115 | |
11.
OTHER CURRENT LIABILITIES
The
following table presents the major components of other current liabilities (in thousands):
SCHEDULE OF OTHER CURRENT LIABILITIES
| |
December 31, 2022 | | |
December 31, 2021 | |
Current finance lease liabilities | |
$ | 293 | | |
$ | 329 | |
Current operating lease liabilities | |
| 394 | | |
| 1,169 | |
Other | |
| – | | |
| 22 | |
Total other current liabilities | |
$ | 687 | | |
$ | 1,520 | |
12.
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 Board designated the Compensation Committee of the Board the administrator of 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 419,549 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. Pursuant to the 2020 Plan, the number of shares of common
stock available for issuance increased by 131,872 shares during January 2022. On September 9, 2022 the Board approved an amendment to
the Company’s 2020 Stock Option and Incentive Plan to increase the number of shares available for awards by adding 1,450,000 shares
to the 2020 Plan. The increase in shares is subject to stockholder approval at the next annual or special meeting of stockholders. As
of December 31, 2022, the Company had 1,275 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
Board designated the Compensation Committee of the Board the administrator of 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 120,000
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 December 31, 2022, the Company had 7,350 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 Board designated
the Compensation Committee of the Board the administrator of 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 292,000 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 December 31, 2022, the Company had 6,122 shares available for future issuances under
the 2017 Plan.
A
summary of the Company’s employee and non-employee stock option activity is presented below:
SCHEDULE OF SHARE-BASED COMPENSATION, STOCK OPTIONS, ACTIVITY
| |
Number of Shares | | |
Weighted- Average Exercise Price | |
Outstanding – December 31, 2021 | |
| 230,899 | | |
$ | 197.66 | |
Granted | |
| 520 | | |
$ | 10.34 | |
Forfeited | |
| (49,108 | ) | |
$ | 229.66 | |
Outstanding – December 31, 2022 | |
| 182,311 | | |
$ | 188.50 | |
Options exercisable, December 31, 2022 | |
| 169,138 | | |
$ | 200.04 | |
During
the years ended December 31, 2022 and 2021, the estimated weighted-average grant-date fair value of options granted was $7.57 and $22.63,
respectively. The intrinsic value of options exercised for the year ended December 31, 2021 was $0. During the years ended December 31,
2022 and 2021, the estimated total grant-date fair value of options vested was $0.4 million and $2.6 million, respectively.
The
aggregate intrinsic value of options outstanding and exercisable at December 31, 2022 was $0. The weighted average remaining contractual
term of options outstanding and exercisable at December 31, 2022 was 5.34 years. As of December 31, 2022, there was approximately $33,000
of unrecognized compensation cost related to stock option awards, which is expected to be recognized over a remaining weighted-average
vesting period of 1.2 years.
Employee
Stock Purchase Plan (ESPP)
In
May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 20,000 shares
of common stock for purchase under the ESPP. The initial offering period began January 1, 2019, and ended on June 30, 2019, with the
first purchase date. Subsequent offering periods will automatically commence on each January 1 and July 1 and will have a duration of
six months ending with a purchase date June 30 and December 31 of each year. On each purchase date, ESPP participants will purchase shares
of common stock at a price per share equal to 85% of the lesser of (1) the fair market value per share of the common stock on the offering
date or (2) the fair market value of the common stock on the purchase date. As of December 31, 2022, the Company had 7,379 shares available
for future issuances under the ESPP.
Stock-based
compensation related to the ESPP for the years ended December 31, 2022 and 2021 was $9,007 and $40,000, respectively. During the year
ended December 31, 2022 a total of 3,200 shares of common stock were purchased at a weighted-average purchase price of $0.94 for total
proceeds of $3,000 pursuant to the ESPP. During the year ended December 31, 2021 a total of 4,076 shares of common stock were purchased
at a weighted-average purchase price of $13.50 for total proceeds of $0.1 million.
Stock
Options and ESPP Valuation
The
fair value of each option grant and ESPP purchase right is estimated on the date of grant using the Black-Scholes option-pricing model
with the following range of assumptions:
SCHEDULE OF SHARE-BASED PAYMENT AWARD, STOCK OPTIONS, VALUATION ASSUMPTIONS
| |
For the Year Ended December 31, |
|
| |
2022 |
| |
2021 |
|
Option grants | |
| |
| |
| |
|
Risk free annual interest rate | |
| 1.3% - 4.3 |
% | |
| 0.3% - 1.2 |
% |
Expected volatility | |
| 98.0% - 112.0 |
% | |
| 97.9% - 104.7 |
% |
Expected term of options (years) | |
| 4.6 – 4.8 |
| |
| 4.6 – 4.7 |
|
Assumed dividends | |
| – |
| |
| – |
|
ESPP | |
| |
| |
| |
|
Risk free annual interest rate | |
| 0.2% - 4.8 |
% | |
| 0.1% - 0.2 |
% |
Expected volatility | |
| 72.8% - 159.2 |
% | |
| 98.4% - 125.2 |
% |
Expected term of options (years) | |
| 0.5 |
| |
| 0.5 |
|
Assumed dividends | |
| – |
| |
| – |
|
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, 2021 | |
| 206,547 | |
Granted | |
| 203,600 | |
Vested(1) | |
| (146,328 | ) |
Forfeited | |
| (7,384 | ) |
Unvested – December 31, 2022 | |
| 256,435 | |
|
(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. |
The
weighted-average per share grant-date fair value of restricted stock granted during the years ended December 31, 2022 and 2021 was $0.87
and $31.24 per share, respectively. The total fair value of restricted stock vested during the years ended December 31, 2022 and 2021
was approximately $3.8 million and $4.7 million, respectively.
As
of December 31, 2022, there was approximately $0.3 million of unrecognized compensation cost related to unvested restricted stock awards,
which is expected to be recognized over a remaining weighted-average vesting period of 1.1 years.
Stock-Based
Compensation Expense
Total
stock-based compensation expense related to stock options, restricted stock awards, and ESPP was as follows (in thousands):
SCHEDULE OF SHARE-BASED COMPENSATION RELATED TO RESTRICTED STOCK AWARDS AND STOCK OPTIONS
| |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
General and administrative expense | |
$ | 1,402 | | |
$ | 4,097 | |
Research and development expense | |
| 455 | | |
| 1,146 | |
Sales and marketing expense | |
| – | | |
| 357 | |
Total stock-based compensation expense | |
$ | 1,857 | | |
$ | 5,600 | |
13.
SALE OF COMMON STOCK, WARRANTS AND PRE- FUNDED WARRANTS
February
2020 Offering
On
February 14, 2020, the Company completed an underwritten offering of 425,532 shares of its common stock and warrants to purchase 425,532
shares of common stock. Each common share and warrant were sold together for a combined public purchase price of $58.75 before underwriting
discount and commission. The exercise price of each warrant was $70.00 per share, the warrants were exercisable immediately, and will
expire February 12, 2027. On November 19, 2020, the Company reduced the exercise price of the warrants from $70.00 per share to $2.50
per share effective November 20, 2020. As of December 31, 2020, 402,932 of these warrants were exercised for shares of common stock for
aggregate proceeds of $1.0 million. As the warrants could require cash settlement in certain scenarios, they were classified as liabilities
and were initially recorded at an estimated fair value of $11.7 million upon issuance. The total proceeds from the offering were first
allocated to the liability classified warrants, based on their fair values, with the residual $12.0 million allocated to the common stock.
Issuance costs allocated to the common stock of $1.3 million were recorded as a reduction to paid-in capital.
The
Company measured the fair value of the liability classified warrants using the Monte Carlo simulation model at December 31, 2022 and
2021, respectively, using the following inputs:
SCHEDULE FOR MEASUREMENT OF FAIR VALUE OF WARRANTS
February 14, 2020 Warrants | |
December 31, 2022 | | |
December 31, 2021 | |
Stock price | |
$ | 0.66 | | |
$ | 14.68 | |
Exercise price | |
$ | 2.40 | | |
$ | 2.50 | |
Risk-free rate | |
| 4.09 | % | |
| 1.27 | % |
Volatility | |
| 112.9 | % | |
| 102.0 | % |
Remaining term (years) | |
| 4.1 | | |
| 5.1 | |
December
2020 Offering
On
December 23, 2020, the Company completed a registered direct offering of 218,000 shares of its common stock, par value $0.001 per share,
pre-funded warrants to purchase up to 209,522 shares of common stock and accompanying common warrants to purchase up to 427,522 shares
of common stock. Each share of common stock and pre-funded warrant was sold together with a warrant. The combined offering price of each
common stock share and accompanying warrant was $18.7125 and for each pre-funded warrant and accompanying warrant was $18.6875. The pre-funded
warrants had an exercise price of $0.025 each and were exercised in full in January 2021. Each warrant was exercisable for one share
of the Company’s common stock at an exercise price of $15.60 per share. The warrants were immediately exercisable and expire five
years from the date of issuance. The holder of the warrants could 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
could 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 25,651 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 $23.39 per share). The
net proceeds to the Company from the offering were $7.2 million, after offering expenses 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 $5.2 million and $0.3 million, respectively. Since the pre-funded warrants
did not contain the same cash settlement provision, these warrants are classified as a component of stockholders’ equity within
additional paid-in-capital. The pre-funded warrants are equity classified because they meet characteristics
of the equity classification criteria. The total proceeds from the offering were first allocated to the liability classified warrants,
based on their fair values, with the residual $2.5 million allocated on a relative fair value basis to the common stock and pre-funded
common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.3 million
were recorded as a reduction to paid-in capital. Issuance costs allocated to the liability classified warrants of $0.5 million were recorded
as an expense. The Company measured the fair value of the liability classified warrants using the Monte Carlo simulation model at December
31, 2022 and 2021, respectively, using the following inputs:
The
Company measured the fair value of the liability classified placement agent common stock warrants using the Monte Carlo simulation model
at December 31, 2022 and 2021, respectively, using the following inputs:
January
2021 Offerings
On
January 14, 2021, the Company completed a registered direct offering of 266,800 shares of its common stock, par value $0.001 per share,
pre-funded warrants to purchase up to 96,836 shares of common stock and accompanying common warrants to purchase up to 363,636 shares
of common stock (the “January 14 Warrants”). Each share of common stock and pre-funded warrant was sold together with a warrant.
The combined offering price of each common stock share and accompanying warrant was $27.50 and for each pre-funded warrant and accompanying
warrant was $27.475. The pre-funded warrants had an exercise price of $0.025 each and were exercised in full in January 2021. Each January
14 Warrant is exercisable for one share of the Company’s common stock at an exercise price of $30.00 per share. The January 14
Warrants are immediately exercisable and will expire five years from the date of issuance. The holder of the January 14 Warrants may
not exercise any portion of such 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 21,818 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 $34.375 per share). The net proceeds to the Company
from the offering were $9.2 million, after direct offering expenses of $0.8 million payable by the Company.
As
the January 14 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the January
14 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 are classified as a 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 to the liability classified warrants,
based on their fair values, with the residual $1.4 million allocated on a relative fair value basis to the common stock and pre-funded
common stock warrants. Issuance costs allocated to the equity classified pre-funded common stock warrants and common stock of $0.1 million
were recorded as a reduction to 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 January 14 Warrants and placement agent warrants using the Monte Carlo simulation
model at issuance and at December 31, 2021 and 2022, respectively, using the following inputs:
Accompanying
common warrants:
On
January 22, 2021, the Company entered into a letter agreement with the holder of warrants to exercise the warrants to purchase 427,522
shares of common stock at an exercise price of $15.60 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 427,522 warrants in full and the Company agreed
to issue and sell to the holder common warrants to purchase up to 320,641 shares of the Company’s common stock, par value $0.001
per share, at a price of $3.125 (the “January 25 Warrants”) (and together with the January 14 Warrants, the “Existing
2021 Warrants”). Each January 25 Warrant is exercisable for one share of common stock at an exercise price of $30.00 per share.
The January 25 Warrants are immediately exercisable and will expire five years from the date of issuance. A holder may not exercise any
portion of the January 25 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 19,238 shares of common stock). The placement agent warrants have substantially the same terms as the new warrants. The 427,522
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 December 2020 Warrants and gross proceeds of approximately
$1.0 million from the sale of the new warrants.
Immediately
prior to the exercise of the existing 427,522 liability classified December 2020 Warrants in January 2021, a remeasurement loss of $3.6
million was recorded.
The
Company measured the fair value of the common stock warrants using the Monte Carlo simulation model on January 22, 2021, using the following
inputs:
As
the new January 25 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the new
January 25 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 January 25 Warrants and placement agent common stock warrants using the Monte Carlo
simulation model at issuance and at December 31, 2022 and 2021, respectively, using the following inputs:
Accompanying
new common stock warrants:
The
following table summarizes warrant activity for the year ended December 31, 2021.
SUMMARY OF WARRANT ACTIVITY
| |
Outstanding December 31, 2020 | | |
Warrants Issued | | |
Warrants Exercised | | |
Outstanding December 31, 2021 | |
Transaction | |
| | | |
| | | |
| | | |
| | |
February 14, 2020 common warrants | |
| 22,600 | | |
| – | | |
| (1,020 | ) | |
| 21,580 | |
December 23, 2020 common warrants | |
| 427,522 | | |
| – | | |
| (427,522 | ) | |
| – | |
December 23, 2020 placement agent warrants | |
| 25,651 | | |
| – | | |
| – | | |
| 25,651 | |
December 23, 2020 pre-funded warrants | |
| 209,522 | | |
| – | | |
| (209,522 | ) | |
| – | |
January 14, 2021 common warrants | |
| – | | |
| 363,636 | | |
| – | | |
| 363,636 | |
January 14, 2021 placement agent warrants | |
| – | | |
| 21,818 | | |
| – | | |
| 21,818 | |
January 14, 2021 pre-funded warrants | |
| – | | |
| 96,836 | | |
| (96,836 | ) | |
| – | |
January 25, 2021 common warrants | |
| – | | |
| 320,641 | | |
| – | | |
| 320,641 | |
January 22, 2021 placement agent warrants | |
| – | | |
| 19,238 | | |
| – | | |
| 19,238 | |
Total | |
| 685,295 | | |
| 822,169 | | |
| (734,900 | ) | |
| 772,564 | |
March
2022 Offering
On
March 16, 2022, the Company completed a registered direct offering of 3,000.000435 shares of Series A convertible preferred stock, 2,000.00029
shares of Series B convertible preferred stock and 655,738 warrants to purchase 655,738 shares of common stock (the “March 2022
Warrants”). Gross proceeds generated by the offering were $5.0 million. The exercise price of each warrant is $8.75 per share,
the warrants become exercisable six months after the date of the offering and will expire two years from the offering date.
Concurrent
with the closing of the offering on March 16, 2022, the Company modified the exercise price of the Existing 2021 Warrants. 363,636 warrants
issued on January 14, 2021, and 320,641 warrants issued on January 25, 2021 were modified to reduce the exercise price from $30.00 to
$8.75 per share. The exercise price of the placement agent warrants was not modified. The Existing 2021 Warrants remain outstanding and
unexercised as of December 31, 2022.
The
holders of Series A and Series B convertible preferred stock were entitled to receive dividend payments in the same form as dividends
paid on shares of the common stock when, as and if such dividends were paid on shares of the common stock, on an if converted basis.
In the event of a liquidation event, the holders of each series of convertible preferred stock were entitled to receive out of the assets,
whether capital or surplus, of the Company the same amount that a holder of common stock would receive if the preferred stock were fully
converted. Each share of preferred stock was convertible at any time after the offering at the option of the holder into a number of
shares of the Company’s common stock, equal to $1,000 stated value per share, divided by the conversion price of $7.625. On March
17, 2022 all shares of Series B preferred stock were converted into 262,295 shares of common stock. On March 29, 2022, all shares of
Series A preferred stock were converted into 393,443 shares of common stock.
The
holder of the March 2022 Warrants may not exercise any portion of such 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 5.0% of the aggregate number of March
2022 Warrants sold in the offering, or 32,787 warrants to purchase common stock. The placement
agent warrants have substantially the same terms as the March 2022 Warrants, except that
the placement agent warrants have an exercise price $9.525 per share, which is 125% of the price at which each share of preferred stock
sold in the offering is convertible to common stock.
As
the March 2022 Warrants and placement agent warrants could each require cash settlement in certain scenarios, the March 2022 Warrants
and placement agent warrants were classified as liabilities upon issuance and were initially recorded
at estimated fair values of $3.0 million and $0.1 million, respectively. The Series A and Series B preferred stock were equity classified
because they met characteristics of the equity classification criteria. The total proceeds from the offering were first allocated
to the liability classified warrants, based on their fair values, with the residual $1.9 million allocated to the preferred stock. The
net proceeds to the Company from the offering were $4.5 million, after direct offering expenses of $0.2 attributable to equity classified
preferred stock, which were recorded as a reduction to paid-in capital, and $0.3 million attributable to the liability classified March
2022 Warrants and private placement common stock warrants, which are included in general
and administrative within the accompanying consolidated statement of operations for the year ended December 31, 2022.
The
Company measured the fair value of the accompanying March 2022 Warrants and placement agent warrants using the Monte Carlo simulation
model at issuance and again at December 31, 2022, using the following inputs:
Common
warrants:
June
2022 Offering
On
June 5, 2022, the Company entered into a securities purchase agreement with a single healthcare-focused institutional investor for the
purchase and sale of shares of its common stock (or pre-funded warrants in lieu thereof) in a registered direct offering. In a concurrent
private placement (together with the registered direct offering, the “Offerings”), the Company entered into a separate securities
purchase agreement with the same investor for the unregistered purchase and sale of shares of common stock (or pre-funded warrants in
lieu thereof).
On
June 8, 2022, the Company completed the registered direct offering of 445,500 shares of its common stock, par value $0.001 per share
at a purchase price of $2.525 per share and 1,138,659 pre-funded warrants at a purchase price of $2.524 per warrant. The Company also
sold 1,584,159 pre-funded warrants at a purchase price of $2.524 per warrant in the private placement offering. Each pre-funded warrant
sold in the registered direct offering and private placement offering is exercisable for one share
of common stock at an exercise price of $0.001 per share, is immediately exercisable, and will not expire until fully exercised. Under
the securities purchase agreements for the Offerings, the Company agreed to issue to the investor in the Offerings unregistered preferred
investment options (the “June 2022 Warrants”) to purchase up to an aggregate of 3,168,318 shares of common stock, which were
issued at the closing of the Offerings. The June 2022 Warrants are exercisable for one share immediately upon issuance at an exercise
price of $2.40 per share and will expire five years from the date of issuance. The holder of the pre-funded warrants sold in the registered
direct offering has exercised 488,659, 545,000, and 1,689,159 of such warrants in June 2022, July 2022, and August 2022, respectively,
leaving 3,168,318 June 2022 Warrants that remain outstanding and unexercised as of December 31, 2022. The holder of the warrants may
not exercise any portion of such 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 5.0% of the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase
up to 158,416 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 $3.156 per share). None of the placement
agent warrants have been exercised as December 31, 2022. The net proceeds to the Company from the offering were $7.3 million, after direct
offering expenses of $0.7 million payable by the Company.
As
the June 2022 Warrants and placement agent common stock warrants could each require cash settlement in certain scenarios, the June 2022
Warrants and placement agent common stock warrants were classified as liabilities upon issuance and were initially recorded at estimated
fair values of $5.7 million and $0.3 million, respectively. Since the pre-funded warrants did not contain the same cash settlement provision,
these warrants are classified as a 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 to the liability classified warrants, based on their fair values, with the residual $2.0 million allocated on a relative
fair value basis to the common stock and pre-funded common stock warrants. Issuance costs allocated to the equity classified pre-funded
common stock warrants and common stock of $0.2 million were recorded as a reduction to paid-in capital. Issuance costs allocated to the
liability classified warrants of $0.5 million were recorded as an expense.
The
Company measured the fair value of the accompanying June 2022 Warrants and placement agent warrants using the Monte Carlo simulation
model at issuance and again at December 31, 2022 using the following inputs:
Common
warrants:
On
March 30, 2021, the Company entered into a sales agreement (“Sales Agreement”) with an investment banking firm 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 the investment banking firm would act as sales agent. On February 28, 2022, the Company exercised its right
to terminate the Sales Agreement and was obligated to make a one-time payment to the investment banking firm of $0.4 million. As a result
of the termination of the Sales Agreement, the Company expensed previously capitalized deferred offering costs of $0.7 million which
are included in general and administrative expense within the accompanying consolidated statement of operations and comprehensive loss
for the year ended December 31, 2022. No common stock was sold under the Sales Agreement.
14.
NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The
following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share:
SCHEDULE OF EARNINGS PER SHARE, BASIC AND DILUTED
Numerator: | |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
Numerator: | |
2022 | | |
2021 | |
Net loss, primary | |
$ | (7,833 | ) | |
$ | (30,187 | ) |
Less: gain from change in fair value of warrant liabilities | |
| (4,949 | ) | |
| – | |
Net loss, diluted | |
$ | (12,782 | ) | |
$ | (30,187 | ) |
Denominator: | |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
Denominator: | |
2022 | | |
2021 | |
Basic weighted average number of common shares(1) | |
| 6,853,169 | | |
| 3,200,561 | |
Potentially dilutive effect of warrants | |
| 812,021 | | |
| – | |
Diluted weighted average number of common shares | |
| 7,665,190 | | |
| 3,200,561 | |
|
(1) |
In December 2020, January
2021, and June 2022, the Company sold pre-funded warrants to purchase up to 209,522, 96,836, and 2,722,818 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 in January 2021 and
488,659, 545,000 and 1,689,159 of the pre-funded warrants sold in June 2022 were exercised in June 2022, July 2022, and August 2022,
respectively, and included in the denominator for the period of time the warrants were outstanding. |
The
following outstanding potentially dilutive shares 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
| |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
Stock options | |
| 182,311 | | |
| 230,912 | |
Restricted stock | |
| 256,435 | | |
| 206,547 | |
Common stock warrants | |
| 1,439,509 | | |
| 772,564 | |
Shares committed under ESPP | |
| 4,072 | | |
| 1,678 | |
Outstanding potentially dilutive securities | |
| 4,072 | | |
| 1,678 | |
15.
DEBT
PPP
Loan
On
April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note evidencing an unsecured
loan in the amount of $3,576,145 made to it under the Paycheck Protection Program (the “Loan”). The Paycheck Protection Program
(or “PPP”) was established under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) and
is administered by the U.S. Small Business Administration. The Loan to the Borrower was made through KeyBank, N.A., a national banking
association (the “Lender”). The interest rate on the Loan is 1.00%. Beginning seven months from the date of the Loan the
Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing
the Loan contains customary events of default relating to, among other things, payment defaults, making materially false and misleading
representations to the SBA or Lender, or breaching the terms of the Loan documents. The occurrence of an event of default may result
in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower, or filing suit and obtaining judgment
against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion
of a loan granted under the PPP. On October 15, 2020, the Borrower applied to the Lender for forgiveness of the PPP Loan in its entirety
based on the Borrower’s use of the PPP Loan for payroll costs, rent, and utilities. In June of 2021, the Company received notice
of forgiveness of the PPP Loan in whole and the Lender was paid by the SBA, including all accrued unpaid interest. The Company recorded
the forgiveness of $3.6 million of principal and accrued interest, which were included in gain on extinguishment of debt on the consolidated
statement of operations for the year ended December 31, 2021. The SBA may audit any PPP loans at its discretion up to six years after
the date the SBA forgave the PPP Loan.
16.
RESTRUCTURING
As
discussed in Note 7, the Company decided to file an IND in the second half of 2021, cease commercial sales of SkinTE by May 31, 2021,
and wind down its SkinTE commercial operations. As a result, management approved several actions as part of a restructuring plan. Costs
associated with the restructuring plan were included
in restructuring and other charges on the consolidated statement of operations.
The
following table presents the components of incremental restructuring costs and gains associated with the cessation of commercial operations
and wind down on SkinTE commercial operation (in thousands):
SCHEDULE
OF RESTRUCTURING COSTS AND GAINS
| |
Year Ended | | |
Year Ended | |
| |
December 31, 2022 | | |
December 31, 2021 | |
Property and equipment impairment and disposal | |
$ | – | | |
$ | 425 | |
Employee severance and benefit arrangements | |
| 103 | | |
| 390 | |
Modification of employee stock options | |
| – | | |
| 187 | |
Net gain on lease termination(1) | |
| – | | |
| (324 | ) |
Net restructuring costs | |
$ | 103 | | |
$ | 678 | |
|
(1) |
During the second quarter
of 2021 and effective June 30, 2021, the Company terminated a lease which included manufacturing, laboratory, and office space. The
Company recorded a net gain on termination of $0.3 million for the year ended December 31, 2021. |
17.
COMMITMENTS AND CONTINGENCIES
Contingencies
Securities
Class Action and Derivative Lawsuits
On
September 24, 2021, a class action complaint alleging violations of the Federal securities laws was filed in the United States District
Court, District of Utah, by Marc Richfield against the Company and certain officers of the Company, Case No. 2:21-cv-00561-BSJ. The Court
subsequently appointed a Lead Plaintiff and ordered the Lead Plaintiff to file an amended Complaint by February 7, 2022, which was extended
to February 21, 2022. The Lead Plaintiff filed an amended complaint on February 21, 2022, against the Company, two current officers of
the Company, and three former officers of the Company (the “Complaint”). The Complaint alleges that during the period from
January 30, 2018, through November 9, 2021, the defendants made or were responsible for, disseminating information to the public through
reports filed with the Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation
of Sections 10(b) and 20(a) of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically,
the Complaint alleges that the defendants misrepresented or failed to disclose that: (i) the Company’s product, SkinTE, was improperly
registered as a 361 HCT/P under Section 361 of the Public Health Service Act and that, as a result, the Company’s ability to commercialize
SkinTE as a 361 HCT/P was not sustainable because it was inevitable SkinTE would need to be registered under Section 351 of the Public
Health Service Act; (ii) the Company characterized itself as a commercial stage company when it knew sales of SkinTE as a 361 HCT/P were
unsustainable and that, as a result, it would need to file an IND and become a development stage company; (iii) issues arising from an
FDA inspection of the Company’s facility in July 2018, were not resolved even though the Company stated they were resolved; and
(iv) the IND for SkinTE was deficient with respect to certain chemistry, manufacturing, and control items, including items identified
by the FDA in July 2018, and as a result it was unlikely that the FDA would approve the IND in the form it was originally filed. The
Company filed a motion to dismiss the complaint for failure to state a claim, on April 22, 2022. The Lead Plaintiff filed its memorandum
in opposition to the Company’s motion to dismiss on July 18, 2022. The Company filed its reply memorandum to the Lead Plaintiff’s
opposition memorandum on August 11, 2022, and oral argument on the motion to dismiss was held September 8, 2022. At the hearing the judge
issued a ruling from the bench dismissing the Complaint without prejudice and granting the Lead Plaintiff leave to file an amended complaint.
The Lead Plaintiff filed an amended complaint (the “Amended Complaint”) on October 3, 2022, alleging additional facts. The
Company filed a motion to dismiss the Amended Complaint for failure to state a claim on November 2, 2022, Lead Plaintiff filed its brief
in opposition to the Company’s motion on December 2, 2022, and the Company filed its reply brief to the Lead Plaintiff brief in
opposition on December 23, 2022. Oral argument on the Company’s motion to dismiss the Amended Complaint was held March 6, 2023.
Following oral argument, the judge ruled that the Amended Complaint be dismissed with prejudice and requested that the Company, through
its counsel, submit a proposed opinion and order. Once the judge enters the order, the Lead Plaintiff will have 30 days to file a notice
of appeal. The Company is unable to predict at this time whether the Lead Plaintiff will file an appeal.
On
October 25, 2021, a stockholder derivative complaint alleging violations of the Federal securities laws was filed in the United States
District Court, District of Utah, by Steven Battams against the Company, each member of the Board of directors, and two officers of the
Company, Case No. 2:21-cv-00632-DBB (the “Stockholder Derivative Complaint”). The Stockholder Derivative Complaint alleges
that the defendants made, or were responsible for, disseminating information to the public through reports filed with the Securities
and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10(b) and 20(a)
of the Securities and Exchange Act of 1934, as amended, and Rule 10b-5 adopted thereunder. Specifically, the Stockholder Derivative Complaint
alleges that the defendants misrepresented or failed to disclose that: (i) the IND for the Company’s product, SkinTE, filed with
the FDA was deficient with respect to certain chemistry, manufacturing, and control items; (ii) as a result, it was unlikely that the
FDA would approve the IND in its current form; (iii) accordingly, the Company had materially overstated the likelihood that the SkinTE
IND would obtain FDA approval; and (iv) as a result, the public statements regarding the IND were materially false and misleading. The
parties have stipulated to stay the Stockholder Derivative Complaint until (1) the dismissal of the Complaint described above, (2) denial
of a motion to dismiss the Complaint, or (3) notice is given that any party is withdrawing its consent to the stipulated stay of the
Stockholder Derivative Complaint proceeding. After the order of dismissal with prejudice of the class action lawsuit described above
and exhaustion of all appeals by the Lead Plaintiff, the stay of the Stockholder Derivative Complaint will expire. The Company believes
the allegations in the Stockholder Derivative Complaint are without merit and intends to defend the litigation vigorously after the stay
expires. At this early stage of the proceedings the Company is unable to make any prediction regarding the outcome of the litigation.
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,
at December 31, 2022, the Company was not party to any legal or arbitration proceedings that may have significant effects on its financial
position or results of operations. No governmental proceedings are pending or, to the Company’s knowledge, contemplated against
the Company. The Company is not a party to any material proceedings in which any director, member of senior management or affiliate of
the Company’s is either a party adverse to the Company or its subsidiaries or has a material interest adverse to the Company or
its subsidiaries.
Commitments
The
Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.
On
June 25, 2021, the Company entered into a statement of work with a contract research organization to provide services for a proposed
clinical trial described as a multi-center, prospective, randomized controlled trial evaluating the effects of SkinTE in the treatment
of full-thickness diabetic foot ulcers at a cost of approximately $6.5 million consisting of $3.1 million of service fees and $3.4 million
of estimated costs. In July 2021 the Company prepaid 10% of the total cost recited in the original work order, or $0.5 million, which
will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the clinical trial the
service provider shall submit to the Company for payment invoices on a monthly basis for units of work stated in the work order that
are completed and billable expenses incurred. During the years ended December 31, 2022 and 2021, the Company received invoices for work
performed and expenses incurred totaling $1.2 million and $0.4 million, respectively. Either party may terminate the agreement without
cause on 60 days’ notice to the other party.
18.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In
October 2018, the Company entered into an office lease covering approximately 7,250 square feet of rental space in the building located
at 40 West 57th Street in New York City. The lease is for a term of three years. The annual lease rate is $60 per square foot. Initially
the Company would occupy and pay for only 3,275 square feet of space, and the Company was not obligated under the lease to pay for the
remaining 3,975 square feet covered by the lease unless it elected to occupy that additional space. The Company believes the terms of
the lease were very favorable to it, and the Company obtained the 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. The lease expired on October 31, 2021. The Company recognized $0 and $182,000 of sublease income for the years ended December
31, 2022 and 2021, respectively. The sublease income is included in other income, net in the statement of operations. As of December
31, 2022, and December 31, 2021, there were no significant amounts due from the related party under this agreement.
19.
SEGMENT REPORTING
Reportable
segments are presented in a manner consistent with the internal reporting provided to the chief operating decision maker (CODM), the
Chief Executive Officer of the Company. The CODM allocates resources to and assesses the performance of each segment using information
about its revenue and operating income (loss). The Company’s operations involve products and services which are managed separately.
Accordingly, it operates in two segments: 1) regenerative medicine products and 2) contract services. In April 2022, the Company sold
IBEX and IBEX Property, the Company’s subsidiaries which operate within the contract services reporting segment. The remaining
contract services business is no longer a reportable segment upon the disposal of IBEXand historical information from prior to the disposal
date is reported here. See Note 5 for detail on management’s disposal of IBEX.
Certain
information concerning the Company’s segments is presented in the following tables (in thousands):
SCHEDULE
OF SEGMENT INFORMATION
| |
2022 | | |
2021 | |
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
Net revenues: | |
| | | |
| | |
Reportable segments: | |
| | | |
| | |
Regenerative medicine products | |
$ | – | | |
$ | 3,076 | |
Contract services | |
| 814 | | |
| 6,328 | |
Total net revenues | |
$ | 814 | | |
$ | 9,404 | |
| |
| | | |
| | |
Net income/(loss): | |
| | | |
| | |
Reportable segments: | |
| | | |
| | |
Regenerative medicine products | |
$ | (7,430 | ) | |
$ | (29,568 | ) |
Contract services | |
| (403 | ) | |
| (619 | ) |
Total net loss | |
$ | (7,833 | ) | |
$ | (30,187 | ) |
| |
December 31, 2022 | | |
December 31, 2021 | |
Identifiable assets employed: | |
| | | |
| | |
Reportable segments: | |
| | | |
| | |
Regenerative medicine products | |
$ | 22,847 | | |
$ | 25,344 | |
Contract services | |
| – | | |
| 5,834 | |
Total assets | |
$ | 22,847 | | |
$ | 31,178 | |
20.
EMPLOYEE BENEFIT PLAN
The
Company’s 401(k) Plan is a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Under the 401(k) Plan,
participating employees (full-time employees with the Company for one year) may defer a portion of their pre-tax earnings, up to the
IRS annual contribution limit ($20,500 for calendar year 2022). The Company contributes 3% of employee’s eligible earnings. The
Company recorded contribution expense related to its 401(k) Plan of $0.2 million and $0.3 million for the years ended December 31, 2022
and 2021, respectively.
21.
INCOME TAXES
The
Company calculates its provision for federal and state income taxes based on current tax law. The provision (benefit) for income taxes
consisted of the following (in thousands):
SCHEDULE OF COMPONENTS OF INCOME TAX EXPENSE (BENEFIT)
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
Current: | |
| | | |
| | |
Federal | |
$ | – | | |
$ | – | |
State | |
| – | | |
| – | |
Deferred: | |
| | | |
| | |
Federal | |
| (1,789 | ) | |
| (5,484 | ) |
State | |
| 2,270 | | |
| 605 | |
Change in valuation allowance | |
| (481 | ) | |
| 4,879 | |
Total provision (benefit) for income taxes | |
$ | – | | |
$ | – | |
The
difference between income taxes computed at the statutory federal rate and the provision for income taxes related to the following (in
thousands, except percentages):
SCHEDULE OF STATUTORY FEDERAL RATE AND PROVISION FOR INCOME TAX
| |
For the Year Ended December 31, | |
| |
2022 | | |
2021 | |
| |
Amount | | |
Percent of Pretax Loss | | |
Amount | | |
Percent of Pretax Loss | |
Tax (benefit) at federal statutory rate | |
$ | (1,644 | ) | |
| 21 | % | |
$ | (6,340 | ) | |
| 21 | % |
State income taxes, net of federal income taxes | |
| 2,270 | | |
| (29 | )% | |
| 605 | | |
| (2 | )% |
Effect of warrant liability | |
| (2,864 | ) | |
| 37 | % | |
| 215 | | |
| (1 | )% |
Effect of IBEX sale | |
| 376 | | |
| (5 | )% | |
| – | | |
| – | % |
Effect of other permanent items | |
| 150 | | |
| (2 | )% | |
| 16 | | |
| – | % |
Effect of stock compensation | |
| 14 | | |
| – | % | |
| 238 | | |
| (1 | )% |
Change in valuation allowance | |
| (481 | ) | |
| 6 | % | |
| 4,879 | | |
| (16 | )% |
Effect of write-off of state net operating losses | |
| 2,170 | | |
| (28 | )% | |
| – | | |
| – | % |
Other | |
| 9 | | |
| – | % | |
| 387 | | |
| (1 | )% |
| |
$ | – | | |
| – | % | |
$ | – | | |
| – | % |
The
components of deferred income tax assets (liabilities) were as follows (in thousands):
SCHEDULE OF DEFERRED TAX ASSETS AND LIABILITIES
| |
2022 | | |
2021 | |
| |
December 31, | |
| |
2022 | | |
2021 | |
Leases | |
$ | 30 | | |
$ | 17 | |
Depreciation and amortization | |
| 357 | | |
| (38 | ) |
Compensation expense not deductible until options are exercised | |
| 5,844 | | |
| 8,343 | |
All other temporary differences | |
| (807 | ) | |
| 430 | |
Net operating loss carry forwards | |
| 49,082 | | |
| 47,223 | |
Section 174 – R&D Capitalization | |
| 988 | | |
| – | |
Less valuation allowance | |
| (55,494 | ) | |
| (55,975 | ) |
Deferred tax asset (liability) | |
$ | – | | |
$ | – | |
Realization
of deferred tax assets, including those related to net operating loss carryforwards, are dependent upon future earnings, if any, of which
the timing and amount are uncertain. Accordingly, the net deferred tax assets have been fully offset by a valuation allowance. Based
upon the Company’s current operating results management cannot conclude that it is more likely than not that such assets will be
realized.
Utilization
of the net operating loss carryforwards may be subject to a substantial annual limitation due to the “change in ownership”
provisions of the Internal Revenue Code. The annual limitation may result in the expiration of net operating loss carryforwards before
utilization. The net operating loss carryforwards available for income tax purposes at December 31, 2022 amounts to approximately $203.4
million. Of this amount, $38.4 million will expire between 2038 and 2039 and $165 million will have an indefinite life. Approximately
$161 million for state income taxes will begin to expire starting in 2034.
The
Company files income tax returns in the U.S. and various states. As of December 31, 2022, the Company had no unrecognized tax benefits,
which would impact its tax rate if recognized. As of December 31, 2022, the Company had no accrual for the potential payment of penalties.
As of December 31, 2022, the Company was not subject to any U.S. federal, and state tax examinations. The Company does not anticipate
any significant changes in its unrecognized tax benefits over the next 12 months.