UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
☒ Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
FORM 10-K
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2020
OR
For the Transition Period from _________________________
Commission File No. 000-51128
POLARITYTE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction
of incorporation or organization)
06-1529524
(I.R.S. Employer
Identification No.)
1960 S. 4250 West
Salt Lake City, Utah 84104
(Address of principal executive office)
Registrant’s telephone number, including area code (800) 560-3983
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Common Stock, par value $0.001
Trading Symbol(s)
PTE
Name of each exchange on which registered
NASDAQ Capital Market
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes☐ No☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§
232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth
company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
☐
☒
Accelerated filer
Smaller reporting company
Emerging growth company
☐
☒
☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial
accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial
reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒
The aggregate market value of the common stock held by non-affiliates as of June 30, 2020, was $36,135,894.
The outstanding number of shares of common stock as of March 25, 2021, was 80,319,378.
Documents incorporated by reference: Portions of the registrant’s proxy statement for the 2021 Annual Meeting of Stockholders (2021 Proxy Statement) are incorporated into
Part III hereof. The 2021 Proxy Statement will be filed with the U.S. Securities and Exchange Commission within 120 days after the registrant’s fiscal year ended December 31,
2020.
TABLE OF CONTENTS
Business
Risk Factors
Unresolved Staff Comments
Properties
Legal Proceedings
Mine Safety Disclosures
PART I
Item 1.
Item 1A.
Item 1B.
Item 2.
Item 3.
Item 4.
PART II
Item 5.
Item 6.
Item 7.
Item 7A.
Item 8.
Item 9.
Item 9A.
Item 9B.
PART III
Item 10.
Item 11.
Item 12.
Item 13.
Item 14.
PART IV
Item 15.
Item 16.
Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Selected Financial Data
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures About Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
Controls and Procedures
Other Information
Directors, Executive Officers and Corporate Governance
Executive Compensation
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
Certain Relationships and Related Transactions, and Director Independence
Principal Accounting Fees and Services
Exhibits, Financial Statement Schedules
Form 10-K Summary
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As used in this report, the terms “we,” “us,” “our,” “the Company,” and “PolarityTE” mean PolarityTE, Inc., a Delaware corporation, and our wholly owned Nevada
subsidiaries (direct and indirect), PolarityTE, Inc., PolarityTE MD, Inc., Arches Research, Inc., Utah CRO Services, Inc., IBEX Preclinical Research, Inc., and IBEX Property
LLC., unless otherwise indicated or required by the context.
POLARITYTE, the PolarityTE Logo, WELCOME TO THE SHIFT, WHERE SELF REGENERATES SELF, COMPLEX SIMPLICITY, IBEX, ARCHES, and SKINTE are all
trademarks or registered trademarks of PolarityTE. Solely for convenience, the trademarks and trade names in this report may be referred to without the ® and ™ symbols, but
such references should not be construed as any indicator that we will not assert, to the fullest extent under applicable law, our rights thereto.
ii
Forward-looking Statements
This Annual Report on Form 10-K contains forward-looking statements. Risks and uncertainties are inherent in forward-looking statements. Furthermore, such
statements may be based on assumptions that fail to materialize or prove incorrect. Consequently, our business development, operations, and results could differ materially
from those expressed in forward-looking statements made in this Annual Report. We make such forward-looking statements pursuant to the safe harbor provisions in Section
27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). All statements
other than statements of historical facts contained in this Annual Report are forward-looking statements. In some cases, you can identify forward-looking statements by words
such as “anticipate,” “believe,” “contemplate,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “seek,” “should,” “target,”
“would,” or the negative of these words or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:
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the timing or success of obtaining regulatory licenses or approvals for marketing our products;
the initiation, timing, progress, and results of our pre-clinical studies or clinical trials;
sufficiency of our working capital to fund our operations over the next 12 months;
infrastructure required to support operations in future periods, including the expected costs thereof;
estimates associated with revenue recognition, asset impairments, and cash flows;
variance in our estimates of future operating costs;
future vesting and forfeitures of compensatory equity awards;
the effectiveness of our disclosure controls and our internal control over financial reporting;
the impact of new accounting pronouncements;
size and growth of our target markets; and
the initiation, timing, progress, and results of our research and development programs.
Factors that may cause actual results to differ materially from those contemplated by such forward-looking statements include, without limitation:
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the ability to comply with regulations applicable to the manufacture and distribution of our products and delivery of our services;
the ability to meet demand for our products and services;
the ability to deliver our products and services if employees are quarantined due to the impact of COVID-19;
the scope of protection we can establish and maintain for intellectual property rights covering our product candidates and technology;
developments relating to our competitors and industry;
new discoveries or the development of new therapies or technologies that render our products or services obsolete or unviable;
outbreaks of disease, including the COVID-19 pandemic, and related stay-at-home orders, quarantine policies and restrictions on travel, trade, and business
operations;
political and economic instability, whether resulting from natural disasters, wars, terrorism, pandemics, or other sources;
the ability to gain adoption by healthcare providers of our products for patient care;
the ability to find and retain skilled personnel;
the need for, and ability to obtain, additional financing in the future;
general economic conditions;
inaccuracies in estimates of our expenses, future revenues, and capital requirements;
future accounting pronouncements;
unauthorized access to confidential information and data on our information technology systems and security and data breaches; and
the other risks and uncertainties described in this report under Item 1A. Risk Factors, beginning on page 20.
Forward-looking statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that
may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by these
forward-looking statements. Any forward-looking statement in this Annual Report on Form 10-K and the documents incorporated by reference herein reflects our current view
with respect to future events and is subject to these and other risks, uncertainties and assumptions relating to our operations, results of operations, industry, and future growth.
Given these uncertainties, you should not place undue reliance on these forward-looking statements. Except as required by law, we assume no obligation to update or revise
these forward-looking statements for any reason, even if new information becomes available in the future.
This Annual Report on Form 10-K also contains estimates, projections and other information concerning our industry, our business, and the markets for certain
diseases, including data regarding the estimated size of those markets, and the incidence and prevalence of certain medical conditions. Information that is based on estimates,
forecasts, projections, market research, or similar methodologies is inherently subject to uncertainties, and actual events or circumstances may differ materially from events and
circumstances reflected in this information. Unless otherwise expressly stated, we obtained this industry, business, market and other data from reports, research surveys,
studies, and similar data prepared by market research firms and other third parties, industry, medical and general publications, government data, and similar sources.
iii
PART I
Item 1. Business
Overview
PolarityTE, Inc., headquartered in Salt Lake City, Utah, is a biotechnology company developing regenerative tissue products and biomaterials. We also operate a
laboratory testing and clinical research business using equipment, personnel, and facilities we acquired to advance our development of regenerative tissue products.
Regenerative Tissue Product
Our first regenerative tissue product is SkinTE, which is intended for the repair, reconstruction, replacement, and supplementation of skin in patients who have a need
for treatment of acute or chronic wounds, burns, surgical reconstruction events, scar revision, or removal of dysfunctional skin grafts. SkinTE was registered and listed with the
United States Food and Drug Administration (“FDA”) in August 2017 based on our determination that SkinTE is appropriately regulated solely under Section 361 of the Public
Health Service Act and Part 1271 of Title 21 of the Code of Federal Regulations (i.e., as a so-called 361 HCT/P) and that, as a result, no premarket review or approval by the
FDA was required. We proceeded to develop sales and manufacturing capabilities for SkinTE and focused on advancing commercialization of SkinTE. We began a regional
commercial rollout of SkinTE in October 2018.
Following informal, voluntary discussions between us and the FDA we were advised by the FDA in April 2020 that its preliminary assessment is that SkinTE does not
meet the requirements to be regulated solely as a 361 HCT/P. Rather, the FDA’s preliminary assessment was that SkinTE is a biological product that should be regulated under
Section 351 of the Public Health Service Act. We re-evaluated our regulatory approach and determined it is prudent to submit an investigational new drug application (“IND”)
for SkinTE and an eventual biologics license application (“BLA”) because we believe it will create a more valuable asset with a greater likelihood of achieving widespread
commercial adoption, and to avoid the possibility of a protracted dispute with the FDA. As a result of the change in the regulatory approach for SkinTE, we decided to adjust our
SkinTE commercial operations accordingly.
The FDA developed and published in November 2017 a regenerative medicine policy framework to help facilitate regenerative medicine therapies. Under the
framework, the FDA stated its intent to exercise enforcement discretion until November 2020 with respect to the FDA’s IND and premarket approval requirements, which was
subsequently extended through May 2021. We continued to sell SkinTE as a 361 HCT/P in 2020 and into 2021 in reliance on our view that there is a reasonable basis for
regulating SkinTE as a 361 HCT/P and also in reliance on the enforcement discretion position stated in the policy framework. In May 2020, we effectuated a reduction in force
within our regenerative medicine business segment to reduce historical monthly cash burn and preserve capital for pursuing the filing of an IND. Since then we have focused
our commercial effort for SkinTE on the territories where we have current and repeat users of SkinTE.
We have evaluated the question of whether the FDA may extend enforcement discretion on regenerative medical products, and as of the date of this report the FDA has
not taken any action on extending enforcement discretion. Following the end of the FDA’s period of enforcement discretion, we may need to cease selling SkinTE until the
FDA approves a BLA, and then we will only be able to market the product for indications that have been approved in a BLA. We cannot predict at this time when we may
decide on continuing SkinTE sales because of the uncertainty around the decisions the FDA may make in this area.
We plan to focus our SkinTE activity on the preparation and submission of an IND in the second half of 2021, and the commencement of clinical trials under that IND
once it is open. We believe that the network of physicians and other healthcare providers who have treated more than 1,100 patients to date with SkinTE will provide valuable
support for our clinical development program as we work towards a BLA for SkinTE.
1
Testing and Research Services
Beginning in 2017 we developed internally a laboratory and research capability to advance the development of SkinTE and related technologies, which we operate
through our subsidiary, Arches Research, Inc. (“Arches”). At the beginning of May 2018, we acquired a preclinical research and veterinary sciences business to be used, in part,
for preclinical studies on our regenerative tissue products, which we operate through our subsidiary IBEX Preclinical Research, Inc. (“IBEX”). Through Arches and IBEX, we
also offer research and laboratory testing services to unrelated third parties on a contract basis.
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 the
course of its operations, Arches maintains equipment and staff capable of performing molecular polymerase chain reaction testing for COVID-19, which made it possible for
Arches to begin providing COVID-19 testing services at the end of May 2020. We believe that COVID-19 testing offers an opportunity to use existing resources to generate
additional revenue in the contract services segment and thereby help defray our operating expenses. We provided COVID-19 testing services through the end of 2020, which we
expect will continue in 2021.
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 defence 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 1/10,000th 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.
2
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 in order 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.
3
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 tunnelling, 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 our future clinical trials
conducted under an 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
We have initiated and completed several clinical trials and have additional clinical trials underway. All clinical trials to date have been conducted on a post-marketing
basis with SkinTE as a 361 HCT/P. As we transition to a BLA, and as discussed in more detail under “Our Plan for Advancing SkinTE” below, we will be conducting additional
clinical trials once we have an open IND for SkinTE with the FDA, and we expect that those registration trials will be used to support our eventual BLA submission. We believe
that the data from our clinical trials to date, however, are valuable as robust evidence of the strong safety and efficacy profile of SkinTE, and plan to include information from
these trials in our IND submission to the FDA.
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. There were no related adverse events pertaining to the SkinTE applications in the
trial.
Diabetic Foot Ulcer (DFU) Trials
DFUs are chronic wounds and represent one of the most costly, and medically significant, health related morbidities encountered during a patient’s lifetime. The
estimated annual US 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
4
We are now engaged in a multicenter, randomized controlled trial evaluating SkinTE plus standard of care (SOC) versus SOC alone in treatment of DFU (the DFU
RCT). The size of the study is 100 patients and the final patient was enrolled in January 2021. The primary endpoint is percentage of ulcers closed at 12 weeks. Secondary
endpoints include percent area reduction (PAR) at 4, 6, 8, and 12 weeks, quality of life assessment at 12 weeks, pain assessment at 12 weeks, peripheral neuropathy assessment
at 12 weeks, and cost-effectiveness.
In July 2020, we reported data from an interim analysis of the DFU RCT. The analysis was based on 25 SkinTE/SOC patients and 25 SOC patients at 13 sites across
the United States. All patients received only one application of SkinTE, except two patients who received reapplication due to inadvertent removal of the original product
(mean 1.08 applications per SkinTE/SOC subject). Key demographics included:
Mean wound area (cm2):
SkinTE/SOC:
SOC:
4.3
3.3
Mean wound age (weeks):
SkinTE/SOC:
SOC:
25.3
22.1
For the primary endpoint, 18 of 25 DFUs (72%) in the SkinTE/SOC group closed at 12 weeks, 8 of 25 DFUs (32%) in the SOC group closed at 12 weeks, and the associated p-
value for these results is 0.005. For the PAR secondary endpoint, the interim analysis showed:
Week
4
6
8
12
SkinTE/SOC
78.6%
83.2%
86.6%
88.2%
SOC
24.0%
43.8%
47.2%
49.6%
p-value
0.00021
0.004
0.002
0.012
Furthermore, there was no significant difference between SkinTE/SOC closed wounds and SOC closed wounds with respect to the quality of life assessment at 12
weeks, pain assessment at 12 weeks, and peripheral neuropathy assessment at 12 weeks. In our interim analysis for the DFU RCT we calculated mean total product cost per
patient by multiplying current pricing for SkinTE by the number of applications required per patient (1.08 mean applications per patient), resulting in a SkinTE mean total
product cost per treated wound of $1,311.20.
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 we
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
● No SkinTE-related adverse reactions were observed
We started a multicenter, randomized controlled trial evaluating SkinTE versus standard of care in treatment of VLU, but decided in the first quarter of 2021 to suspend
that trial after 30 patients were enrolled because we believed that our resources would be better used in future clinical trials conducted under an open IND that can be used in
our eventual planned BLA submission.
5
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.
●
● We believe SkinTE is suitable for treating a number of acute wounds. In 2017 the inpatient traumatic injury rate was 524.3 persons for every 100,000 people. This
resulted in an estimated 1.8 million traumatic injuries per year requiring inpatient hospitalization of which approximately 5% are directly related to open wounds.
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. The American Diabetes Association report on the economic costs of diabetes in 2017 states that the direct medical cost of diabetes in that year
was $237 billion. A 2005 article estimated the number of DFUs at between 1.2 and 3.0 million, and a 2003 article estimated the prevalence of unhealed DFUs after
12 weeks of conventional treatment at between 1.0 and 2.5 million. The estimated annual US payor burden of DFU ranges from $9.1 billion to $13.2 billion
according to a 2014 article in Diabetes Care.
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● 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 200-360 thousand 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. According to the
Agency for Healthcare Research & Quality (AHRQ) there are more than 2.5 million individuals that develop pressure ulcers annually, and approximately 600-700
thousand people are admitted to hospitals with one or more pressure ulcers. Of these ulcers, approximately 77% are treated with both topical therapies and
excisional surgical debridement.
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 resulted in hospitalization.
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Our Plan for Advancing SkinTE
As discussed above under “Overview,” we decided in April 2020 to pursue the preparation and filing with the FDA of an IND and BLA for SkinTE. Consequently, in
May 2020 we effectuated a reduction in force within our regenerative medicine business segment to reduce monthly cash burn. At the end of 2020 we had approximately 10
salespeople and six clinical science staff that supported the sales team. In the coming months we will pursue the preparation of an IND filing with the FDA, which we believe we
will be able to file in the second half of 2021.
In August 2020 we submitted a Type B Pre-IND meeting request to FDA regarding an indication for SkinTE to treat DFUs, and we received written responses to our
meeting request and questions in October 2020. FDA’s responses included, among other things, feedback, and recommendations on SkinTE manufacturing, preclinical studies,
and clinical data submitted in the Company’s briefing package, and guidance on additional information for the Company to include in its IND submission. Consistent with
published FDA guidance documents, including “Guidance for Industry: Providing Clinical Evidence of Effectiveness for Human Drug and Biological Products,” the Agency
stated that for a condition like DFUs, it would generally expect at least two adequate and well-controlled studies to provide substantial evidence of effectiveness and evidence of
safety to support a future marketing application. The Agency noted that our ongoing DFU RCT has elements of an adequate and well-controlled study but stated that it would
not accept our ongoing post-marketing DFU RCT as one of the two adequate and well-controlled studies to support a future marketing application.
Based on FDA’s feedback and our real-world experience with SkinTE, we plan to pursue multiple indications addressing complex wounds, including wounds with
exposed critical structures. The initial indications we plan to pursue are DFUs penetrating to tendon, capsule, and bone classified Wagner Grades 2 through 4 (corresponding to
University of Texas Grades 2 and 3), Stage 3 and 4 pressure injuries, and acute wounds. These wound types occur in patients with different demographics and have different
etiologies, but they have common characteristics including significant wound depth, significant wound volume, frequent presence of tunnelling and undermining, and exposure
of critical structures. We believe much of the chemistry, manufacturing, and controls (CMC) work, as well as preclinical work, that we would do for our initial IND in the DFU
indication can be leveraged for multiple subsequent indications. Our present intention is to focus our efforts on an initial IND submission for the above-referenced DFU
indication and make further IND submissions to develop the indications for pressure injuries and acute wounds either in parallel or a tight sequential process.
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The Company has maintained a collaborative dialogue with the FDA and will continue to work closely with the FDA as it progresses towards its BLA submission.
Upon BLA approval, we believe that SkinTE we will have 12 years of data exclusivity with regard to potential biosimilars.
Biological Product License Application (BLA) Pathway
Biological products subject to BLA requirements are approved under the Public Health Service Act. Biological products require FDA approval of a BLA to be
marketed. In order to be approved, a BLA must demonstrate the safety, purity and potency of the product candidate based on results of preclinical studies and clinical trials. A
BLA must also contain extensive CMC and other manufacturing information, and the applicant must pass an FDA pre-approval inspection of the manufacturing facility or
facilities at which the biologic product is produced to assess compliance with the FDA’s current Good Manufacturing Practices (cGMP). Satisfaction of FDA approval
requirements for biologics typically takes several years and the actual time required may vary substantially based on the type, complexity, and novelty of the product. We
cannot be certain that any BLA approvals for our products will be granted on a timely basis, or at all.
The steps for obtaining FDA approval of a BLA to market a biologic product in the U.S. ordinarily include:
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completion of preclinical laboratory tests, animal studies and formulation studies under the FDA’s good laboratory practices regulations;
submission to the FDA of an IND for human clinical testing, which must become effective before human clinical trials may begin and include independent
Institutional Review Board (IRB) approval before the trials may be initiated;
performance of one or more adequate and well-controlled clinical trials in accordance with Good Clinical Practices to establish the safety and efficacy of the product
for each indication;
submission to the FDA of a BLA, which contains detailed information about CMC for the product, reports of the outcomes, and full data sets of the clinical trials,
and proposed labeling and packaging for the product;
satisfactory review of the contents of the BLA by the FDA, including the satisfactory resolution of any questions raised during the review;
satisfactory completion of an FDA Advisory Committee review, if applicable;
satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP
regulations, to assure that the facilities, methods and controls are adequate to ensure the product’s identity, strength, quality, and purity; and
FDA approval of the BLA including agreement on post-marketing commitments, if applicable.
Preclinical tests typically include laboratory evaluations of product chemistry, toxicity, and formulation, as well as animal studies, and an IND sponsor must submit
the results of the preclinical tests, together with manufacturing information and analytical data, to the FDA as part of the IND. In our communications with the FDA, the FDA
has informed us that its current position is that additional preclinical studies are not required to support initiation of a clinical trial once the IND is effective, but this is not a
final determination, and the Company still expects to conduct certain additional preclinical work as part of its SkinTE development program, including a toxicology study
conducted under Good Laboratory Practices with a three-month terminal timepoint.
The IND must become effective before human clinical trials may begin. An IND will automatically become effective 30 days after receipt by the FDA, unless before
that time the FDA raises concerns or questions about issues such as the conduct of the trials and or supporting preclinical data as outlined in the IND. In that case, the sponsor
and the FDA must resolve any outstanding FDA concerns or questions before clinical trials can proceed. In other words, submission of an IND may not result in the FDA
allowing clinical trials to commence.
We plan to submit an IND for SkinTE for the treatment of certain DFUs in the second half of 2021, and plan to commence clinical trials for this indication shortly after
the IND becomes effective.
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Our SkinTE Sales Activity in 2020
We have observed that the sales process is affected by several factors, including the receptiveness of the physician to consider and then adopt a new therapeutic
approach, facility administrative approval where required, the nature and type of wounds treated at a target account, and the incidence of wound care cases at target accounts.
We also believe that the previous lack of SkinTE clinical trials, which we were not required to obtain before commercialization as a 361 HCT/P, has adversely affected the
willingness of healthcare providers to use SkinTE.
In the first part of 2020 the sales process for SkinTE met a new challenge with the COVID-19 pandemic that broke out in March 2020, which grew rapidly in the
United States as spring began. Throughout the country, healthcare assets in terms of facilities and providers were marshalled and dedicated to the care and treatment of COVID-
19 patients while still trying to meet the acute and traumatic care needs of the general population. Consequently, medical care and procedures that are considered “elective”
were put on hold in many regions across the country. Many of the initial economic effects in the healthcare industry of the early stages of the COVID-19 outbreak in the United
States and the shift in healthcare resources occurred during the last three weeks of the quarter ended March 31, 2020, and we observed that some SkinTE procedures planned for
the second calendar quarter were postponed, cancelled, or not scheduled as a direct result of the COVID-19 pandemic. The impact was most evident in chronic wounds without
amputation risk. As a result of the shift in patient care due to COVID-19, other challenges in the sales offering, and the shift in our regulatory pathway for SkinTE, beginning in
May 2020, our commercial team focused the sales effort on regions where we had repeat customers that are hospital groups or large facilities that treat acute and traumatic
wounds conditions. Consequently, in 2020 38% of our net revenues from SkinTE sales were generated at one hospital system.
SkinTE’s pricing structure is designed to be competitive in the marketplace and reflects SkinTE’s ability to deliver durable, functional full-thickness skin replacement
with only one application, compared to the costly practice of regular wound care over a long period of time. Our practice has been to work closely with our customers to ensure
that pricing is not a barrier to use of SkinTE for patient care.
We have continued to sell SkinTE in 2021, but as discussed above under “Overview” we may need to cease selling SkinTE if FDA enforcement discretion ends and
while a BLA is pending until the FDA approves a BLA, and then we will only be able to market SkinTE for the indications that have been approved in the BLA.
Payment and Reimbursement
Inpatient Setting.
In the inpatient setting, facility reimbursement is dictated by the associated bundled Medicare Severity-Diagnosis Related Group (MS-DRG) payment for the entire
episode of care under the Medicare Inpatient Prospective Payment System (IPPS). The bundled DRG facility payment is determined by the DRG code applied, which factors in
the primary diagnosis and patient characteristics, such as co-morbidities present on admission. In this scenario, all products and supplies utilized during the episode of care are
paid for with the bundled DRG facility payment, including products like SkinTE. In addition, physician services are billed and reimbursed outside of the bundled DRG facility
payment, including any procedures performed during that admission, which are billed for and reimbursed utilizing Current Procedural Terminology (CPT) codes associated
with the respective procedures. SkinTE has been used within the inpatient setting and reimbursed underneath the applicable DRG bundled facility payments, and to our
knowledge all associated procedures billed for outside the DRG as physician services with CPT codes have been reimbursed, as well.
Hospital Outpatient Department (HOPD) and Ambulatory Surgical Center (ASC) Setting.
Like the inpatient setting, bundled Ambulatory Payment Classification (APC) facility payments are received under the Medicare Outpatient Prospective Payment
System (OPPS) for services and supplies utilized for procedures within Hospital Outpatient Departments (HOPDs) and Ambulatory Surgical Centers (ASCs). In these settings,
bundled APC facility payments are dictated by the procedures performed and billed for through the appropriate CPT codes. SkinTE has been used in these settings and covered
with the associated bundled APC facility payments and physician services have been paid for outside of the APC payment utilizing CPT codes to bill for the associated
procedures.
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Office or Clinic Setting.
In contrast to the inpatient, HOPD, and ASC settings, care provided in a physician office or clinic is reimbursed based on individual Healthcare Common Procedure
Coding System (HCPCS) and CPT codes, facilitating reimbursement for the specific products utilized and procedures performed during the clinic visit. The CPT codes used in
the setting are the same or similar to the CPT codes used to bill for physician services in the other settings of care. We believe there are appropriate Level 1 CPT Codes within
the Full Thickness Skin Graft code category, in addition to Surgical Preparation codes with appropriate modifiers (52 & 58) that are appropriate for SkinTE.
Development Projects
Preparing and filing our IND with the FDA and beginning necessary clinical trials are the focus of our operational activity. We have development projects, however,
that we believe will add value to SkinTE if and when we obtain pre-market approval.
SkinTE Cryo
SkinTE Cryo allows us to offer multiple deployments from one original harvest through a cryopreservation process. We believe this is a valuable offering that will
enhance our SkinTE product offering for several reasons. 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.
SkinTE POC
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. SkinTE
POC is in the development stage and is a long-term development project.
PTE 11000
PTE 11000 is an allogenic, biologically active dressing for use in wound care and aesthetics to accelerate healing of skin. It is a composition made using cadaveric
tissue via a proprietary process. It is currently in the preclinical phase of development and we cannot predict when that phase may be complete.
Other Potential 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, however, we intend to apply our business and financial
resources to the SkinTE IND and BLA, and SkinTE-related projects described above, and we have at this time put on hold further development work on OsteoTE and products
related to other tissue substrates so that we can focus our resources on SkinTE.
Manufacturing
Throughout 2020 we maintained at our facility in Salt Lake City, Utah, manufacturing processes and quality systems that allow us 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. We validated our
manufacturing process as being aseptic. All SkinTE is manufactured within an ISO 5 isolator located within an ISO 7 cleanroom. Our processes are designed and validated to
prevent the spread of communicable disease, and to prevent cross-contamination between samples. Our quality systems comply with current Good Tissue Practices (“cGTP”)
under 21 C.F.R. Part 1271.
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In connection with the preparation of our IND we are making plans to modify our manufacturing practices and facility so that we comply with current Good
Manufacturing Practices (“cGMP”) 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 our strategy of ensuring timely delivery of our products, we have avoided relying on any third-party supplier as a sole source vendor for any element of our
production process. We have identified alternate suppliers and, where appropriate, supply alternatives for any sourcing challenges.
Intellectual Property
As we advance our platform technology, 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 a variety of technologies, including our MPFU technology, our Complex Living Interface Coordinated Self-Assembling Materials
(“CLICSAM”) Technology, our Composite-Interfacing, Biomaterial Accelerant Substrate (“CIBAS”) Technology, as well as Biological Sample Harvest and Deployment Kits.
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
which issued on February 23, 2021. U.S. Patent No. 10,926,001 was filed on November 30, 2015 as Application No. 14/954,335 and thus has 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 of 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.
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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 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.
Contract Research Services
In May 2018, we purchased the assets of a preclinical research sciences business and related real estate from Ibex Group, L.L.C., a Utah limited liability company, and
Ibex Preclinical Research, Inc., a Utah corporation. We acquired these assets to accelerate research and development of our product candidates, and now operate the business as
IBEX to advance our product development and deliver preclinical research services to third parties. The business consists of a preclinical research facility that that complies
with Good Laboratory Practices and is USDA registered and includes vivarium, operating rooms, preparation rooms, storage facilities, and surgical and imaging equipment. The
real property includes two parcels in Logan, Utah, consisting of approximately 1.75 combined gross acres of land, together with the buildings, structures, fixtures, and personal
property located on the real property.
Arches offers a complimentary array of research services to those offered through IBEX, providing access to experimental planning, histology, and in vivo and in vitro
imaging, including micro-ct. Arches is well equipped with state-of-the-art equipment and sophisticated research staff that provide a range of services including veterinary and
preclinical services, advanced imaging, biomedical engineering and validation, and molecular biology assays.
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 the
course of its operations, Arches maintains equipment and staff capable of performing molecular polymerase chain reaction (“PCR”) testing for COVID-19. We had the
opportunity to use our 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 we began providing COVID-19 testing services on May 27, 2020. We believe that COVID-19 testing offers an opportunity to use existing
resources to generate additional revenue and thereby help defray our operating expenses. We pursued this opportunity through the end of 2020 and expect to continue to do so as
long as we believe COVID-19 testing services are beneficial to supporting our operations.
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On September 2, 2020, Arches entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”). The COVID-19 Laboratory Services Agreement between
the parties provides that Arches will perform specimen testing services for customers referred by Co-Diagnostics to Arches. Co-Diagnostics will arrange all logistics for
delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service. Arches bills Co-Diagnostics for the testing services and
Co-Diagnostics manages all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches and Co-Diagnostics provides that Co-
Diagnostics will make available to Arches the Oktopure high throughput extraction machine that Arches will use to perform COVID-19 testing. The term of the agreement is 12
months, requires Arches to use Co-Diagnostics tests exclusively in the machine, and establishes for Arches a minimum monthly purchase obligation for Co-Diagnostics tests
and related consumables used in the testing process.
Competition for COVID-19 testing is intense with a large number of participants providing testing services. Many of our current competitors, either alone or with their
collaboration partners, have significantly greater financial resources, testing resources, laboratory personnel, expertise, and marketing resources than we do. We are only able to
offer our testing services in states where Arches is licensed or registered to provide laboratory testing services or where an emergency order or authorization allows unlicensed
laboratories to provide COVID-19 testing, which limits the geographical market we can serve. We are a relatively unknown testing laboratory, so we have relied on word of
mouth and management relationships to connect with prospects and vied for new business on the basis of price and service. During 2020 we had testing agreements with
multiple nursing home and pharmacy facilities in the state of New York controlled by a single company that accounted for 96% of COVID-19 testing revenues in 2020. We
were fortunate to obtain our major customer for testing services, which was a result of a direct relationship with management, and we have been able to retain this customer on
the basis of price and service. We provide testing services in New York in reliance on monthly executive orders and authorizations that require regular testing of staff in these
facilities and permit laboratories not licensed in New York to provide those services. On March 26, 2021, we were advised by the company that controls the New York nursing
homes and pharmacy facilities we service that the state of New York is allowing on-site employee testing and that on-site testing will be implemented for the New York
facilities we service, which will likely have the effect of substantially diminishing our revenues from COVID-19 testing after the first quarter of 2021.
We offer PCR testing for COVID-19, which is the current industry standard for accuracy of results. A number of companies, as well as academic research institutions,
governmental agencies, and public and private research institutions, are pursuing the development of new COVID-19 tests that purport to be faster, easier, and less expensive
than PCR testing. The successful development of such a test could substantially diminish the demand for the PCR testing we offer.
Government Regulation
FDA Regulation of Tissue-Based Products
The FDA has specific regulations governing human cells, tissues, and cellular and tissue-based products, or HCT/Ps. An HCT/P is a product containing or consisting
of human cells or tissue intended for transplantation into a human patient. In the United States, HCT/Ps are subject to varying degrees of regulation by the FDA, depending on if
they fall solely within the scope of Section 361 of the Public Health Service Act (the “PHS Act”) (42 U.S.C. § 264) or if they are regulated as drugs, devices, or biological
products under Section 351 of the PHS Act (42 U.S.C. § 262) and the federal Food, Drug, and Cosmetic Act (the “FD&C Act”). Under this two-tiered framework, certain higher
risk HCT/Ps are regulated as new biologics. Manufacturers of new biologics must complete extensive clinical trials, which must be conducted pursuant to an effective IND. In
addition, the FDA must review and approve a BLA before a new biologic may be marketed.
If an HCT/P meets the criteria for regulation solely under Section 361 of the Public Health Service Act and Part 1271 of Title 21 of the Code of Federal Regulations
(so-called “361 HCT/Ps”), no premarket FDA review for safety and effectiveness under a drug, device, or biological product marketing application is required. The processor of
the 361 HCT/P is required to register and list its products with the FDA, comply with regulations regarding labeling, record keeping, donor eligibility and screening and testing,
process the tissue in accordance with established cGTP, and investigate and, in certain circumstances, report adverse reactions or deviations.
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To be a 361 HCT/P, a product generally must meet all four of the following criteria:
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It must be minimally manipulated;
It must be intended for homologous use;
Its manufacture must not involve combination with another article, except for water, crystalloids, or a sterilizing, preserving or storage agent, provided the addition
of such article does not raise new clinical safety concerns; and
It must not have a systemic effect and must not be dependent upon the metabolic activity of living cells for its primary function (unless the product is intended for
reproductive use, autologous use, or use in a first- or second-degree blood relative).
We believe that SkinTE qualifies as a 361 HCT/P. Following informal, voluntary discussions between us and the FDA we were advised by the FDA in April 2020 that
its preliminary assessment is that SkinTE does not meet the requirements to be regulated solely as a 361 HCT/P. Rather, the FDA’s preliminary assessment was that SkinTE is a
biological product that should be regulated under Section 351 of the Public Health Service Act. We re-evaluated our regulatory approach and determined it is prudent to submit
an IND for SkinTE and an eventual BLA because we believe it will create a more valuable asset with a greater likelihood of achieving widespread commercial adoption, and to
avoid the possibility of a protracted dispute with the FDA. As a result of the change in the regulatory approach for SkinTE, we decided to adjust our SkinTE commercial
operations accordingly.
All establishments that manufacture 361 HCT/Ps must register and list their HCT/Ps with the FDA’s Center for Biologics Evaluation and Research (“CBER”) within
five days after commencing operations. In addition, establishments are required to update their registration annually in December or within 30 days of certain changes and
submit changes in HCT/P listing at the time of or within six months of such change. Establishments that manufacture 361 HCT/Ps will know that they are registered in
compliance with 21 C.F.R. § 1271.10(a) when they receive a validated form with the Federal Establishment Identification number after submitting the Form FDA 3356
(registration form). cGTP requirements govern, as may be applicable, the facilities, controls, and methods used in the manufacture of HCT/Ps, including without limitation,
recovery, donor screening, donor testing, processing, storage, labeling, packaging, and distribution of 361 HCT/Ps. During the enforcement discretion period, the FDA is
permitting products that will become regulated under Section 351 to be manufactured in compliance with cGTP regulations. After the end of the enforcement discretion period,
however, these products will be subject to cGMP compliance. The transition from cGTP to cGMP compliance includes development and enhancement of production processes,
procedures, tests, and assays, and it requires extensive validation work. It can also involve the procurement and installation of new production or lab equipment. These efforts
require expertise and resources.
FDA inspection and enforcement with respect to establishments described in 21 C.F.R. Part 1271 includes inspections conducted, as deemed necessary, to determine
compliance with the applicable provisions and may include, but is not limited to, an assessment of the establishment’s facilities, equipment, finished and unfinished materials,
containers, processes, HCT/Ps, procedures, labeling, records, files, papers, and controls required to be maintained under 21 C.F.R. Part 1271. Such inspections can occur at any
time with or without written notice at such frequency as is determined by the FDA in its sole discretion.
The Tissue Reference Group (“TRG”) is a body within the FDA designed to provide recommendations regarding whether a product candidate will be regulated as a
361 HCT/P. The Office of Combination Products (“OCP”) at FDA provides informal, non-binding recommendations and formal, binding designations regarding the
classification of products as 361 HCT/Ps or drugs, biologics, or medical devices. Product manufacturers are not required to consult with the TRG or OCP and instead can
market their products based on their own conclusion that the product meets the 361 HCT/P criteria. We have not consulted the TRG or sought a formal designation from the
OCP, though we have had informal interactions with OCP.
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If we fail to comply with the FDA regulations and laws applicable to our operation or tissue products, the FDA could take enforcement action, including, without
limitation, pursuing any of the following sanctions, among others:
● Untitled letters, warning letters, fines, injunctions, product seizures, and civil penalties;
● Orders for product retention, recall, or destruction;
● Operating restrictions, partial suspension, or total shutdown of operations;
● Refusing any requests for product clearance or approval;
● Withdrawing or suspending any applications for approval or approvals already granted; or
● Criminal prosecution.
For more information on this regulatory risk, please see the discussion below, “Risk Factors,” including but not limited to the information under the heading, “Risks
Related to Registration or Regulatory Approval of Our Product Candidates and Other Government Regulations.”
Regulation of Clinical Laboratories
Virtually all clinical laboratories operating in the United States must be certified by the federal government or by a federally-approved accreditation agency. In most
cases, that certification is regulated by the Centers for Medicare & Medicaid Services of the U.S. Department of Health and Human Services (“HHS”) through CLIA, which
requires that applicable clinical laboratories meet quality assurance, quality control, and personnel standards. Laboratories also must undergo proficiency testing and are subject
to inspections.
Arches has been issued a CLIA Certificate of Registration (“CLIA Certificate”) to accept human specimens for the purpose of performing laboratory examinations or
procedures. The CLIA Certificate was issued on April 20, 2020 and is valid until April 19, 2022, but is subject to revocation, suspension, limitation, or other sanctions for
violations of applicable laws or regulations.
Arches is also subject to state and local laboratory regulation. CLIA provides that a state may adopt laboratory regulations different from or more stringent than those
under federal law, and a number of states have implemented their own laboratory regulatory requirements. State laws may require that laboratory personnel meet certain
qualifications, specify certain quality controls, or require maintenance of certain records.
We believe Arches is in compliance with all applicable laboratory requirements. Its laboratory has continuing programs to ensure that Arches’ operations meet all such
regulatory requirements, but no assurances can be given that the laboratory will pass all future licensure or certification inspections.
Fraud, Abuse and False Claims
We are directly and indirectly subject to various federal and state laws governing relationships with healthcare providers and other potential referral sources for our
products pertaining to healthcare fraud and abuse, including anti-kickback, false claims, and similar laws. In addition, federal and state laws are sometimes open to
interpretation. We could potentially face legal risks if our interpretation differs from those of enforcement authorities. Further, from time to time we could be at a competitive
disadvantage if our interpretation differs from that of our competitors.
In particular, the federal Anti-Kickback Statute prohibits persons from knowingly and willfully soliciting, offering, receiving or providing remuneration (in cash or in
kind), directly or indirectly, in exchange for or to induce either the referral of an individual, or the furnishing, arranging for, or recommending of, a good or service for which
payment may be made in whole or part under federal healthcare programs, such as the Medicare and Medicaid programs. Penalties for violations include criminal penalties and
civil sanctions such as fines, imprisonment and possible exclusion from Medicare, Medicaid, and other federal healthcare programs. The Anti-Kickback Statute is broad and
prohibits many arrangements and practices that are lawful in businesses outside of the healthcare industry. In implementing the statute, the Office of Inspector General of HHS
(“OIG”) has issued a series of regulations, known as the “safe harbors.” These safe harbors set forth provisions that, if all their applicable requirements are met, exempt certain
remuneration and remunerative arrangements from violating the Anti-Kickback Statute. The failure of a transaction or arrangement to fit precisely within one or more safe
harbors does not necessarily mean that it is illegal or that prosecution will be pursued. However, conduct and business arrangements that do not fully satisfy each applicable
element of a safe harbor may result in increased scrutiny by government enforcement authorities, such as OIG. Many states have laws similar to the federal law.
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Also, the federal False Claims Act (“FCA”) imposes civil liability on any person or entity that submits, or causes others to submit, a false or fraudulent claim for
payment (e.g., by the Medicare or Medicaid programs) to the U.S. government. Damages under the FCA can be significant, and consist of the imposition of fines and penalties,
as well as possible exclusion from Medicare, Medicaid, and other federal healthcare programs. The FCA also allows a private individual or entity (i.e., a whistleblower) with
knowledge of past or present fraud against the federal government to sue on behalf of the government and to be paid a portion of the government’s recovery, which can include
both civil penalties and up to three times the amount of the government’s damages (usually the amount reimbursed by federal healthcare programs). The U.S. Department of
Justice takes the position that the marketing and promotional practices of life sciences product manufacturers, including the off-label promotion of products, the provision of
inaccurate or misleading reimbursement guidance, or the payment of prohibited kickbacks, may cause the submission of improper claims to federal and state healthcare
entitlement programs such as Medicare and Medicaid by health care providers that use the manufacturer’s products, which results in a violation of the FCA. In certain cases, in
order to settle allegations under the FCA, manufacturers have entered into criminal and civil settlements with the federal government under which they entered into plea
agreements, paid substantial monetary amounts and entered into corporate integrity agreements (“CIAs”) that require, among other things, substantial government oversight, as
well as reporting and remedial actions going forward
If we fail to comply with these laws, we could be subject to enforcement actions, including but not limited to:
● Multi-year investigations by federal and state governments;
● Criminal and civil fines and penalties;
● Obligations under settlement agreements, such as CIAs or deferred prosecution agreements; or
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Exclusion from participation in federal and state healthcare programs.
Environmental Matters
Our research, development and tissue preservation activities generate some chemical and biomedical wastes, consisting primarily of diluted alcohols and acids, and
human and animal pathological and biological wastes, including human and animal tissue and body fluids removed during laboratory procedures. The chemical and biomedical
wastes generated by our research, development and tissue processing operations are placed in appropriately constructed and labeled containers and are segregated from other
wastes. We contract with third parties for transport, treatment, and disposal of waste. We strive to remain compliant with applicable laws and regulations promulgated by the
Resource Conservation and Recovery Act, the U.S. Environmental Protection Agency and similar state agencies.
Reimbursement
In the United States, demand for access to any medical product will depend in large part on both the availability and the amount of reimbursement from third-party
payers, including government healthcare programs (such as Medicare and Medicaid), and commercial healthcare insurers, such as managed care organizations and other private
health plans. Third-party payers have complex rules and requirements for coverage and reimbursement of healthcare products and services. Even the applications to such third-
party payers to be eligible for reimbursement for product or services are complex and can be lengthy and time consuming. For new technologies coming to market, these payers
are increasingly examining the clinical evidence supporting medical necessity and cost effectiveness decisions in addition to safety and efficacy, which can result in barriers to
early coverage reimbursement, or denial of coverage and reimbursement altogether. Accordingly, significant uncertainty exists as to the availability of coverage and
reimbursement status for new medical products. If third-party payer reimbursement is unavailable to our customer hospitals, physicians, and providers, our sales may be limited,
and we may not be able to realize an appropriate return on our investment in research and product development.
Payers often set payment rates depending on the site of service and many use the Medicare program as a benchmark for their own payment methodologies. In the
hospital inpatient setting, Medicare payment generally is set at pre-determined rates for all products and services provided during a patient stay and is based on such factors as
the patient diagnosis, procedures performed, patient age, and complications. In the physician office or clinic setting, Medicare payment generally is based on a fee schedule,
with payment rates set for each procedure performed and product used, although the schedule may in some instance bundle the product into the payment for the procedure. In
some outpatient settings, such as in the case of the hospital outpatient clinic setting, Medicare payment rates generally are premised on classifications of services that have
similar clinical characteristics and similar costs.
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Reimbursement policies depend in part on legislation designed to regulate the healthcare industry and federal and state governments continue to propose and pass new
healthcare legislation and government agencies revise or change their regulations and policies from time to time. We cannot predict whether or how such reform measures and
policy changes would affect reimbursement rates and demand for our products.
Patient Privacy
HIPAA, as amended by the Health Information Technology for Economic and Clinical Health Act, or HITECH, and their implementing regulations, including the final
omnibus rule published on January 25, 2013, mandates, among other things, the adoption of uniform standards for the electronic exchange of information in common healthcare
transactions, as well as standards relating to the privacy and security of individually identifiable health information, which require the adoption of administrative, physical and
technical safeguards to protect such information. Among other things, HITECH makes HIPAA’s security standards directly applicable to business associates, defined as
independent contractors or agents of covered entities that create, receive, or obtain protected health information in connection with providing a service for or on behalf of a
covered entity. Because our products use autologous tissue sources that are tracked and reapplied to the same individual patient from which the tissue was harvested, our
business maintains substantial amounts of patient identifiable health information. HITECH also increased the civil and criminal penalties that may be imposed against covered
entities and business associates, and gave state attorneys general new authority to file civil actions for damages or injunctions in federal courts to enforce the federal HIPAA
laws and seek attorney’s fees and costs associated with pursuing federal civil actions. In addition, certain state laws govern the privacy and security of health information in
certain circumstances, some of which are more stringent than HIPAA and many of which differ from each other in significant ways and may not have the same effect, thus
complicating compliance efforts. Failure to comply with these laws, where applicable, can result in the imposition of significant civil or criminal penalties. Since we do not
submit claims electronically to payers, we do not believe we are a covered entity under HIPAA.
Transparency Laws
The Patient Protection and Affordable Care Act imposes, among other things, annual reporting requirements for covered manufacturers for certain payments and other
transfers of value provided to physicians and teaching hospitals, as well as certain ownership and investment interests held by physicians and their immediate family members.
We do not believe that we are a covered manufacturer under the statute because our products are neither regulated as pharmaceuticals, biologics, nor medical devices by the
FDA, and 361 HCT/Ps are not expressly addressed by this law. We do, however, voluntarily file annual reports because we believe it enhances our reputation in the medical
industry to be transparent about what we do and how we do it, and if we receive a BLA approval, we will be required to report certain information under applicable
transparency laws.
USDA
The Company and its subsidiaries conduct preclinical research and development, which is regulated by the United States Department of Agriculture (“USDA”)
Animal and Plant Health and Inspection Service (APHIS) and must be performed in compliance with the Animal Welfare Act, Animal Welfare Regulations, and Animal Care
Policies. The Company and each of its subsidiaries that conduct preclinical research have in place Institutional Animal Care and Use Committees to oversee compliance with
the animal care and use program and report accordingly to the USDA on an at least a semi-annual basis. All sites that maintain USDA-covered species are actively registered as
USDA research facilities.
Employees
We had approximately 80 full-time employees and five part-time employees as of December 31, 2020, all of whom are in the United States. None of our employees
are represented by a labor union or covered by a collective bargaining agreement. We consider our relationship with our employees to be good.
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Corporate History
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.
Prior to the acquisition of PolarityTE NV, Majesco DE developed and published a wide range of video games on digital networks through its Midnight City label. On
May 2, 2017, Majesco Entertainment Company, a Nevada corporation and wholly owned subsidiary of PolarityTE (“Majesco NV Sub”), was formed, into which all the assets
and liabilities of this gaming business were placed. On June 23, 2017, PolarityTE sold the Majesco NV Sub to Zift Interactive LLC, a Nevada limited liability company (“Zift”),
pursuant to a purchase agreement. Pursuant to the terms of the agreement, PolarityTE sold 100% of the issued and outstanding shares of common stock of Majesco NV Sub to
Zift, including all the right, title, and interest in and to Majesco NV Sub’s business of developing, publishing, and distributing video game products.
In May 2018 we acquired assets of a preclinical research and veterinary sciences business and related real estate, which we now operate through IBEX. The aggregate
purchase price was $3.8 million, of which $2.3 million was paid at closing and the balance satisfied by a promissory note payable to the seller with an initial fair value of $1.22
million and contingent consideration with an initial fair value of approximately $0.3 million. As a result, we have significant research facilities and a well-educated and skilled
team of scientists and researchers that perform research on our development projects and comprise the contract research segment of our business.
Summary Risk Factors
The risk factors described below are a summary of the principal risk factors associated with an investment in us. These are not the only risks we face. You should
carefully consider these risk factors, together with the risk factors set forth in “Item 1A. Risk Factors” of this Report and the other reports and documents filed by us with the
U.S. Securities and Exchange Commission (“SEC”).
Risks Related to Our Financial Condition
● We have a history of losses and may incur additional losses in the future.
● We will need additional funding in the future, which may not be available on acceptable terms, or at all, and, if available, may result in dilution to our stockholders.
If we are unable to successfully raise additional capital, our future clinical trials and product development could be limited, and our long-term viability may be
threatened.
● We plan to devote a majority of our financial and human resources to pursue an IND and BLA for SkinTE, which means we may fail to capitalize on product
candidates that may be more profitable or for which there is a greater likelihood of success.
● Our wholly owned subsidiary accepted a loan under the CARES Act pursuant to the Paycheck Protection Program, or the PPP, and the loan may not be forgiven or
may subject us to challenges, audits, or investigations regarding qualification for the loan, any of which could reduce our liquidity and have a material adverse effect
on our business, financial condition and results of operations.
● Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited, which could adversely affect future cash flows.
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Risks Related to our Research & Development, Clinical, and Commercialization Activities
● We are pursuing an IND and BLA for SkinTE, so we are an early-stage biotechnology company subject to the risks associated with such companies, which may
make it difficult to evaluate our current business and predict our success and viability.
● Our ability to timely submit an IND or BLA to the FDA may depend on circumstances outside of our control.
● Clinical trials are expensive, time-consuming, and difficult to design and implement, and as a result there is significant uncertainty with respect to successful
completion.
● Biotechnology and pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of uncertainty. While we have
generated revenue from sales of SkinTE, we have never achieved profitable operating results in our regenerative medicine product segment, and we may never be
able to do so.
● We are dependent on third parties to conduct our clinical trials and the failure of such third parties to perform or delays in performance could increase our costs or
prevent us from being able to use the results of the trials.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
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● Any adverse developments that occur during any clinical trials conducted by academic investigators or other entities conducting clinical trials under independent
INDs may negatively affect the conduct of our clinical trials or our ability to obtain regulatory approvals or commercialize our product candidates.
● Adverse side effects or other safety risks associated with our product candidates could cause us to suspend or discontinue clinical trials or delay or preclude
approval.
● We may form or seek strategic alliances, enter into additional licensing arrangements, or participate in acquisition transactions in the future, and we may not succeed
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in realizing the benefits of such alliances, licensing arrangements, or acquisition transactions.
Even if we obtain regulatory approval of SkinTE or future product candidates may not gain market acceptance among physicians, patients, hospitals, third-party
payors, and others in the medical community.
If we are required to withdraw or we voluntarily recall a product from the market, it could significantly increase our costs, damage our reputation, and disrupt our
business.
● We face significant uncertainty in the industry due to government healthcare reform.
● We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance.
● We operate in a highly competitive and evolving field and face competition from regenerative medicine, biotechnology, and pharmaceutical companies, tissue
engineering entities, tissue processors, and medical device manufacturers, as well as new market entrants, which may result in others discovering, developing or
commercializing competing products before or more successfully than we do.
Risks Related to our Operating Activities
● We may be required to discontinue sales of SkinTE, which would adversely affect our revenues, financial condition, and results of operations.
● We have a limited history of operation with our laboratory testing service so we are unable to predict with any certainty what contribution it will make to defraying
our operating expenses in the future, which could adversely affect our ability to plan for the use of our resources to achieve our goals.
● Our manufacturing and COVID 19 testing operations depend primarily on one facility. If this facility is destroyed or we experience any manufacturing or laboratory
difficulties, disruptions, or delays, this could adversely affect our ability to conduct our clinical trials or perform laboratory testing services.
● We depend on our senior management team and the loss of one or more key employees or an inability to attract and retain highly skilled employees will negatively
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affect our business, financial condition, and results of operations.
The ongoing COVID-19 pandemic could materially affect our operations, as well as the business or operations of third parties with whom we conduct business. Our
business could be adversely affected by the effects of other future health pandemics in regions where we or third parties on which we rely have significant business
operations.
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Risks Related to Our 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
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material and adverse effect on us.
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 may be subject to claims that our employees have wrongfully appropriated, used, or disclosed intellectual property of their former employers.
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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.
● We may become subject to claims of infringement of the intellectual property rights of others, which could prohibit us from developing our products, require us to
obtain licenses from third parties, or to develop non-infringing alternatives, and subject us to substantial monetary damages. We have not obtained and do not intend
to obtain any formal legal opinion regarding our freedom to practice our technology.
● We have a number of patents issued and applications pending in the United States and other foreign jurisdictions, however we may not be able to enforce those
patent rights against third parties.
● We may not be able to protect our intellectual property in countries outside of the United States.
Risks Related to Our Common Stock
● An active trading market for our common stock may not continue to develop or be sustained.
● We are pursuing a plan to advance regulatory approval of SkinTE, so delay or failure in achieving our milestones could adversely affect our prospects and the value
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of ownership of our common stock.
The trading price of the shares of our common stock has been and may continue to be volatile, and you may not be able to resell some or all your shares at a desired
price.
Future sales of our common stock in the public market could cause our stock price to fall.
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● Our Restated Certificate of Incorporation, our Restated Bylaws, and Delaware law could deter a change of our management, which could discourage or delay offers
to acquire us.
● 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.
● We incur costs and demands upon management because of being a public company.
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.
Our website address is http://www.polarityte.com. We have included our website address as an inactive textual reference only. We make available, free of charge
through our website, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K, and amendments to those reports filed or furnished
pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after we electronically file such material, or furnish it to the SEC. We also similarly
make available, free of charge on our website, the reports filed with the SEC by our executive officers, directors and 10% stockholders pursuant to Section 16 under the
Exchange Act as soon as reasonably practicable after copies of those filings are provided to us by those persons. The SEC maintains an internet site that contains reports, proxy
and information statements, and other information regarding issuers that file electronically with the SEC at http://www.sec.gov.
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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 occur, our financial condition or results of operations could suffer.
Risks Related to Our Financial Condition
We have a history of losses and may incur additional losses in the future.
On a cumulative basis we have sustained substantial losses and negative cash flows from operations since we embarked on our regenerative tissue product business at
the beginning of 2017. As of December 31, 2020, our accumulated deficit was $478.2 million. As of December 31, 2020, we had $25.5 million in cash and cash equivalents,
and working capital of approximately $22.7 million. In January 2021, we raised an additional $17.7 million in gross proceeds before offering expenses in a registered direct
offering and through a warrant exercise agreement. In fiscal year 2020, we incurred losses of $42.9 million and we experienced negative cash flows from operations of $37.8
million. We expect to continue incurring material general and administrative expenses in connection with our operations, including the costs associated with preparing and filing
our IND and BLA for SkinTE and beginning clinical trials as part of those applications. As a result, we anticipate that we will incur losses in the future.
We will need additional funding in the future, which may not be available on acceptable terms, or at all, and, if available, may result in dilution to our stockholders. If we
are unable to successfully raise additional capital, our future clinical trials and product development could be limited, and our long-term viability may be threatened.
In 2020 our net revenues from product sales and services contributed $10.1 million to defray cost of sales and total operating costs and expenses in the amount of $56.1
million. Our net revenues reduce the rate at which we burn our capital resources in the pursuit of our IND and BLA for SkinTE, but we have no expectation that product sales
and services will be a major contributor to the capital resources we will need to advance SkinTE through the FDA regulatory process over the next several years.
Based on currently available information as of the date we file this report, we believe that our existing cash and cash equivalents will be sufficient to fund our activities
through the end of 2021 and into the third quarter of 2022. However, our projections of future cash needs may differ from actual results. Furthermore, finite resources may
inhibit our ability to respond to competitive pressures or unanticipated capital needs, or may force us to reduce operating expenses, which would significantly harm our
business. We will need to seek additional working capital, which may be through sales of our equity securities or through bank credit facilities or public or private debt from
various financial institutions or through future arrangements with strategic partners. We cannot be certain that additional funding will be available on acceptable terms, or at all.
If we do identify sources for additional funding, the sale of additional equity securities or convertible debt could result in dilution to our stockholders. Additionally, the sale of
equity securities or issuance of debt securities may be subject to certain security holder approvals under applicable Nasdaq rules or may result in the downward adjustment of
the exercise or conversion price of our outstanding securities. We can give no assurance that sources of funding, such as sales of equity or debt, or strategic relationships would
be available or would be approved by our security holders, if needed, on favorable terms or at all. If we fail to obtain additional working capital as and when needed, such
failure could have a material adverse impact on our business, results of operations and financial condition.
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We plan to devote a majority of our financial and human resources to pursue an IND and BLA for SkinTE, which means we may fail to capitalize on product candidates
that may be more profitable or for which there is a greater likelihood of success.
Because we have limited resources, we plan to forego or delay pursuit of opportunities with other product candidates or for indications that later could prove to have
greater commercial potential. Our resource allocation decisions may cause us to fail to capitalize on viable commercial products or profitable market opportunities. Our
spending on current and future research and development programs for product candidates may not yield any commercially viable products. If we do not accurately evaluate the
commercial potential or target market for a particular product candidate, we may relinquish valuable rights to that product candidate through strategic collaboration, licensing or
other royalty arrangements in cases in which it would have been more advantageous for us to retain sole development and commercialization rights to such product candidate, or
we may allocate internal resources to a product candidate for which it would have been more advantageous to enter into a partnering arrangement.
Our wholly owned subsidiary accepted a loan under the CARES Act pursuant to the Paycheck Protection Program (“PPP”), and the loan may not be forgiven or may
subject us to challenges, audits, or investigations regarding qualification for the loan, any of which could reduce our liquidity and have a material adverse effect on our
business, financial condition and results of operations.
On April 12, 2020, our subsidiary PolarityTE MD, Inc. (the “Borrower”) entered into a promissory note offered by a bank (the “Lender”) evidencing an unsecured
loan in the amount of $3,576,145 made to the Borrower under the PPP (the “Loan”). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act
(the “CARES Act”) and is administered by the U.S. Small Business Administration (the “SBA”). The interest rate on the Loan is 1.00%. Beginning seven months from the date
of the Loan the Borrower is required to make 24 monthly payments of principal and interest in the amount of $150,563. The promissory note evidencing the Loan contains
customary events of default relating to, among other things, payment defaults, making materially false and misleading representations to the SBA or Lender, or breaching the
terms of the Loan documents. The occurrence of an event of default may result in the repayment of all amounts outstanding, collection of all amounts owing from the Borrower,
or filing suit and obtaining judgment against the Borrower. Under the terms of the CARES Act, PPP loan recipients can apply for and be granted forgiveness for all or a portion
of a loan granted under the PPP.
On October 15, 2020, the Borrower applied to the Lender for forgiveness of the Loan in its entirety based on the Borrower’s use of the PPP loan for payroll costs, rent,
and utilities. On October 26, 2020, the Borrower was advised that the Lender approved the application and that the Lender was submitting the application to the SBA for a final
decision. The Company classified the principal balance of the PPP loan within “Current portion of long-term notes payable” and “Long-term notes payable” on the consolidated
balance sheet as of December 31, 2020. If the Borrower’s application for forgiveness of the PPP loan is not approved or approved only in part, it will be obligated to repay the
unforgiven portion of the loan after the SBA makes its decision on the application for forgiveness, in which case our liquidity could be reduced and our business, financial
condition, and results of operations may be adversely affected.
Pursuant to the requirements under the CARES Act, in connection with the Loan, the Borrower certified that current economic uncertainty makes the Loan request
necessary to support the ongoing operations of the Borrower. We believe that the Borrower made such certification in a manner consistent with SBA guidance that borrowers
must make the certification in good faith, taking into account their current business activity and their ability to access other sources of liquidity sufficient to support their ongoing
operations in a manner that is not significantly detrimental to the business. While we believe any certification by the Borrower’s certification was supported in light of the
understandings of the requirements and the assessment made on the certification date, we cannot be certain that SBA or any other governmental entity or third party will concur
with the Borrower, especially in light of the press scrutiny and SBA’s evolving guidance and views, our change in strategy triggered, in part, on regulatory developments
occurring after the Loan was made, and the eventual extent of the impact of current economic uncertainties on Borrower’s operations.
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Subsequent to the Borrower’s application for the loan, SBA issued various interpretive guidelines in connection with the PPP, including guidance on how SBA
interprets certain of the certification requirements. One of the interpretations appears to be in response to various press reports that well-established or well capitalized private
and public companies were able to secure PPP loans that were meant for smaller companies. SBA’s interpretive guidelines published on April 23, 2020, set forth that public
companies with substantial market value and access to capital markets would likely not qualify to participate in the PPP and SBA advised any such public company to be
prepared to provide the basis for the certifications upon SBA request. Subsequently, on April 28, 2020 the Secretary of the Treasury and SBA announced that the government
will conduct a full audit of all PPP loans of more than $2 million for which the borrower applies for forgiveness. Consistent with that announcement the SBA established an
audit procedure for obtaining additional information from PPP borrowers regarding the loan application certification and use of PPP loan proceeds. The Borrower completed
and submitted the additional information in December 2020 and plans to continue to provide information to SBA in support of the Borrower’s original Loan application and use
of Loan proceeds. The Borrower has yet to receive any response from the SBA. There is no assurance the SBA will conclude the Borrower properly applied for, and used the
proceeds of, the Loan. If there is any adverse finding in the SBA audit or if the Borrower were alleged, or determined, not to qualify for the Loan or alleged, or found, to have
made false certifications in connection with the Loan, the Borrower could be required to return the full amount of the Loan, which would reduce its liquidity, and could subject
it to fines and penalties, and exclusion from government contracts. In particular, the Borrower 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 United States. The Borrower may also face enforcement arising under other federal statutes, including criminal laws, and administrative
actions and investigations initiated by SBA or other governmental entities. Furthermore, if the Borrower is identified as an entity that the media, government officials, or others
seek to portray as a business that should not have availed itself of PPP funding, the Borrower may face negative publicity, which could have a materially adverse impact on its
business and operations and on our business and operations as its parent. Generally, the cost of defending claims under the FCA, regardless of merit, could be substantial, even
as much as the PPP loan proceeds, so the Borrower may evaluate voluntarily repaying the loan on the basis of future circumstances to avoid these costs as well as the significant
drain on management resources that accompanies litigation.
Our ability to use our net operating loss carryforwards and certain other tax attributes may be limited, which could adversely affect future cash flows.
We have incurred net losses over the past several years, and we may never achieve or sustain profitability. Generally, losses incurred will carry forward until such
losses expire or are used to offset future taxable income, if any. Under Sections 382 and 383 of the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”),
if a corporation undergoes an “ownership change,” generally defined as a greater than 50 percentage point change (by value) in its equity ownership by certain stockholders
over a three-year period, the corporation’s ability to use its pre-change net operating loss, or NOL, carryforwards and other pre-change tax attributes (such as research tax
credits) to offset its post-change income or taxes may be limited. We have not completed a study to assess whether an ownership change for purposes of Section 382 or 383 has
occurred, or whether there have been multiple ownership changes in the past. We may have experienced ownership changes in the past and may experience ownership changes
in the future as a result of shifts in our stock ownership (some of which shifts are outside our control). As a result, if we earn net taxable income, our ability to use our pre-
change NOL carryforwards to offset such taxable income could be subject to limitations. Similar provisions of state tax law may also apply to limit our use of accumulated state
tax attributes. As a result, even if we attain profitability, we may be unable to use a material portion of our NOL carryforwards and other tax attributes, which could adversely
affect our future cash flows.
Risks Related to our Research & Development, Clinical, and Commercialization Activities
We are pursuing an IND and BLA for SkinTE, so we are an early-stage biotechnology company subject to the risks associated with such companies, which may make it
difficult to evaluate our current business and predict our success and viability.
Our primary focus for the foreseeable future will be shepherding SkinTE through the FDA regulatory process, which is a lengthy process with no assurance of success.
Stockholders should understand that we are an early-stage biotechnology company with a limited history of revenue-generating operations. Therefore, we are subject to all the
risks and uncertainties inherent in an early-stage biotechnology company, in particular those businesses engaged in the pursuit of tissue regenerative technologies.
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Accordingly, you should evaluate our prospects in light of the costs, uncertainties, delays, and difficulties frequently encountered by early-stage companies,
particularly those in the biotechnology field. In particular, stockholders should consider that there is a significant risk that we will not be able to:
successfully complete any preclinical or other studies necessary to submit an IND to the FDA for SkinTE;
successfully compile clinical, CMC, and other information necessary to submit an IND to the FDA for SkinTE;
obtain FDA approval to commence human clinical trials of SkinTE;
successfully enroll sufficient numbers of qualified patients to participate in our clinical trials;
successfully meet the primary endpoints in our clinical trials;
implement or execute our current business plan, or that our current business plan is sound;
raise sufficient funds in the capital markets or otherwise to fully effectuate our business plan;
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● maintain our management team;
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determine that the processes and technologies that we have developed or will develop are commercially viable; and/or
attract, enter into, or maintain contracts with potential commercial partners, healthcare providers, licensors of technology, or licensees of our technologies.
Any of the foregoing risks may adversely affect us and result in the failure of our business. In addition, we expect to encounter unforeseen expenses, difficulties,
complications, delays, and other known and unknown factors.
Our ability to timely submit an IND to the FDA may depend on circumstances outside of our control.
Our ability to submit an IND to the FDA depends on a variety of factors. We must submit the results of various preclinical tests, together with manufacturing
information, analytical data, any available past clinical data or literature, and a proposed clinical protocol to the FDA as part of the IND. Preclinical tests include laboratory
evaluations of product chemistry and formulation, as well as other studies to assess the potential safety and activity of the product candidate. The conduct of the preclinical tests
must comply with federal regulations and requirements, subject to any adjustments allowed by the FDA. The FDA may require that we conduct additional preclinical testing for
any product candidate before it allows us to initiate the clinical testing under any IND, which may lead to additional delays and increase the costs of our preclinical and clinical
development. An IND also involves considerable work from our employees and advisors. Difficulties or delays in the process will likely increase the costs associated with the
IND and result in an unanticipated reduction in the working capital we have available to pursue the IND and BLA.
Clinical trials are expensive, time-consuming, and difficult to design and implement, and as a result there is significant uncertainty with respect to successful completion.
Human clinical trials are expensive and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The costs of our clinical
trials may increase if the FDA does not agree with our clinical development plans or requires us to conduct additional clinical trials, data analyses, or data audits to demonstrate
the safety and efficacy of SkinTE or future product candidates. Should we be unable to cover the expense of our clinical trials or encounter difficulties in execution of our
clinical trials it is unlikely we will be able to advance SkinTE or other product candidates to marketing approval, which would have a significant adverse effect on our business,
prospects, financial condition, and results of operations.
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Biotechnology and pharmaceutical product development is a highly speculative undertaking and involves a substantial degree of uncertainty. While we have generated
revenue from sales of SkinTE, we have never achieved profitable operating results in our regenerative medicine product segment, and we may never be able to do so.
Our ability to generate revenue depends in large part on our ability, alone or with partners, to successfully complete the development of, obtain the necessary regulatory
approvals for, and commercialize, product candidates. Following the end of the FDA’s period of enforcement discretion (currently scheduled through May 2021) for
regenerative tissue products, we may need to cease selling SkinTE until the FDA approves a BLA, and then we will only be able to market the product for indications that have
been approved in a BLA. Our ability to generate future revenues from product sales of regenerative tissue products depends heavily on our success in:
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progressing our discovery-stage programs into pre-clinical testing;
progressing our pre-clinical programs into human clinical trials;
completing requisite clinical trials through all phases of clinical development of our product candidates;
seeking and obtaining marketing approvals for our product candidates that successfully complete clinical trials, if any;
launching and commercializing our product candidates for which we obtain marketing approval, if any, with a partner or, if launched independently, successfully
establishing a manufacturing, sales force, marketing, and distribution infrastructure;
identifying and developing new product candidates;
establishing and maintaining supply and manufacturing relationships with third parties;
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attracting, hiring, and retaining qualified personnel.
Because of the numerous risks and uncertainties associated with biologic and pharmaceutical product development, we are unable to predict the likelihood or timing
for when we may receive regulatory approval of our product candidates or when we will be able to achieve or maintain profitability, if ever. If we are unable to establish a
development and or commercialization partnership, or do not receive regulatory approvals, our business, prospects, financial condition, and results of operations will be
adversely affected. Even if we or a partner obtain the regulatory approvals to market and sell one or more of our product candidates, we may never generate significant revenues
from any commercial sales for several reasons, including because the market for our products may be smaller than we anticipate, or products may not be adopted by physicians
and payors, or because our products may not be as efficacious or safe as other treatment options. If we fail to successfully commercialize one or more products, by ourselves or
through a partner, we may be unable to generate sufficient revenues to sustain and grow our business and our business, prospects, financial condition, and results of operations
will be adversely affected.
We are dependent on third parties to conduct our clinical trials and the failure of such third parties to perform or delays in performance could increase our costs or prevent
us from being able to use the results of the trials.
We depend and will continue to depend upon independent investigators and collaborators, such as universities and medical institutions, to conduct our clinical trials
under agreements with us. Negotiations of budgets and contracts with study sites may result in delays to our development timelines and increased costs. We will rely heavily on
these third parties over the course of our clinical trials, and we control only certain aspects of their activities. Nevertheless, we are responsible for ensuring that each of our
studies is conducted in accordance with applicable protocol, legal, regulatory, and scientific standards, and our reliance on third parties does not relieve us of our regulatory
responsibilities. We and these third parties are required to comply with current good clinical practices (“cGCPs”), which are regulations and guidelines enforced by the FDA for
product candidates in clinical development. The FDA enforces these cGCPs through periodic inspections of clinical trial sponsors, principal investigators, and clinical trial sites.
If we or any of these third parties fail to comply with applicable cGCP regulations, the clinical data generated in our clinical trials may be deemed unreliable and the FDA could
require us to perform additional clinical trials, undertake data analyses or audits, or adopt new or revised clinical study procedures and systems before approving our marketing
applications. It is possible the FDA could determine that any of our clinical trials fail to comply with the cGCP regulations. In addition, our clinical trials must be conducted
with a biologic product produced under current good manufacturing practices, or cGMPs, and will require a large number of test patients. Our failure or any failure by these
third parties to comply with these regulations or to recruit a sufficient number of patients may require us to repeat clinical trials, which would delay the regulatory approval
process. Moreover, our business may be implicated if any of these third parties violates federal or state fraud and abuse or false claims laws and regulations, or healthcare
privacy and security laws.
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Any third parties conducting our clinical trials are not and will not be our employees and, except for remedies available to us under our agreements with these third
parties, we cannot control whether they devote sufficient time and resources to our ongoing preclinical, clinical, and nonclinical programs. These third parties may also have
relationships with other commercial entities, including our competitors, for whom they may also be conducting clinical trials or other drug development activities, which could
affect their performance on our behalf. If these third parties do not successfully carry out their contractual duties or obligations or meet expected deadlines, if they need to be
replaced or if the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols or regulatory requirements or for other
reasons, our clinical trials may be extended, delayed or terminated and we may not be able to complete development of, obtain regulatory approval of or successfully
commercialize our product candidates. As a result, our financial results and the commercial prospects for SkinTE or other product candidates would be harmed, our costs could
increase, and our ability to generate revenue could be delayed.
Switching or adding third parties to conduct our clinical trials involves substantial cost and requires extensive management time and focus. In addition, there is a
natural transition period when a new third party commences work. As a result, delays occur, which can materially impact our ability to meet our desired clinical development
timelines.
If we encounter difficulties enrolling patients in our clinical trials, our clinical development activities could be delayed or otherwise adversely affected.
Even if we are permitted to conduct clinical trials for SkinTE under an IND, we may experience difficulties in subject enrollment in our clinical trials for a variety of
reasons. The timely completion of clinical trials in accordance with their protocols depends, among other things, on our ability to enroll a sufficient number of patients who
remain in the study until its conclusion. The enrollment of patients depends on many factors, including:
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the patient eligibility criteria defined in the clinical trial protocol;
the size of the patient population required for analysis of the trial’s primary endpoints;
the proximity of patients to the study site;
the design of the clinical trial;
our ability to retain clinical trial investigators with the appropriate competencies and experience;
our ability to obtain and maintain patient consents;
the risk that patients enrolled in clinical trials will drop out of the clinical trials before completion;
competing clinical trials and approved therapies available for patients; and
unexpected difficulties, complications, and delays that could arise at any stage of our clinical trials as a result of the COVID-19 pandemic or otherwise.
In particular, SkinTE clinical trials will be designed to test the treatment of wounds with specific characteristics and be conducted at a limited number of sites, so to a
large extent we will have no control or influence on the number and timing of enrolling patients that are suitable for our trials.
Our clinical trials could compete with other companies’ clinical trials for product candidates that are in the same therapeutic areas as our product candidates, and this
competition could reduce the number and types of patients available to us, because some patients who might have opted to enroll in our clinical trials may instead opt to enroll
in a trial being conducted by one of our competitors. It is possible we could conduct our clinical trials at the same clinical trial sites that some of our competitors may use, which
could reduce the number of patients who are available for our clinical trial in these clinical trial sites. Delays in patient enrollment may result in increased costs or may affect the
timing or outcome of our planned clinical trials, which could prevent completion of the clinical trials and adversely affect our ability to advance the development of SkinTE.
Any adverse developments that occur during any clinical trials conducted by academic investigators or other entities conducting clinical trials under separate INDs may
negatively affect the conduct of our clinical trials or our ability to obtain regulatory approvals or commercialize our product candidates.
Skin-based HCT/Ps and other HCT/Ps for wound care are being used, or may be used, by third parties in clinical trials that are completely independent of our plan for
SkinTE. We have no control over the conduct of those clinical trials. If serious adverse events occur during those or any other clinical trials using technologies similar to ours,
the FDA and other regulatory authorities may delay our clinical trial, or could delay, limit, or deny approval of SkinTE or require us to conduct additional clinical trials as a
condition to marketing approval, which would increase our costs. If we receive regulatory approval for SkinTE and a new and serious safety issue is identified in connection
with clinical trials conducted by third parties, the applicable regulatory authorities may withdraw their approval of SkinTE or otherwise restrict our ability to market and sell our
product. In addition, treating physicians may be less willing to administer our products due to concerns over such adverse events, which would limit our ability to
commercialize our products.
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Adverse side effects or other safety risks associated with our product candidates could cause us to suspend or discontinue clinical trials or delay or preclude approval.
During our DFU RCT and in the course of our commercial sales of SkinTE we did not observe undesirable side effects from the application of SkinTE. There is no
assurance, however, that undesirable side effects will not be observed in our clinical trials, whether or not they are caused by SkinTE. Any such undesirable side effects could
result in the delay, suspension, or termination of clinical trials by the FDA or us for a number of reasons. In addition, because the patients who will be enrolled in our clinical
trials may be suffering from one or more serious chronic or life-threatening conditions it may be difficult to accurately assess the relationship between SkinTE and adverse
events experienced by very ill patients. If we elect or are required to delay, suspend, or terminate any of our clinical trials, the commercial prospects of SkinTE could be harmed
and our ability to generate product revenues from SkinTE could be delayed or eliminated. In addition, serious adverse events observed in clinical trials could hinder or prevent
market acceptance of SkinTE. Any of these occurrences may harm our business, prospects, financial condition, and results of operations significantly.
We may form or seek strategic alliances, enter into additional licensing arrangements, or participate in acquisition transactions in the future, and we may not succeed in
realizing the benefits of such alliances, licensing arrangements, or acquisition transactions.
We may form or seek strategic alliances, create joint ventures or collaborations, enter into licensing arrangements, or participate in an acquisition in which we are the
acquirer or the target with third parties that we believe will complement or augment our development and commercialization efforts with respect to SkinTE or our other product
candidates we may develop. Any of these relationships or transactions may require us to incur non-recurring and other charges, increase our near and long-term expenditures,
issue securities that dilute our existing stockholders, or disrupt our management and business. In addition, we face significant competition in seeking appropriate strategic
opportunities and the negotiation process is time-consuming and complex. Moreover, we may not be successful in arranging a strategic partnership or other alternative
arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our
product candidates as having the requisite potential to demonstrate safety and efficacy or achieve commercial success. If we license or acquire products or businesses, we may
not be able to realize the benefit of such transactions if we are unable to successfully integrate them with our existing operations and company culture. It is possible that,
following a strategic transaction or license, we may not achieve the revenue or specific net income that justifies such transaction. Any delays in entering into new strategic
partnership agreements related to our product candidates could delay the development and commercialization of our product candidates in certain geographies for certain
indications, which would harm our business prospects, financial condition, and results of operations.
Even if we obtain regulatory approval of SkinTE or future product candidates, they may not gain market acceptance among physicians, patients, hospitals, third-party
payors, and others in the medical community.
The development and use of HCT/Ps for tissue regeneration therapies is a recently developed technology and may not become broadly accepted by physicians,
patients, hospitals, third-party payors, and others in the medical community. Many factors will influence whether SkinTE or any other product candidates we may develop are
accepted in the market, including:
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the clinical indications for which our product candidates are approved, if any;
physicians, hospitals, and patients considering our product candidates as a safe and effective treatment;
the potential and perceived advantages of our product candidates over alternative treatments;
the prevalence and severity of any side effects;
product labeling or product insert requirements of the FDA or other regulatory authorities;
limitations or warnings contained in the labeling approved by the FDA or other regulatory authorities;
the extent and quality of the clinical evidence supporting the efficacy and safety of our product candidates;
the timing of market introduction of our product candidates as well as competitive products;
the cost of treatment in relation to alternative treatments;
the availability of adequate reimbursement and pricing by third-party payors and government authorities;
the willingness and ability of patients to pay out-of-pocket in the absence of coverage by third-party payors, including government authorities;
relative convenience and ease of administration, including as compared to alternative treatments and competitive therapies; and
the effectiveness of our or any of our strategic partners’ sales and marketing efforts.
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If our product candidates are approved but fail to achieve market acceptance among physicians, patients, hospitals, or others in the medical community, we will not be
able to generate significant revenue. Even if our products achieve market acceptance, we may not be able to maintain that market acceptance over time if new products or
technologies are introduced that are more favorably received than our products, are more cost effective or render our products obsolete.
Our ability to timely submit an IND to the FDA may depend on circumstances outside of our control.
Our ability to submit an IND to the FDA depends on a variety of factors. We must submit the results of various preclinical tests, together with manufacturing
information, analytical data, all available past clinical data or literature, and a proposed clinical protocol to the FDA as part of the IND. Preclinical tests include laboratory
evaluations of product chemistry and formulation, as well as other studies to assess the potential safety and activity of the product candidate. The conduct of the preclinical tests
must comply with federal regulations and requirements, subject to any adjustments allowed by the FDA. The FDA may require that we conduct additional preclinical testing or
for any product candidate before it allows us to initiate the clinical testing under any IND, which may lead to additional delays and increase the costs of our preclinical and
clinical development. An IND also involves considerable work from our employees and advisors. Difficulties or delays in the process will likely increase the costs associated
with the IND and result in an unanticipated reduction in the working capital we have available to pursue the IND and BLA.
If we are required to or voluntarily withdraw, recall, or cease product manufacturing, it could significantly increase our costs, damage our reputation, and disrupt our
business.
The manufacturing, marketing, and processing of our products and product candidates involves an inherent risk that our tissue products or processes do not meet
applicable quality standards and requirements. In that event, we may voluntarily implement a recall, market withdrawal, or cessation of manufacturing or may be required to do
so by a regulatory authority. A recall, market withdrawal, or cessation of manufacturing of one of our products would be costly and would divert management resources. Any
such action involving one of our products, or a similar product processed by another entity, also could impair sales of our products because of confusion concerning the scope of
the recall or withdrawal, or because of the damage to our reputation for quality and safety.
We face significant uncertainty in the industry due to government healthcare reform.
There have been and continue to be proposals by the federal government, state governments, regulators and third-party payers to control healthcare costs (including but
not limited to capitation – the generalized cap on annual fees for a type of service or procedure such as burn or wound care or rehabilitation), and generally, to reform the
healthcare system in the United States. There are many programs and requirements for which the details have not yet been fully established or the consequences are not fully
understood. These proposals may affect aspects of our business. We also cannot predict what further reform proposals, if any, will be adopted, when they will be adopted, or
what impact they may have on us.
We face the risk of product liability claims and may not be able to obtain or maintain adequate product liability insurance.
Our business exposes us to the risk of product liability claims that are inherent in the manufacturing, processing, and marketing of human cellular and tissue-based
products. We may be subject to such claims if our products cause, or appear to have caused, an injury during clinical trials or after commercialization. Claims may be made by
patients, healthcare providers, or others selling our products. Defending a lawsuit, regardless of merit, could be costly, divert management attention, and result in adverse
publicity, which could result in the withdrawal, or reduced acceptance, of our products in the market.
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Although we have obtained product liability insurance, such insurance is subject to deductibles and coverage limitations and we may not be able to maintain this
insurance. Also, it is possible that claims could exceed the limits of our coverage. If we are unable to obtain or maintain product liability insurance at an acceptable cost or on
acceptable terms with adequate coverage, or otherwise protect ourselves against potential product liability claims or we underestimate the amount of insurance we need, we
could be exposed to significant liabilities, which may harm our business. A product liability or other claim with respect to uninsured liabilities or for amounts in excess of
insured liabilities could result in significant costs and significant harm to our business.
We operate in a highly competitive and evolving field and face competition from regenerative medicine, biotechnology, and pharmaceutical companies, tissue engineering
entities, tissue processors, and medical device manufacturers, as well as new market entrants, which may result in others discovering, developing or commercializing
competing products before or more successfully than we do.
We operate in a competitive and continually evolving field. Competition from other regenerative medicine, biotechnology, and pharmaceutical companies, tissue
engineering entities, tissue processors, medical device companies, and from research and academic institutions is intense, expected to increase, subject to rapid change, and
could be significantly affected by new product introductions. Many of our competitors have substantially greater financial, technical, and other resources, such as larger
research and development staff and experienced marketing and manufacturing organizations and well-established sales forces. Smaller or early-stage companies may also prove
to be significant competitors, particularly through collaborative arrangements with large, established companies. Mergers and acquisitions in the biotechnology and
pharmaceutical industries may result in even more resources being concentrated in our competitors. Competition may increase further as a result of advances in the commercial
applicability of technologies and greater availability of capital for investment in these industries. Our competitors, either alone or with collaborative partners, may succeed in
developing, acquiring, or licensing on an exclusive basis drug or biologic products that are more effective, safer, more easily commercialized, or less costly than our product
candidates or may develop proprietary technologies or secure patent protection that we may need for the development of our technologies and products. Our failure to compete
effectively would have a material and adverse effect on our business, results of operations, and financial condition.
Risks Related to our Operating Activities
We may be required to discontinue sales of SkinTE, which would adversely affect our revenues, financial condition, and results of operations.
We continue to market SkinTE as a 361 HCT/P product and under the FDA’s policy of enforcement discretion (currently scheduled through May 2021) as we work to
transition SkinTE to a Section 351 product. Our net revenues from SkinTE sales in 2020 were $3.7 million. Following the end of the FDA’s period of enforcement discretion,
we may need to cease selling SkinTE until the FDA approves a BLA, and then we will only be able to market the product for indications that have been approved in a BLA. The
loss of our ability to market and sell SkinTE would have an adverse impact on our revenues, financial condition, and results of operations.
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We have a limited history of operation with our laboratory testing service so we are unable to predict with any certainty what contribution it will make to defraying our
operating expenses in the future, which could adversely affect our ability to plan for the use of our resources to achieve our goals.
Net loss from our contract services segment was $39,000 for the year ended December 31, 2020 compared to a net loss of $1.2 million for the year ended December
31, 2019, and this reversal is directly attributable to the new source of revenue we found in COVD-19 testing. Net revenues from our historical clinical service offerings were
$59,000 for the year ended December 31, 2020, compared to $4.3 million in net revenues generated by COVID-19 testing services. COVID-19 testing is a relatively new
business activity that we started with existing equipment and personnel when the opportunity presented itself, which means there are substantial risks and uncertainties
associated with this new business activity. We obtained 96% of COVID-19 testing revenues in 2020 under 30-day renewable testing agreements with multiple nursing home and
pharmacy facilities in the state of New York controlled by a single company. On March 26, 2021, we were advised by the company that controls the New York nursing homes
and pharmacy facilities we service that the state of New York is allowing on-site employee testing and that on-site testing will be implemented for the New York facilities we
service, which will likely have the effect of substantially diminishing our revenues from COVID-19 testing after the first quarter of 2021. We are a relatively unknown testing
laboratory, so we have relied on word of mouth and management relationships to connect with prospects and vied for new business on the basis of price and service, and we
cannot predict how well this marketing approach will work in finding new customers for Arches’ testing services. Even if we are able to find new customers for the COVID-19
testing business there remain substantial risks associated with the COVID-19 testing business, including the following:
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our plan is to commit our financial business resources to advancing our IND and BLA for SkinTE, not to develop or scale the COVID-19 testing business;
competition from other COVID-19 testing facilities is intense, expected to increase, subject to rapid change, and could be significantly affected by the introduction
of new testing products;
there are a number of competitors for testing services that have substantially greater financial, marketing, testing, and managerial resources than we do;
the United States is embarking on an aggressive vaccination program for the entire population against COVID-19 and this could impact the need or demand for
testing in the future;
● we obtained CLIA registration for our laboratory because this is a prerequisite to providing testing services, and we must continue to comply with the practices and
procedures required for registration in order to be able to continue to provide testing services;
our ability to service our testing customers depends on the continuous operation of our testing equipment without significant disruption; and
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A significant decline or loss of the COVID-19 testing business in 2021 that we are unable to substantially replace with new customers could have a material and
adverse effect on our business, results of operations, and financial condition.
Our manufacturing and COVID 19 testing operations depend primarily on one facility. If this facility is destroyed or we experience any manufacturing or laboratory
difficulties, disruptions, or delays, this could adversely affect our ability to conduct our clinical trials or perform laboratory testing services.
All of the manufacturing of SkinTE and COVID-19 testing takes place at our single U.S. facility. If regulatory, manufacturing, or other problems require us to
discontinue production or laboratory operations at our current facility, we would not be able to supply SkinTE for clinical trials or operate our COVID-19 testing business,
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 quickly or inexpensively replace our manufacturing or laboratory capacity or replace the facility 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 or laboratory testing to our IBEX facility. 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. Similarly, if we are able to transfer laboratory testing to
IBEX, the transfer will likely be expensive and require CLIA registration.
We depend on our senior management team and the loss of one or more key employees or an inability to attract and retain highly 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 our senior management and other key personnel. Although we have entered into employment agreements with all of our executive officers, each of them may terminate
their 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. In addition, 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 us. If we hire employees from competitors or other companies, their former
employers may attempt to assert that these employees or we have breached legal obligations, resulting in a diversion of our time and resources and, potentially, damages.
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In addition, 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 declines, it may harm our ability to recruit and retain highly skilled employees. Many of our employees have become or will soon become vested in a
substantial amount of our common stock or a number of common stock options. Our employees may be more likely to leave us if the shares they own have significantly
appreciated in value relative to the original purchase prices of the shares, or if the exercise prices of the options that they hold are significantly below the market price of our
common stock. Our future success also depends on our ability to continue to attract and retain additional executive officers and other key employees. If we fail to attract new
personnel or fail to retain and motivate our current personnel, it will negatively affect our business, financial condition, and results of operations.
The ongoing COVID-19 pandemic could materially affect our operations, as well as the business or operations of third parties with whom we conduct business. Our
business could be adversely affected by the effects of other future health pandemics in regions where we or third parties on which we rely have significant business
operations.
COVID-19 has spread globally and the World Health Organization has declared it a pandemic. While still evolving, the COVID-19 pandemic has caused significant
worldwide economic and financial turmoil and has fueled concerns that it will lead to a global recession. On March 13, 2020, the United States declared a national emergency
with respect to COVID-19 and the majority of states, including the state of Utah, and local governments have since issued orders restricting the operations of non-essential
businesses or restricting activities of residents. As the pandemic has evolved since March 2020, some restrictions have eased, however, if in the future there are surges of
infection and hospitalization rates, more severe restrictions many be implemented by local government agencies. We are following the recommendations of local health
authorities to minimize exposure risk for our employees and visitors, including requiring designated employees to work from home. The continued and prolonged
implementation of restrictions by federal, state, and local authorities to slow the spread of COVID-19 have disrupted and, we expect, will continue to disrupt, our business and
operations.
Depending upon the length of the COVID-19 pandemic and whether the FDA allows us to commence our clinical trials once we submit our proposed IND, our future
clinical trials for SkinTE may be affected by the COVID-19 pandemic. If COVID-19 continues to spread in the U.S. and elsewhere, we may experience additional disruptions
that could adversely impact our business and clinical trials, including: (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 our clinical trial, 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 the COVID-19 pandemic that may require us to change the ways in which our clinical trial is to be conducted, which may result in unexpected costs, or to
discontinue the clinical trial 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 trial; (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 of clinical trial data; (vii) risk that participants enrolled in our clinical trials will acquire COVID-19 while the clinical trial is ongoing, which
could impact the results of the clinical trial, including by increasing the number of observed adverse events; (viii) 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; (ix) 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; (x) refusal of the FDA to accept data from clinical trials in affected geographies; and (xi) interruption or delays to our clinical trial activities.
The extent to which the COVID-19 pandemic impacts our business, operations, and financial results will depend on numerous evolving factors that we may not be
able to accurately predict, including: the duration and scope of the pandemic; governmental, business and individuals’ actions that have been and continue to be taken in
response to the pandemic; the impact of the pandemic on economic activity and actions taken in response; our ability to continue daily operations, including as a result of travel
restrictions and people working from home; and any closures of our and our business partners’ offices and facilities.
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Risks Related to Our 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 one issued patent and one allowed patent application in the United States relating to our 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 advantage. In addition, our presently pending patent applications include claims to material aspects of
our activities that are not currently protected by issued patents in the United States. 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 advantage 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 United States 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.
31
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 the Company 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 treatment, require us to obtain
licenses from third parties, or to develop non-infringing alternatives, and subject us to substantial monetary damages. We have not obtained and do not intend to obtain
any formal legal opinion regarding our freedom to practice our technology.
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.
32
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 or services, which could adversely affect our business and
results of operations.
We may not be able to enforce our patent rights against third parties.
Successful challenge of any patents or future patents or patent applications such as through opposition, reexamination, inter partes review, interference, or derivation
proceedings could result in a loss of patent rights in the relevant jurisdiction. 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
these results to be negative, it could have a substantial adverse effect on the price of our common stock.
We may not be able to protect our intellectual property in countries outside of the United States.
Intellectual property law outside the United States 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 United States 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 United States. 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.
Risks Related to Our Common Stock
An active trading market for our common stock may not continue to develop or be sustained.
Although our common stock is listed on the NASDAQ Capital Market, or NASDAQ, we cannot assure you that an active, liquid trading market for our shares will
continue to develop or be sustained. If an active market for our common stock does not continue to develop or is not sustained, it may be difficult for you to sell shares quickly
or without depressing the market price for the shares or to sell your shares at all.
We are pursuing a plan to advance regulatory approval of SkinTE, so delay or failure in achieving our milestones could adversely affect our prospects and the value of
ownership of our common stock.
While a positive contributor to operating results, we do not plan to commit any meaningful amount of capital to scale our testing and research services business because
we plan to devote our capital resources to the advancement of SkinTE through the regulatory process. We believe growth in stockholder value will follow if and when we
achieve milestones in the process of pursuing our IND and BLA for SkinTE. To the extent that we encounter problems or delays in this process, our growth prospects and
stockholder value could be materially, adversely affected.
33
The trading price of the shares of our common stock has been and may continue to be volatile, and you may not be able to resell some or all your shares at a desired price.
Our stock price has been highly volatile during the 12-month period ended February 28, 2021, with closing stock prices ranging from a high of $1.85 per share to a
low of $0.61 per share. The stock market in general, and the market for biotech companies in particular, have experienced extreme volatility that, at times, has been unrelated to
the operating performance of particular companies. Because of this volatility, investors in our stock may not be able to sell their common stock at or above the price paid for the
shares. The market price for our common stock may be influenced by many factors, including:
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the timing or success of obtaining regulatory licenses or approvals for marketing our products;
the initiation, timing, progress, and results of our pre-clinical studies or clinical trials;
sufficiency of our working capital to fund our operations over the next 12 months and beyond;
infrastructure required to support operations in future periods, including the expected costs thereof;
estimates associated with revenue recognition, asset impairments, and cash flows;
variance in our estimates of future operating costs;
the impact of new accounting pronouncements;
size and growth of our target markets;
the initiation, timing, progress, and results of our research and development programs;
issues in manufacturing our product candidates or future approved products;
regulatory developments or enforcement in the United States and foreign countries with respect to our product candidates or our competitors’ products;
competition from existing products or new products that may emerge;
developments or disputes concerning patents, patent applications, or other proprietary rights;
introduction of technological innovations or new commercial products by us or our competitors;
announcements by us, our collaborators, or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations, or capital commitments;
changes in estimates or recommendations by securities analysts, if any, who cover our common stock;
fluctuations in the valuation of companies perceived by investors to be comparable to us;
public concern over our product candidates or any future approved products;
threatened or actual litigation;
future or anticipated sales of our common stock;
share price and volume fluctuations attributable to inconsistent trading volume levels of our shares;
additions or departures of key personnel;
changes in the structure of health care payment systems in the United States or overseas;
failure of any of our products or product candidates to perform safely or effectively or achieve commercial success;
economic and other external factors or other disasters or crises;
period-to-period fluctuations in our financial condition and results of operations;
general market conditions and market conditions for biopharmaceutical stocks; and
overall fluctuations in U.S. equity markets.
In addition, in the past, when the market price of a stock has been volatile, holders of that stock have instituted securities class action litigation against the company
that issued the stock. Defending such litigation could result in substantial defense costs and divert the time and attention of our management, which could seriously harm our
business.
Future sales of our common stock in the public market could cause our stock price to fall.
Sales of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could depress the market price of our
common stock and could impair our ability to raise capital through the sale of additional equity securities. As of March 25, 2021, we had 80,319,378 shares of common stock
outstanding, all of which, other than shares held by our directors and certain officers and affiliates, were eligible for sale in the public market, subject in some cases to
compliance with the requirements of Rule 144, including the volume limitations and manner of sale requirements. As of March 25, 2021, we also had a significant number of
securities convertible into, or allowing the purchase of, our common stock, including 19,314,143 warrants to purchase shares of our common stock, 6,079,210 options and
rights to acquire shares of our common stock that are outstanding under our equity incentive plans, and 4,271,350 shares of common stock reserved for future issuance under
our equity incentive plans.
34
Our Restated Certificate of Incorporation, our Restated Bylaws, and Delaware law could deter a change of our management, which could discourage or delay offers to
acquire us.
Certain provisions of Delaware law and of our Restated Certificate of Incorporation, as amended, and by-laws, could discourage or make it more difficult to
accomplish a proxy contest or other change in our management or the acquisition of control by a holder of a substantial amount of our voting stock. It is possible that these
provisions could make it more difficult to accomplish, or could deter, transactions that stockholders may otherwise consider to be in their best interests or in our best interests.
These provisions include:
● we have a classified Board requiring that members of the Board be elected in different years, which lengthens the time needed to elect a new majority of the Board;
●
our Board is authorized to issue up to 25,000,000 shares of preferred stock without stockholder approval, which could be issued by our Board to increase the
number of outstanding shares or change the balance of voting control and thwart a takeover attempt;
stockholders are not entitled to remove directors other than by a two-thirds vote and only for cause;
stockholders cannot call a special meeting of stockholders;
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● we require all stockholder actions be taken at a meeting of our stockholders, and not by written consent; and
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stockholders must give advance notice to nominate directors or submit proposals for consideration at stockholder meetings.
We are subject to the anti-takeover provisions of Section 203 of the Delaware General Corporation Law, which regulates corporate acquisitions by prohibiting
Delaware corporations from engaging in specified business combinations with particular stockholders of those companies. These provisions could discourage potential
acquisition proposals and could delay or prevent a change in control transaction. They could also have the effect of discouraging others from making tender offers for our
common stock, including transactions that may be in your best interests. These provisions may also prevent changes in our management or limit the price that investors are
willing to pay for our stock.
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 price of
our common stock, if any, will provide a return to investors in this offering.
We incur costs and demands upon management because of being a public company.
As a public company listed in the United States, we are incurring, and will continue to incur, significant legal, accounting, and other costs. These costs could negatively
affect our financial results. In addition, changing laws, regulations and standards relating to corporate governance and public disclosure, including regulations implemented by
the SEC and stock exchanges, may increase legal and financial compliance costs, and make some activities more time consuming. These laws, regulations and standards are
subject to varying interpretations and, as a result, their application in practice may evolve over time as new guidance is provided by regulatory and governing bodies. We intend
to invest resources to comply with evolving laws, regulations and standards, and this investment may result in increased general and administrative expenses and a diversion of
management’s time and attention from revenue-generating activities to compliance activities. If, notwithstanding our efforts to comply with new laws, regulations, and
standards, we fail to comply, regulatory authorities may initiate legal proceedings against us, and our business may be harmed.
Failure to comply with these rules also might make it more difficult for us to obtain some types of insurance, including directors’ and officers’ liability insurance, and
we might be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also
make it more difficult for us to attract and retain qualified persons to serve on our board of directors, on committees of our board of directors or as members of senior
management
35
Item 1B. Unresolved Staff Comments.
None.
Item 2. Properties.
On December 27, 2017, we entered into a commercial lease agreement with Adcomp LLC, a Utah limited liability company, pursuant to which we leased
approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space at 1960 S. 4250 West, Salt Lake City, Utah. The initial term of the lease is five
years, and it expires on November 30, 2022. We have a one-time option to renew for an additional five years. The initial base rent under this lease is $98,190 per month ($0.55
per sq. ft.) for the first year of the initial lease term and increases 3.0% per annum thereafter.
In May 2018, we purchased two parcels of real property in Cache County, Utah, consisting of approximately 1.75 combined gross acres of land, together with the
buildings, structures, fixtures, and personal property located at 1072 West RSI Drive, Logan, Utah. This facility is used for the operation of our pre-clinical contract services
business.
Item 3. Legal Proceedings.
On June 26, 2018, a class action complaint alleging violations of the federal securities laws was filed in the U.S. District Court, District of Utah, by Jose Moreno
against the Company and two directors of the Company, Case No. 2:18-cv-00510-JNP (the “Moreno Complaint”). On July 6, 2018, a similar complaint was filed in the same
court against the same defendants by Yedid Lawi, Case No. 2:18-cv-00541-PMW (the “Lawi Complaint”). On November 28, 2018, the court consolidated the Moreno and Lawi
cases under the caption In re PolarityTE, Inc. Securities Litigation with Case No. 2:18-cv-00510 (the “Consolidated Securities Litigation”). The gravamen of the consolidated
complaint in the Consolidated Securities Litigation was that defendants made statements or disseminated information to the public through reports filed with the SEC and other
channels that contained material misstatements or omissions in violation of Sections 10 and 20(a) of the Exchange Act and Rule 10b-5 adopted thereunder, specifically that the
defendants misrepresented the status of one of the Company’s patent applications while touting the unique nature of the Company’s technology and its effectiveness. The
Company filed a motion to dismiss the consolidated complaint on June 3, 2019. Plaintiffs’ opposition to the Company’s motion to dismiss was filed on August 2, 2019, and the
Company filed a reply to the opposition on September 13, 2019. Following a hearing on the Company’s motion to dismiss the court issued an order on November 22, 2020,
dismissing the complaint in the Consolidated Securities Litigation with prejudice.
In November 2018, a shareholder derivative lawsuit was filed in the U.S. District Court, District of Utah, with the caption Monther v. Lough, et al., case no. 2:18-cv-
00791-TC, alleging violations of the Exchange Act, breach of fiduciary duty, and unjust enrichment on the part of certain officers and directors based on the facts and
circumstances recited in the Consolidated Securities Litigation. On November 26, 2018, the court issued an order staying all proceedings until after the disposition of motions to
dismiss the Consolidated Securities Litigation. After disposition of the Consolidated Securities Litigation described above the parties to the shareholder derivative lawsuit
agreed to dismiss the lawsuit without prejudice, and the lawsuit was dismissed on January 29, 2021.
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. At December 31, 2020, 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.
36
Item 4. Mine Safety Disclosures.
Not applicable.
PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock is listed for trading on the Nasdaq Capital Market under the symbol “PTE.”
At March 29, 2021, there were approximately 104 holders of record of our common stock.
The following table provides information on our compensation plans at December 31, 2020, under which equity securities are authorized for issuance.
Plan category
Equity compensation plans approved by security holders
(a)
Number of
securities to be
issued upon
exercise of
outstanding
options,
warrants, and
rights
(b)
Weighted-
average
exercise price
of
outstanding
options,
warrants and
rights
(c)
Number of securities
remaining available
for future issuances
under equity
compensation plans
(excluding securities
reflected in column (a))
4,649,567
$
10.02
3,603,057
Equity compensation plans not approved by security holders (1)
Total
145,000
4,794,567
$
10.38
-0-
3,603,057
(1) These plans are individual grants of stock options to one consultant and four employees in connection with their engagement or employment by us. Each stock option
vests in 24 monthly installments subject to continued engagement or employment. The grant date, number of shares, and exercise price for each stock option granted are as
follows:
Grant Date
02/08/2017
04/06/2017
04/10/2017
04/10/2017
No. of Shares
Exercise Price
50,000 $
75,000 $
10,000 $
10,000 $
4.72
13.12
14.25
14.25
Shares Forgone by Employees or Reacquired by Us to Satisfy Tax Withholding Liability
During the year ended December 31, 2020, we withheld or acquired from employees shares of common stock to satisfy statutory withholding tax liability upon the
vesting of share-based awards. The following table sets forth information on our acquisition of these shares for each month in 2020 in which an acquisition occurred.
37
Issuer Purchases of Equity Securities
(a)
(b)
(c)
Period
Total number of shares (or
units) purchased
Average price paid per share
(or unit)
March 2020
April 2020
May 2020
June 2020
July 2020
August 2020
September 2020
October 2020
December 2020
Total
Item 6. Selected Financial Data
4,587
545
1,090
5,283
52,190
13,254
5,283
29,664
6,091
117,987
$
$
$
$
$
$
$
$
$
$
1.052
1.050
0.898
1.370
1.520
1.547
1.040
1.076
0.700
1.315
Total number of shares (or
units) purchased as part of
publicly announced plans
or programs
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(d)
Maximum number (or
approximate dollar value)
of shares (or units) that
may yet be purchased under
the plans or programs
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
As a smaller reporting company, we are not required to provide the information under this item, pursuant to Regulation S-K Item 301(c).
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following information should be read in conjunction with the consolidated financial statements and related notes thereto included in this Annual Report on Form
10-K.
In addition to historical information, this report contains forward-looking statements that involve risks and uncertainties that may cause our actual results to differ
materially from plans and results discussed in forward-looking statements. We encourage you to review the risks and uncertainties discussed in the sections entitled Item 1A.
“Risk Factors” and “Forward-Looking Statements” included at the beginning of this Annual Report on Form 10-K. The risks and uncertainties can cause actual results to
differ significantly from those in our forward-looking statements or implied in historical results and trends. We caution readers not to place undue reliance on any forward-
looking statements made by us, which speak only as of the date they are made. We disclaim any obligation, except as specifically required by law and the rules of the SEC, to
publicly update or revise any such statements to reflect any change in our expectations or in events, conditions, or circumstances on which any such statements may be based,
or that may affect the likelihood that actual results will differ from those set forth in the forward-looking statements.
Overview
We are a biotechnology company developing regenerative tissue products and biomaterials. Our first regenerative tissue product is SkinTE, which is intended for the
repair, reconstruction, replacement, and supplementation of skin in patients who have a need for treatment of acute or chronic wounds, burns, surgical reconstruction events,
scar revision, or removal of dysfunctional skin grafts. Given our significant real-world experience with the application of SkinTE 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. We believe that SkinTE could significantly improve clinical outcomes versus the standards of care for these wounds.
38
Since the beginning of 2017, we have incurred substantial operating losses and our operations have been financed primarily by public equity financings. Our plan is to
file an IND for SkinTE in the second half of 2021 and commence clinical trials under our BLA by the first quarter of 2022, but this timing will depend on when we obtain FDA
approval of our IND. The clinical trials and regulatory process will likely result in an increase in our expenses. 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 next several years to fund our operations.
In May 2020 we reduced head count as a result of our decision to file an IND for SkinTE, and this decision was also influenced by what we believed would be adverse
effects of the COVID-19 pandemic. At the end of 2020 we had 85 full and part-time employees compared to 157 at the end of 2019. This 46% reduction in personnel is the
primary driver for the 47% reduction of total operating costs and expenses in 2020. We will continue to search for opportunities to lower our operating expenses in 2021 and
thereby lower the rate at which we use capital obtained from external sources.
We have generated revenue from the sale of SkinTE as a 361 HCT/P product since 2018. In addition, we have generated revenue from our laboratory testing and
research service business. Revenue from these activities has been helpful in lowering the rate at which we use capital obtained from external sources.
Gross profit from the sale of SkinTE covered 5% of our total operating costs and expenses in 2020. However, if the FDA allows enforcement discretion for
regenerative tissue products to expire at the end of May 2021, we may need to cease selling SkinTE until the FDA approves a BLA, and then we will only be able to market
SkinTE for the indications that have been approved in the BLA. Consequently, it is possible that SkinTE sales may not continue to contribute to our capital resources in 2022.
We are actively seeking opportunities to continue the process of reducing our operating expenses, and if SkinTE sales end in the future we intend to re-double our efforts to
reduce costs of operations to make up for the loss of revenues.
Revenues generated from our laboratory testing and research services have also been helpful in lowering the rate at which we use capital obtained from external
sources. Gross margin from services in 2020 covered 6% of our total operating costs and expenses in 2020. Gross profit from services was 39% higher in 2020 than in 2019 due
to the revenues generated through COVID-19 testing that began at the end of May 2020. COVID-19 testing is a relatively new business activity, and 96% of COVID-19 testing
revenues in 2020 were obtained under 30-day renewable testing agreements with multiple nursing home and pharmacy facilities in the state of New York controlled by a single
company. On March 26, 2021, we were advised by the company that controls the New York nursing homes and pharmacy facilities we service that the state of New York is
allowing on-site employee testing and that on-site testing will be implemented for the New York facilities we service, which will likely have the effect of substantially
diminishing our revenues from COVID-19 testing after the first quarter of 2021. We are a relatively unknown testing laboratory, so we have relied on word of mouth and
management relationships to connect with prospects and vied for new business on the basis of price and service, and we cannot predict how well this marketing approach will
work in finding new customers for Arches’ testing services. Even if we are able to find new customers for the COVID-19 testing business there remain substantial uncertainties
around the COVID-19 testing business due to rapid developments in testing and vaccines.
Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending upon the timing of our clinical trials and our expenditures for satisfying
all the conditions of obtaining FDA market approval for SkinTE. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in
the change in our accounts payable and accrued research and development and other current liabilities.
Recent Developments
Capital Formation
We raised capital in December 2020 and January 2021 to fund our operations. We previously reported in November 2020 that at September 30, 2020, our cash and
cash equivalents totaled $23.186 million, which would not be adequate to fund our operations beyond the first quarter of 2021. We embarked on a plan to raise capital to fund
our operations that began with a restructuring in November 2020 of warrants sold in a public offering in February 2020, which we believed had a chilling effect on our ability to
attract institutional investors and depressed the public trading price of our common stock.
39
After the warrant restructuring we sold 5,450,000 shares of common stock, pre-funded warrants to purchase up to 5,238,043 shares of common stock (with an exercise
price of $0.001), and accompanying common warrants to purchase up to 10,688,043 shares of common stock to a single healthcare-dedicated institutional investor in a
registered direct offering. Each common share and pre-funded warrant were sold together with a common warrant. The combined offering price of each common share and
accompanying common warrant was $0.7485 and for each pre-funded warrant and accompanying common warrant was $0.7475. The pre-funded warrants were subsequently
exercised in January 2021 and the net proceeds we received from the offering were $7.2 million. In January 2021, the holder of the common warrants exercised all 10,688,043
warrants at an exercise price of $0.624 per share resulting in gross proceeds of $6.7 million. In exchange for the agreement of the holder to exercise those common warrants we
issued to the holder new common stock purchase warrants at a price of $0.125 per new warrant to purchase up to 8,016,033 shares of common stock at an exercise price of
$1.20 per share. Gross proceeds from the sale of the new warrants was $1.0 million.
Also in January 2021 we sold to the same institutional investor who participated in the December registered direct offering 6,670,000 shares of common stock, pre-
funded warrants to purchase up to 2,420,910 shares of common stock (with an exercise price of $0.001), and accompanying common warrants to purchase up to 9,090,910
shares of common stock in another registered direct offering. Each common share and pre-funded warrant were sold together with a common warrant. The combined offering
price of each common share and accompanying common warrant was $1.10 and for each pre-funded warrant and accompanying common warrant was $1.099. The pre-funded
warrants were subsequently exercised so the gross proceeds of the offering were $10.0 million. The common warrants sold in the registered direct offering have an exercise
price of $1.20 per share.
We believe this capital infusion from the foregoing offerings will enable us to fund our IND filing and the start of at least two clinical trials under the BLA for SkinTE.
Business Effects of COVID-19
The current COVID-19 pandemic has presented a substantial public health and economic challenge around the world and is affecting our employees, patients,
clinicians, communities, and business operations, as well as the U.S. economy and financial markets. The full extent to which the COVID-19 pandemic will directly or
indirectly impact the timing and cost of pursuing FDA approval of SkinTE under a BLA is highly uncertain and cannot be accurately predicted. We will need to engage contract
research organizations (“CROs”) for our future clinical trials and the COVID-19 pandemic and response efforts may have an impact on the ability of CROs to timely perform
the trials we need for SkinTE.
We saw a decrease in SkinTE cases in March 2020 and procedures scheduled for April 2020 postponed or not being scheduled, which was a trend we expected would
continue and adversely affect our results of operations. As a result of our decision to file an IND for SkinTE and the disturbing trend in SkinTE cases, in May 2020 we reduced
our workforce within our regenerative medicine business segment, which is engaged primarily in the commercialization of SkinTE. We also refocused our commercialization
effort on the territories where we have current and repeat users of SkinTE, and this new focus resulted in a quarter over quarter increase in the average wound size treated and a
concomitant increase in revenues, which we did not expect.
In the contract services segment COVID-19 had a significant adverse effect on pre-clinical research business from March through the end of 2020, so we expected our
contract services business would also suffer as a result of COVID-19. However, we unexpectedly received inquiries in April 2020 from third parties acquainted with our
management team regarding our laboratory and its ability to perform COVID-19 testing, which we attribute to the surge in COVID-19 testing throughout the United States and
what we believe to be a lack of laboratory testing capacity to meet the surging demand. Management evaluated Arches’ resources and found that it has the capability of
performing molecular polymerase chain reaction testing for COVID-19. Management decided that COVID-19 testing offered an opportunity to use existing resources to
generate additional revenue in the contract services segment and thereby help defray our operating expenses. We began providing COVID-19 testing services at the end of May
2020, and from then to the end of 2020 COVID-19 testing generated $4.3 million in net revenues. These developments notwithstanding, there is great uncertainty around the
COVID-19 pandemic that makes it impossible to accurately predict how the pandemic may directly or indirectly impact our business, results of operations, liquidity, and
financial condition
40
The COVID-19 pandemic has caused us to modify our business practices including, but not limited to, curtailing or modifying employee travel, moving to partial
remote work, and cancelling physical participation in meetings, events, and conferences. We may take further actions as may be required by government authorities or that we
determine are in the best interests of our employees, patients, clinicians, and business partners. The majority of our office-based employees have been working from home since
March 2020, while ensuring essential staffing levels to support our operations remain in place, including maintaining key personnel in our laboratories.
Liquidity and Capital Resources
As of December 31, 2020, we had $25.5 million in cash and cash equivalents, and working capital of approximately $22.7 million. In January 2021, we raised an
additional $17.7 million in gross proceeds before offering expenses in a registered direct offering and through a warrant exercise agreement.
We believe the net revenues we generate internally together with the cash and cash equivalents on our balance sheet will fund our business activities through the end of
2021 and into the third quarter of 2022. In the fourth quarter of 2020 cash used in operating activities was $5.6 million, or an average of $1.9 million per month. After our IND
is filed and then accepted by the FDA, we will move to begin clinical trials as soon as possible. Preliminary estimates indicate one clinical trial could cost approximately $5.0
million over two years, and we believe we will need to conduct at least two clinical trials for SkinTE. Clinical trials are the major expense we see in the near and long term, and
while we are pursuing clinical trials we will continue to incur the costs of maintaining our business. In addition to clinical trials, the most significant uses of cash to maintain our
business going forward are compensation and costs of occupying our facilities. If we need to discontinue commercial sales of SkinTE, we will lose net revenues from the sale of
SkinTE, but we will also focus on eliminating operating expenses related to the SkinTE service. We cannot predict how this will impact our cash flows and working capital.
We will need to raise additional capital to fund our effort to obtain FDA approval of SkinTE and maintain our operations in the future. Although we have been
successful in raising capital in the past, financing may not be available on terms favorable to us, if at all, so there is no assurance that we will be successful in obtaining
additional financing. For the foreseeable future we will continue to pursue fundraising opportunities when available. If adequate funds are not available to us in the future, we
may be required to delay, reduce the scope of, or eliminate our plans for obtaining regulatory approval for SkinTE or be unable to continue operations over a longer term.
Results of Operations
(in thousands)
Net revenues
Products
Services
Total net revenues
Cost of sales
Products
Services
Total cost of sales
Gross profit
Operating costs and expenses
Research and development
General and administrative
Sales and marketing
Restructuring and other charges
Total operating costs and expenses
Operating loss
Other income (expense), net
Change in fair value of common stock warrant liability
Interest (expense) income, net
Other income, net
Net loss
* Not meaningful
Net Revenues
For the Year Ended
December 31, 2020 December 31, 2019
Increase
(Decrease)
Amount
%
$
$
$
3,730
6,396
10,126
1,068
3,356
4,424
5,702
11,532
27,557
8,719
3,834
51,642
(45,940)
2,914
(182)
354
(42,854)
$
41
2,353
3,299
5,652
1,365
1,114
2,479
3,173
16,397
63,189
16,980
-
96,566
(93,393)
-
151
749
(92,493)
$
$
1,377
3,097
4,474
(297)
2,242
1,945
2,529
(4,865)
(35,632)
(8,261)
3,834
(44,924)
47,453
2,914
(333)
(395)
46,639
59%
94%
79%
(22)%
201%
78%
80%
(30)%
(56)%
(49)%
*
(47)%
(51)%
*
(221)%
(53)%
(54)%
Net revenues increased by 79% to $10.126 million in 2020. The increase in net revenues for sale of products was the result of a sales strategy adopted in May 2020 to
focus on regions and facilities where we had repeat users of SkinTE. For 2020 the average wound size treated with SkinTE was 219 cm2 compared to 120 cm2 in 2019, which
corresponds with the difference in revenue between those years. The increase in net revenues for services was the result of $4.324 million in new COVID-19 testing services we
began to offer through Arches at the end of May 2020. In 2019 services net revenues was derived primarily from pre-clinical testing services provided through IBEX, which
were adversely impacted by COVID-19 in 2020.
Cost of Sales
Cost of sales increased by 78% to $4.424 million in 2020, which is attributable to the cost of sales of $2.417 million for providing COVID-19 testing services that were
added in 2020. The cost of sales for products were lower in 2020 by 22% over 2019 due to the economies of scale gained from selling SkinTE for larger wounds.
Operating Costs and Expenses
Total operating costs and expenses decreased to $51.642 million in 2020 from $96.566 million in 2019, or 47%. This is the most significant change in our results of
operations period over period and is attributable to the 46% reduction in personnel from the end of 2019 to the end of 2020. The reduction in personnel substantially reduced
salary and benefit costs across the Company. Salary and benefits totaled $19.721 in 2020 compared to $28.812 in 2019. In addition, stock-based compensation decreased by
77% from $31.402 million in 2019 to $7.258 million in 2020. The decrease in salary and benefits in 2020 accounts for 20% of the decrease in total operating costs and expenses
in 2020 compared to 2019. The decrease in stock-based compensation in 2020 accounts for 54% of the decrease in total operating costs and expenses in 2020 compared to 2019.
The reduction in personnel also allows us to make incremental reductions in the cost of infrastructure required to support the activities of employees.
Research and Development
Research and development expenses decreased by 30% in 2020 to $11.532 million, which is attributable to the reduction in salary and benefits and stock compensation
costs from 2019.
General and Administrative Expenses
General and administrative expenses decreased by 56% in 2020 to $27.557 million. In addition to reductions in salary and benefits and stock compensation costs from
2019, travel and related costs decreased to $0.243 million in 2020 from $1.318 million in 2019. Expenses for our leased facilities were $2.094 million in 2020. Lease expenses
for our corporate office facility was $0.357 million in 2020, which will not recur in 2021 because the lease expired in 2020. Our lease expense for our manufacturing facility in
Utah was $1.251 million in 2020, and we remain obligated under the terms of the lease for that facility until the end of November 2022.
Sales and Marketing
Sales and marketing expenses decreased by 49% in 2020 to $8.719 million. In addition to reductions in salary and benefits and stock compensation costs from 2019,
promotional consulting and expense was reduced to $0.834 million in 2020 from $5.270 in 2019, and travel and related costs decreased to $0.444 million in 2020 from $1.440
million in 2019.
42
Restructuring and other charges
We recorded $3.834 million in restructuring and other charges in 2020. The main components of the restructuring charges are capitalized costs in the amount of $0.518
million for the development of a vivarium project at our Salt Lake City facility we abandoned in 2020, abandonment of equipment purchased in prior periods in the amount of
$1.014 million, and severance payments in the amount of $1.025 million associated with the reduction of personnel in 2020.
In addition, when we were pursuing an aggressive commercialization plan for SkinTE in 2019 we entered into a lease agreement for establishing a manufacturing node
at the Joseph M. Still Burn Center in Augusta, Georgia. The node lease has a term of five years and a monthly base rent of $10,286. In 2020 we spent $0.606 million on node
operations, including rent of $0.119 million. In the fourth quarter of 2020 we decided to abandon operations at the node, which resulted in the recognition of a charge in the
amount of $1.175 million comprised of equipment, leasehold improvements, and a right of use asset. We continue to make payments on the lease for the node and are seeking
opportunities to sublease the space.
Other income (expense), net – Change in Fair Value of Common Stock Warrants
We have issued and outstanding warrants classified as liabilities. The amount of the liabilities attributable to the warrants are remeasured as of the end of each fiscal
quarter and adjusted accordingly through an increase or decrease recorded on our consolidated statement of operations for the period. At December 31, 2020, the total common
stock warrant liability was $5.975 million reflecting a fair value change of $2.914 million under other income.
Critical Accounting Policies and Estimates
For a description of our significant accounting policies, see note 2 to our consolidated financial statements.
Revenue Recognition. With respect to revenue recognition in contract services provided by IBEX, revenues generally consist of a single performance obligation that
IBEX satisfies over time using an input method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. We
believe that this method provides a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the
obligation. This requires that our services personnel at IBEX make reasonable estimates of the extent of progress toward completion of the contract and, as a result, unbilled
receivables and deferred revenue are recognized based on payment timing and work completed.
Stock-Based Compensation. The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived
from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on our historical stock prices.
Common Stock Warrant Liability. The fair value of the common stock warrant liability is estimated using the Monte Carlo simulation model, which involves simulated
future stock price amounts over the remaining life of the commitment. The fair value estimate is affected by our stock price as well as estimated change of control
considerations.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
As a smaller reporting company, we are not required to provide the information under this item, pursuant to Regulation S-K Item 305(e).
Item 8. Financial Statements and Supplementary Data.
The financial statements required by Item 8 are submitted in a separate section of this report beginning on Page F-1 and are incorporated herein and made a part
hereof.
43
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures.
We maintain disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) that are designed to ensure that information
required to be disclosed in our reports filed under the Exchange Act, is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and
forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer,
as appropriate, to allow timely decisions regarding required disclosure.
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and
procedures as of the end of the period covered by this report. Based on the evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2020,
our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective.
Management’s Report on Internal Control Over Financial Reporting.
Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under
the Exchange Act. Our internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with generally accepted accounting principles in the United States (“GAAP”). Our internal control over financial
reporting includes those policies and procedures that:
●
●
pertain to the maintenance of records that in reasonable detail accurately and fairly reflect transactions involving our assets;
provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that our
receipts and expenditures are being made only in accordance with the authorization of our management; and
●
provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect
on the financial statements.
Our management does not expect that our disclosure controls and procedures or our internal controls will prevent all errors and all fraud. A control system, no matter
how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Because of the inherent limitations in
all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally,
controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of
controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or
procedures may deteriorate. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in
conditions, or that the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system,
misstatements due to error or fraud may occur and not be detected.
44
Management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, management used the
framework set forth in the report entitled Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission in 2013,
or COSO. The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii)
control activities, (iv) information and communication, and (v) monitoring. Based on this evaluation, management determined that our system of internal control over financial
reporting was effective as of December 31, 2020.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the three-month period ended December 31, 2020.
Item 9B. Other Information.
“At the Market” Offering
On March 30, 2021, we entered into a sales agreement (the “Sales Agreement”) with Cantor, Fitzgerald & Co. (“Cantor”), to sell shares of our common stock having
aggregate sales proceeds of up to $50.0 million, from time to time, through an “at the market” equity offering program under which Cantor will act as sales agent.
Under the Sales Agreement, we will set the parameters for the sale of shares of our common stock, including the number of shares to be issued, the time period during
which sales are requested to be made, and any minimum price below which sales may not be made. Subject to the terms and conditions of the Sales Agreement, Cantor will use
commercially reasonable efforts to sell the shares by methods deemed to be an “at the market offering” as defined in Rule 415 under the Securities Act, including sales made
directly on The Nasdaq Global Market or any other trading market for our common stock. We will pay Cantor a commission of up to 4.0% of the aggregate gross proceeds of
any common stock sold through Cantor under the Sales Agreement, if any. In the event the total amount of commissions paid to Cantor is not at least $400,000 as of March 30,
2022, we will pay to Cantor the difference between $400,000 and the total amount of commissions paid to Cantor as of that date. The Sales Agreement contains customary
representations, warranties and agreements between us and Cantor, as well as customary indemnification rights, including for liabilities under the Securities Act.
We are not obligated to make any sales of common stock under the Sales Agreement. The offering of shares of common stock pursuant to the Sales Agreement will
terminate upon the termination of the Sales Agreement in accordance with its terms. We and Cantor may terminate the Sales Agreement at any time by providing written notice
to the other party.
The foregoing description of the Sales Agreement is qualified in its entirety by reference to the Sales Agreement, a copy of which is attached hereto as Exhibit 1.1 and
incorporated herein by reference. The Sales Agreement contains representations, warranties, and covenants that were made only for purposes of such agreement and as of
specific dates, are solely for the benefit of the parties to such agreement and may be subject to limitations agreed upon by the contracting parties. The Sales Agreement is not
intended to provide any other factual information about us.
The legal opinion of King & Spalding LLP relating to the shares of common stock being offered pursuant to the Sales Agreement is filed as Exhibit 5.1 to this Annual
Report on Form 10-K.
Keystone Equity Line
Pursuant to an Equity Purchase Agreement dated as of December 5, 2019 (the “Purchase Agreement”) that we entered into with Keystone Capital Partners, LLC
(“Keystone”), Keystone agreed to purchase up to $25.0 million of shares of our common stock, subject to certain limitations, at our direction from time to time during the 36-
month term of the Purchase Agreement. In anticipation of the “at the market” equity offering program described above, we provided notice to Keystone of our decision to
terminate the Purchase Agreement, which was effective on March 26, 2021. During the period from the date of the Purchase Agreement to the date of termination we sold
270,502 shares of our common stock under the Purchase Agreement generating total gross proceeds of $0.7 million.
45
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The information under the captions “Proposal No. 1 Election of Directors,” “Corporate Governance and the Board of Directors,” and “Board of Directors” in our
proxy statement for our 2021 annual meeting of stockholders (our “2021 Proxy Statement”) is incorporated herein by reference. There were no material changes to the
procedures by which stockholders may recommend nominees to our board of directors. See also, “Part 1, Item 1- Contact and Available Information,” above.
ITEM 11. EXECUTIVE COMPENSATION
The information under the captions “Board of Directors” and “Executive Compensation” in our 2021 Proxy Statement is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The information under the captions “Security Ownership of Certain Beneficial Owners and Management” in our 2021 Proxy Statement is incorporated herein by
reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
The information under the captions “Corporate Governance and the Board of Directors” and “Certain Relationships and Related Transactions” in our 2021 Proxy
Statement is incorporated herein by reference.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
The information under the proposal pertaining to ratification of the appointment of EisnerAmper LLP as independent public accountant for the fiscal year ending
December 31, 2021 in our 2021 Proxy Statement is incorporated herein by reference.
With the exception of the information specifically incorporated by reference in Part III of this Annual Report on Form 10-K from our 2021 Proxy Statement, our 2021
Proxy Statement will not be deemed to be filed as part of this report. Without limiting the foregoing, the information under the caption “Audit Committee Report” in our 2021
Proxy Statement is not incorporated by reference in this Annual Report on Form 10-K.
PART IV
Item 15. Exhibits, Financial Statement Schedules.
(1) Financial Statements.
The financial statements required by Item 15 are submitted in a separate section of this report, beginning on Page F-1, incorporated herein and made a part hereof.
(2) Financial Statement Schedules.
Schedules have been omitted because of the absence of conditions under which they are required or because the required information is included in the financial statements or
notes thereto.
(3) Exhibits.
46
The following index lists the exhibits that are filed with this report or incorporated by reference, as noted:
1.1
3.1
3.2
3.3
3.4
3.5
3.6
3.7
3.8
3.9
4.1
4.2
4.3
4.4
4.5
4.6
4.7
4.8
4.9
4.10
4.11
4.12
*4.13
*5.1
#10.1
#10.2
#10.3
#10.4
Sales Agreement dated March 30, 2021, between the Company and Cantor Fitzgerald & Co.
Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Quarterly Report on Form 10-Q filed on September 15, 2014).
Certificate of Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on July 29, 2016)
Certificate of Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on January 10, 2017)
Certificate of Amendment to Restated Certificate of Incorporation (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on April 7, 2017)
Certificate of Elimination to Restated Certificate of Incorporation eliminating the Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D
Preferred Stock, Series E Preferred Stock and Series F Preferred Stock in the Corporation’s Certificate of Incorporation, as amended (incorporated by reference to
Exhibit 3.1 to our Form 8-K filed with the SEC on March 7, 2018)
Certificate of Designation of Series A Junior Participating Preferred Stock (incorporated by reference to Exhibit 3.1 to our Form 8-K filed with the SEC on November 7,
2019)
Restated Bylaws (incorporated by reference to Exhibit 3.1 to our Current Report on Form 8-K filed on June 17, 2005).
Amendment No. 1 to Restated Bylaws dated January 11, 2019, Changing Fiscal Year (incorporated by reference to Exhibit 3.13 to our Form 10-K filed with the SEC on
January 14, 2019)
Articles of Merger (incorporated by reference to Exhibit 3.2 to our Form 8-K filed with the SEC on April 7, 2017)
Registration Rights Agreement dated December 5, 2019, between the Company and Keystone Capital Partners, LLC (incorporated by reference to Exhibit 4.1 to our
Form 8-K filed with the SEC on December 5, 2019)
Form of Common Stock Warrant Certificate (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on February 14, 2020)
Form of Warrant Agency Agreement (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on February 14, 2020)
Form of letter agreement for repricing of common stock warrants issued February 14, 2020 (incorporated by reference to Exhibit 99.1 to our Form 8-K filed with the
SEC on November 23, 2020)
Form of Series A Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on
December 23, 2020)
Form of Series B Pre-Funded Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC
on December 23, 2020)
Form of Placement Agent Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on
December 23, 2020)
Form of Series A Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on January 14, 2021)
Form of Series B Pre-Funded Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on January
14, 2021)
Form of Placement Agent Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.3 to our Form 8-K filed with the SEC on January 14,
2021)
Form of Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.1 to our Form 8-K filed with the SEC on January 26, 2021)
Form of Placement Agent Common Stock Purchase Warrant – January 2021 (incorporated by reference to Exhibit 4.2 to our Form 8-K filed with the SEC on January 26,
2021)
Description of Securities
Opinion of King & Spalding relating to the Sales Agreement dated March 30, 2021
Employment Agreement with David Seaburg (incorporated by reference to Exhibit 10.30 to our Form 10-KT filed with the SEC on March 18, 2019)
Employment Agreement with Richard Hague (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed with the SEC on May 10, 2019)
Employment Agreement with Paul Mann (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on September 14, 2018)
Amendment No. 1 to Employment Agreement with David Seaburg (incorporated by reference to Exhibit 10.2 to our Form 10-Q filed with the SEC on August 8, 2019)
47
#10.5
#10.6
#10.7
Amendment No. 1 to Employment Agreement with Richard Hague (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed with the SEC on August 8, 2019)
Amendment No. 1 to Employment Agreement with Paul Mann (incorporated by reference to Exhibit 10.3 to our Form 10-Q filed with the SEC on August 8, 2019)
Form of Notice of Restricted Stock Grant and Restricted Stock Award Agreement under the 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.4 to our
Form 10-Q filed with the SEC on August 8, 2019)
*#10.8 Change in Control Compensation Plan
#10.9
Form of Restricted Stock Unit Agreement – 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.20 to our Form 10-K filed with the SEC on January 14,
2019)
#10.10 Form of Stock Option Agreement – 2017 Equity Incentive Plan (incorporated by reference to Exhibit 10.21 to our Form 10-K filed with the SEC on January 14, 2019)
#10.11 Form of Restricted Stock Unit Agreement – 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.22 to our Form 10-K filed with the SEC on January 14,
2019)
#10.12 Form of Stock Option Agreement – 2019 Equity Incentive Plan (incorporated by reference to Exhibit 10.23 to our Form 10-K filed with the SEC on January 14, 2019)
#10.13 PolarityTE 2017 Equity Incentive Plan (incorporated by reference to Appendix A of our proxy statement filed with the SEC on February 24, 2017)
#10.14 PolarityTE 2019 Equity Incentive Plan (incorporated by reference to Exhibit 99.2 to our Form S-8 registration Statement filed with the SEC on October 5, 2018)
#10.15 PolarityTE 2019 Employee Stock Purchase Plan (incorporated by reference to Exhibit 99.1 to our Form S-8 registration Statement filed with the SEC on October 5,
2018)
#10.16 PolarityTE 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 99.1 to our Form 8-K filed with the SEC on December 29, 2020)
#10.17 Form of Incentive Stock Option Agreement – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.17 to our Form 10-K filed with the SEC on
March 12, 2020)
#10.18 Form of Non-qualified Stock Option Agreement – Non-employee Directors – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.18 to our
Form 10-K filed with the SEC on March 12, 2020)
#10.19 Form of Non-qualified Stock Option Agreement – Employees – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.19 to our Form 10-K
filed with the SEC on March 12, 2020)
#10.20 Form of Non-qualified Stock Option Agreement – Consultants – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.20 to our Form 10-K
filed with the SEC on March 12, 2020)
#10.21 Form of Restricted Stock Award – 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.21 to our Form 10-K filed with the SEC on March 12,
2020)
#10.22 Form of Restricted Stock Unit Award – Non-employee Directors - 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.22 to our Form 10-K
filed with the SEC on March 12, 2020)
#10.23 Form of Restricted Stock Unit Award – Employees - 2020 Stock Option and Incentive Plan (incorporated by reference to Exhibit 10.23 to our Form 10-K filed with the
SEC on March 12, 2020)
#10.24 Employment Agreement with Denver Lough (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on November 16, 2017)
#10.25 Settlement Terms Agreement dated August 21, 2019, between Denver Lough and the Company (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed with
the SEC on November 12, 2019)
#10.26 Separation, Transition, and Release of Claims Agreement dated March 31, 2020, between Paul Mann and the Company (incorporated by reference to Exhibit 10.1 to our
Form 8-K filed with the SEC on April 1, 2020)
#10.27 Form of Indemnification Agreement for directors and officers (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on March 25, 2020)
10.28
Agreement of Lease between the Company and Lefrak SBN Limited Partnership dated October 19, 2018 (incorporated by reference to Exhibit 10.26 to our Form 10-K
filed with the SEC on January 14, 2019)
Sublease Agreement by and between the Company and Peter Cohen LLC for office space at 40 West 57th Street, New York, New York 10019 (incorporated by
reference to Exhibit 10.27 to our Form 10-K filed with the SEC on January 14, 2019)
Sublease Agreement with Joseph M. Still Burn Centers, Inc., dated April 22, 2019 (incorporated by reference to Exhibit 10.28 to our Form 10-K filed with the SEC on
March 12, 2020)
Commercial Lease Agreement by and Between the Company and Adcomp LLC (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on
December 29, 2017)
48
Purchase Agreement dated December 5, 2019 between the Company and Keystone Capital Partners, LLC (incorporated by reference to Exhibit 10.1 to our Form 8-K
filed with the SEC on December 5, 2019)
Note and Loan Agreement dated April 12, 2020, between PolarityTE MD, Inc., and KeyBank National Association (incorporated by reference to Exhibit 10.1 to our
Form 8-K filed with the SEC on April 15, 2020)
COVID-19 Laboratory Services Agreement between Arches Research, Inc., and Co-Diagnostics, Inc., dated September 2, 2020 [service pricing information is redacted
from the exhibit] (incorporated by reference to Exhibit 10.1 to our Form 10-Q filed with the SEC on November 9, 2020)
Rental Agreement for LGC Genomics Oktopure Extraction Machine between Arches Research, Inc., and Co-Diagnostics, Inc., dated September 2, 2020 [product pricing
information is redacted from the exhibit] (incorporated by reference to Exhibit 10.2 to our Form 10-Q filed with the SEC on November 9, 2020)
Form of Securities Purchase Agreement dated December 21, 2020 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on December 23, 2020)
Form of Securities Purchase Agreement dated January 11, 2021 (incorporated by reference to Exhibit 10.1 to our Form 8-K filed with the SEC on January 14, 2021)
Form of letter agreement for exercise of Series A Common Stock Purchase Warrant dated December 23, 2020 (incorporated by reference to Exhibit 10.1 to our Form 8-
K filed with the SEC on January 26, 2021)
Subsidiaries (incorporated by reference to Exhibit 21.1 to our Form 10-K filed with the SEC on March 12, 2020)
Consent of Independent Registered Public Accounting Firm
Consent of King & Spalding LLP (included in Exhibit 5.1)
Certification Pursuant to Rule 13a-14(a)
Certification Pursuant to Rule 13a-14(a)
Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code
10.29
10.30
10.31
10.32
10.33
10.34
10.35
10.36
10.37
10.38
21.1
*23.1
*23.2
*31.1
*31.2
*32.1
XBRL Instance Document
*101.INS
*101.SCH XBRL Taxonomy Extension Schema Document
*101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
*101.DEF XBRL Taxonomy Extension Definition Linkbase Document
*101.LAB XBRL Taxonomy Extension Labels Linkbase Document
*101.PRE
*104
XBRL Taxonomy Extension Presentation Linkbase Document
Cover Page Interactive Data File
#
*
Constitutes a management contract, compensatory plan, or arrangement.
Filed herewith.
Item 16. Form 10-K Summary.
Not Applicable.
49
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
POLARITYTE, INC.
By:
/s/ David Seaburg
Chief Executive Officer
(Principal Executive Officer)
Date: March 30, 2021
By:
/s/ Jacob Patterson
Chief Financial Officer (Principal Financial and Accounting Officer)
Date: March 30, 2021
50
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature
Title
/s/ Peter A. Cohen
Peter A. Cohen
/s/ Jeffrey Dyer
Jeffrey Dyer
/s/ Chris Nolet
Chris Nolet
/s/ Minnie Baylor-Henry
Minnie Baylor-Henry
/s/ Willie C. Bogan
Willie C. Bogan
/s/ Jessica Shen
Jessica Shen
Chairman of the Board of Directors
Director
Director
Director
Director
Director
51
POLARITYTE, INC. AND SUBSIDIARIES
Consolidated Financial Statements
TABLE OF CONTENTS
Date
March 30, 2021
March 30, 2021
March 30, 2021
March 30, 2021
March 30, 2021
March 30, 2021
Report of Independent Registered Public Accounting Firm
Consolidated Balance Sheets as of December 31, 2020 and 2019
Consolidated Statements of Operations for the Years Ended December 31, 2020 and December 31, 2019
Consolidated Statements of Comprehensive Loss for the Years Ended December 31, 2020 and December 31, 2019
Consolidated Statements of Stockholders’ Equity for the Years Ended December 31, 2020 and December 31, 2019
Consolidated Statements of Cash Flows for the Years Ended December 31, 2020 and December 31, 2019
Notes to Consolidated Financial Statements
Page
F-1
F-3
F-4
F-5
F-6
F-7
F-8
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
PolarityTE, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of PolarityTE, Inc. and Subsidiaries (the “Company”) as of December 31, 2020 and 2019 and the related
consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for each of the years then ended, and the related notes (collectively referred to
as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December
31, 2020 and 2019 and the consolidated results of their operations and their cash flows for each of the years then ended, in conformity with accounting principles generally
accepted in the United States of America (U.S. GAAP).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our
audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the
PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an
audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the
purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that
respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included
evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe
that our audits provide a reasonable basis for our opinion.
Critical Audit Matter
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be
communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved especially
challenging, subjective, or complex judgments. The communication of the critical audit matter does not alter in any way our opinion on the consolidated financial statements,
taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to
which it relates.
Equity Linked Instruments
As discussed in Notes 11 and 12, the Company has issued common stock warrants to purchasers of its common stock that are classified as a liability and are recorded at fair
value in the Company’s balance sheet and has granted stock-based awards in the form of stock options, restricted stock awards and restricted stock units to employees and non-
employees for which compensation expense is recorded based on the fair value of the awards. In addition, equity linked instruments classified as liabilities are remeasured each
period until settled or until classified as equity. Management utilized the Monte Carlo Simulation and Black Scholes models to estimate the fair value of these instruments which
required assumptions for the inputs to those models.
F-1
We identified the accounting for equity linked instruments as a critical audit matter due to (i) the significant management judgment and subjectivity in developing the
assumptions to the models utilized (ii) there was subjectivity in assessing the features of the common stock warrants in evaluating classification and the relevant accounting
guidance for classification is complex, and (iii) the complexity of the Monte Carlo Simulation model.. This in turn led to a high degree of auditor judgment and subjectivity and
significant audit effort was required in performing procedures to evaluate the accounting for equity linked instruments. Additionally, the audit effort involved the use of
professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statements.
We obtained an understanding and evaluated the design of controls relating to the Company’s accounting for equity linked instruments. Our procedures also included, among
others, (i) evaluating management’s process for selecting the appropriate valuation models and techniques and assumptions used as inputs to those valuation models; (ii) testing
the completeness, mathematical accuracy, and relevance of underlying data used in the models and calculations; and (iii) evaluating the features of the equity linked instruments
and applying our understanding of the applicable provisions of U.S. GAAP in testing their classification. We involved a valuation specialist in auditing the estimated fair value
of the common stock warrant liability, which utilized the Monte Carlo Simulation model. The valuation specialist assisted with evaluating the valuation models and related
assumptions utilized, as well as performed a sensitivity analysis of the Monte Carlo Simulation.
/s/ EisnerAmper LLP
We have served as the Company’s auditor since 2010. Partners of Amper, Politziner & Mattia LLP joined EisnerAmper LLP in 2010. Amper, Politziner & Mattia LLP had
served as the Company’s auditor since 2009.
EISNERAMPER LLP
Iselin, New Jersey
March 30, 2021
F-2
POLARITYTE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
ASSETS
Current assets
Cash and cash equivalents
Short-term investments
Accounts receivable, net
Inventory
Prepaid expenses and other current assets
Total current assets
Property and equipment, net
Operating lease right-of-use assets
Intangible assets, net
Goodwill
Other assets
TOTAL ASSETS
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Accounts payable and accrued expenses
Other current liabilities
December 31,
2020
December 31,
2019
$
$
$
25,522
–
3,819
883
992
31,216
10,550
2,452
542
278
472
45,510
4,148
2,106
$
$
$
10,218
19,022
1,731
252
1,264
32,487
14,911
4,590
731
278
602
53,599
7,095
2,338
Current portion of long-term note payable
Deferred revenue
Total current liabilities
Common stock warrant liability
Operating lease liabilities
Other long-term liabilities
Long-term notes payable
Total liabilities
Commitments and Contingencies (Note 17)
STOCKHOLDERS’ EQUITY
Preferred stock – 25,000,000 shares authorized, 0 shares issued and outstanding at December 31, 2020 and
2019
Common stock - $.001 par value; 250,000,000 shares authorized; 54,857,099 and 27,374,653 shares
issued and outstanding at December 31, 2020 and 2019, respectively
Additional paid-in capital
Accumulated other comprehensive income
Accumulated deficit
Total stockholders’ equity
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY
$
The accompanying notes are an integral part of these consolidated financial statements
F-3
POLARITYTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share amounts)
2,059
168
8,481
5,975
1,476
723
1,517
18,172
–
55
505,494
–
(478,211)
27,338
45,510
$
528
98
10,059
–
2,994
1,630
–
14,683
–
27
474,174
72
(435,357)
38,916
53,599
Net revenues
Products
Services
Total net revenues
Cost of sales
Products
Services
Total costs of sales
Gross profit
Operating costs and expenses
Research and development
General and administrative
Sales and marketing
Restructuring and other charges
Total operating costs and expenses
Operating loss
Other income (expense), net
Change in fair value of common stock warrant liability
Interest (expense) income, net
Other income, net
Net loss
Net loss per share attributable to common stockholders
Basic
Diluted
Weighted average shares outstanding
Basic
Diluted
For the Year Ended
December 31,
2020
For the Year Ended
December 31,
2019
$
3,730
6,396
10,126
1,068
3,356
4,424
5,702
11,532
27,557
8,719
3,834
51,642
(45,940)
2,914
(182)
354
(42,854)
(1.11)
(1.16)
38,779,316
39,367,390
$
$
$
2,353
3,299
5,652
1,365
1,114
2,479
3,173
16,397
63,189
16,980
–
96,566
(93,393)
–
151
749
(92,493)
(3.70)
(3.70)
24,966,355
24,966,355
$
$
$
$
The accompanying notes are an integral part of these consolidated financial statements
F-4
POLARITYTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(in thousands)
Net loss
Other comprehensive income (loss):
Unrealized gain on available-for-sale securities
For the Year Ended
December 31,
2020
For the Year Ended
December 31,
2019
$
(42,854)
$
11
(92,493)
493
Reclassification of realized gain included in net loss
Comprehensive loss
$
(83)
(42,926)
$
(457)
(92,457)
The accompanying notes are an integral part of these consolidated financial statements
F-5
POLARITYTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share and per share amounts)
Preferred Stock
Common Stock
Number
Amount
–
$
–
Number
21,447,088
Amount
$
21
$
414,840
Additional
Paid-in
Capital
Accumulated
Other
Comprehensive
Income
36
$
Accumulated
Deficit
Total
Stockholders’
Equity
$
(342,864)
$
72,033
Balance - December 31, 2018
Issuance of common stock, net of issuance
costs of $1,147
Issuance of restricted stock awards
Stock option exercise
Stock-based compensation expense
Purchase of ESPP shares
Vesting of restricted stock units, net
Shares withheld for tax withholding on
vesting of restricted stock
Other comprehensive income
Net loss
Balance - December 31, 2019
Issuance of common stock, net of issuance
costs of $1,319
Issuance of common stock and pre-funded
warrants through underwritten offering, net of
issuance costs of $251
Issuance of common stock upon exercise of
warrants
Stock option exercise
Stock-based compensation expense
Purchase of ESPP shares
Vesting of restricted stock units
Shares withheld for tax withholding on
vesting of restricted stock
Forfeiture of restricted stock awards
Other comprehensive loss
Net loss
$
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
–
3,473,008
1,579,919
292,417
–
36,177
645,473
(99,429)
–
–
27,374,653
$
10,854,710
5,450,000
10,073,298
10,208
–
97,445
1,161,658
(117,987)
(46,886)
–
–
3
2
–
–
–
1
–
–
–
27
11
5
10
–
–
–
2
–
–
–
–
28,070
(2)
529
31,440
99
(1)
(801)
–
–
474,174
$
$
12,589
2,261
9,263
31
7,258
75
(2)
(155)
–
–
–
–
–
–
–
–
–
–
36
–
72
–
–
–
–
–
–
–
–
–
(72)
–
–
–
–
–
–
–
–
–
(92,493)
(435,357)
$
$
–
–
–
–
–
–
–
–
–
–
(42,854)
28,073
–
529
31,440
99
–
(801)
36
(92,493)
38,916
12,600
2,266
9,273
31
7,258
75
–
(155)
(72)
(42,854)
54,857,099
$
55
$
505,494
$
–
$
(478,211)
$
27,338
Balance - December 31, 2020
–
$
The accompanying notes are an integral part of these consolidated financial statements
F-6
POLARITYTE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense
Depreciation and amortization
Change in allowance for doubtful accounts
Change in fair value of common stock warrant liability
Amortization of intangible assets
Amortization of debt discount
Change in fair value of contingent consideration
Loss on abandonment of property and equipment and ROU assets
Other non-cash adjustments
Changes in operating assets and liabilities:
Accounts receivable
Inventory
Prepaid expenses and other current assets
Operating lease right-of-use assets
Other assets/liabilities, net
Accounts payable and accrued expenses
Other current liabilities
Deferred revenue
Operating lease liabilities
For the Year
Ended
December 31,
2020
For the Year
Ended
December 31,
2019
$
(42,854)
$
(92,493)
7,258
3,074
148
(2,914)
189
19
–
2,806
(21)
(2,236)
(631)
272
1,700
(200)
(2,761)
35
70
(1,708)
31,402
2,992
26
–
193
49
(36)
914
20
(1,045)
84
193
1,651
(249)
1,269
32
(72)
(1,578)
Net cash used in operating activities
(37,754)
(56,648)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment
Purchase of available-for-sale securities
Proceeds from maturities of available-for-sale securities
Proceeds from sale of available-for-sale securities
Net cash provided by/(used in) investing activities
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from term note payable and financing arrangements
Principal payments on term note payable and financing arrangements
Payment of contingent consideration liability
Principal payments on financing leases
Net proceeds from the sale of common stock, warrants and pre-funded warrants
Proceeds from warrants exercised
Cash paid for tax withholdings related to net share settlement
Proceeds from stock options exercised
Proceeds from ESPP purchase
Net cash provided by financing activities
Net increase/(decrease) in cash and cash equivalents
Cash and cash equivalents - beginning of period
Cash and cash equivalents - end of period
Supplemental cash flow information:
Cash paid for interest
Supplemental schedule of non-cash investing and financing activities:
Property and equipment additions acquired through finance leases
Property and equipment acquired through financing arrangements
Unpaid liability for acquisition of property and equipment
Reclassification of stock-based compensation expense that was previously classified as a liability to
paid-in capital
Right-of-use asset obtained in exchange for new lease liability
Allocation of proceeds from sale of common stock and warrants to warrant liability
Reclassification of warrant liability to stockholders’ equity upon exercise of warrant
$
$
$
$
$
$
$
$
$
(1,339)
(14,144)
16,945
16,171
17,633
4,629
(1,675)
–
(508)
32,020
1,008
(155)
31
75
35,425
15,304
10,218
25,522
$
187
$
–
–
87
–
82
17,154
8,265
$
$
$
$
$
$
$
(2,773)
(40,072)
23,327
3,901
(15,617)
–
(534)
(225)
(453)
28,073
–
(679)
529
99
26,810
(45,455)
55,673
10,218
199
2,578
58
273
38
–
–
–
The accompanying notes are an integral part of these consolidated financial statements
F-7
POLARITYTE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION
PolarityTE, Inc. and subsidiaries (the “Company”) is a biotechnology company developing and commercializing regenerative tissue products and biomaterials.
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,
stock-based compensation, the valuation allowances for deferred tax benefits, the valuation of warrant liabilities, and impairment and abandonment 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 are managed separately. Accordingly, it operates in two
segments: 1) regenerative medicine products and 2) contract services. The Chief Operating Decision Maker (CODM), the Chief Executive Officer (CEO), allocates resources to
and assesses the performance of each operating segment using information about its revenue and operating income (loss).
Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less from the date of purchase.
Investments. Investments in debt securities have been classified as available-for-sale and are carried at fair value, with unrealized gains and losses reported as a
component of accumulated other comprehensive income. Realized gains and losses are included in other income, net. The cost of securities sold is based on the specific-
identification method. Interest on marketable securities is included in interest (expense) income, net. Investments with original maturities of greater than three months but less
than one year from the date of purchase are classified as current. Investments with original maturities of greater than one year from the date of purchase are classified as non-
current.
Accounts Receivable. Accounts receivable consists of amounts due to the Company related to the sale of the Company’s core product SkinTE and contract services.
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, 2020 and 2019, the Company recorded an allowance of approximately $ 174,000 and
$26,000, respectively.
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.
F-8
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 short-term portion of operating lease obligations are included in other current liabilities. The
classification of the Company’s leases as operating or finance leases along with the initial measurement and recognition of the associated ROU assets and lease liabilities is
performed at the lease commencement date. The measurement of lease liabilities is based on the present value of future lease payments over the lease term. As the Company’s
leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the lease commencement date in determining the
present value of future lease payments. The ROU asset is based on the measurement of the lease liability and also includes any lease payments made prior to or on lease
commencement and excludes lease incentives and initial direct costs incurred, as applicable. The lease terms may include options to extend or terminate the lease when it is
reasonably certain the Company will exercise any such options. Rent expense for the Company’s operating leases is recognized on a straight-line basis over the lease term.
Amortization expense for the ROU asset associated with its finance leases is recognized on a straight-line basis over the term of the lease and interest expense associated with its
finance leases is recognized on the balance of the lease liability using the effective interest method based on the estimated incremental borrowing rate.
The Company has lease agreements with lease and non-lease components. As allowed under 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. During the year, the Company performed a qualitative assessment and concluded that it is more likely than not that the fair value of the reporting unit is more
than its carrying value. Accordingly, there was no indication of impairment, and further quantitative analysis was not required.
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.
Impairment of Long-Lived Assets. The Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business
circumstances indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when to perform an impairment
review include significant underperformance of the business in relation to expectations, significant negative industry or economic trends, and significant changes or planned
changes in the use of the assets. If an impairment review is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash
flows expected to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized when estimated
undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The impairment loss would be based on the excess of the carrying
value of the impaired asset over its fair value, determined based on discounted cash flows.
F-9
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 which the entity expects to receive in exchange for those goods or services. To determine revenue recognition for arrangements that an entity determines are
within the scope of ASC 606, the Company performs the following five steps: (i) identify the contract(s) with a customer; (ii) identify the performance obligations in the
contract; (iii) determine the transaction price; (iv) allocate the transaction price to the performance obligations in the contract; and (v) recognize revenue when (or as) the entity
satisfies a performance obligation.
The Company records product revenues primarily from the sale of its regenerative tissue products. The Company sells its products to healthcare providers (customers),
primarily through direct sales representatives. Product revenues consist of a single performance obligation that the Company satisfies at a point in time. In general, the Company
recognizes product revenue upon delivery to the customer.
In the contract services segment, the Company records service revenues from the sale of its contract research services, which includes delivery of preclinical studies
and other research services to unrelated third parties. Service revenues generally consist of a single performance obligation that the Company satisfies over time using an input
method based on costs incurred to date relative to the total costs expected to be required to satisfy the performance obligation. The Company believes that this method provides
a faithful depiction of the transfer of services over the term of the performance obligation based on the remaining services needed to satisfy the obligation. This requires the
Company to make reasonable estimates of the extent of progress toward completion of the contract. As a result, unbilled receivables and deferred revenue are recognized based
on payment timing and work completed. Generally, a portion of the payment is due upfront and the remainder upon completion of the contract, with most contracts completing
in less than a year. Contract services include research and laboratory testing services to unrelated third parties on a contract basis. These customer contracts generally consist of
a single performance obligation that the Company satisfies at a point in time. The Company recognizes revenue upon delivery of testing results to the customer. As of
December 31, 2020 and 2019, the Company had unbilled receivables of $0.2 million and $0.1 million, respectively, and deferred revenue of $0.2 million and $0.1 million,
respectively. The unbilled receivables balance is included in consolidated accounts receivable. Revenue of $0.1 million was recognized during the year ended December 31,
2020 that was included in the deferred revenue balance as of December 31, 2019.
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. Concentration of revenues was as
follows:
Customer A
Customer B
Customer C
Concentration of accounts receivable was as follows:
Customer B
Customer C
Customer D
Customer E
Segment
Contract Services
Regenerative Medicine
Contract Services
F-10
Segment
Regenerative Medicine
Contract Services
Contract Services
Regenerative Medicine
For the Year Ended
December 31, 2020
% of Revenue
For the Year Ended
December 31, 2019
% of Revenue
*
13%
41%
December 31, 2020
% of Accounts
Receivable
December 31, 2019
% of Accounts
Receivable
14%
46%
*
*
23%
*
*
14%
*
15%
11%
The following table contains revenues as presented in the Consolidated Statements of Operations disaggregated by services and products.
Regenerative Medicine
SkinTE Products
Contract Services
Lab Testing Services
Preclinical Research Services
Total Net Revenues
* The amount did not exceed 10%
December 31, 2020
December 31, 2019
$
$
3,730
$
4,454
1,942
6,396
10,126
$
2,353
176
3,123
3,299
5,652
Research and Development Expenses. Costs incurred for research and development are expensed as incurred. Nonrefundable advance payments for goods or services
that have the characteristics that will be used or rendered for future research and development activities pursuant to executory contractual arrangements with third party research
organizations are deferred and recognized as an expense as the related goods are delivered or the related services are performed.
Accruals for 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 each period
until settled or until classified as equity. No reclassification occurred within the periods presented.
F-11
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. The volatility factor is determined based on the Company’s historical stock prices. Forfeitures are recognized as they occur.
The fair value of restricted stock grants is measured based on the fair market value of the Company’s common stock on the date of grant and amortized over the vesting
period of, generally, six months to three years.
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.
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. Further, in December 2020, in connection with the December 23, 2020 underwritten offering, the Company sold pre-funded
warrants to purchases 5,238,043 shares of common stock. The pre-funded warrants are exercisable for shares of common stock at a price of $0.001 per share. The shares of
common stock into which the pre-funded warrants may be exercised are considered outstanding for the purposes of computing fully diluted net loss 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 is effective for fiscal years beginning after December
15, 2019, including interim periods within those fiscal years with early adoption permitted. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments—
Credit Losses (Topic 326), Derivatives and Hedging (Topic 815) and Leases (Topic 842): Effective Dates , which defers the effective date of Topic 326. As a smaller reporting
company, Topic 326 will now be effective for the Company beginning January 1, 2023. As such, the Company plans to adopt this ASU beginning January 1, 2023. The
Company is currently evaluating the impact that the standard will have on its consolidated financial statements and related disclosures.
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes, which simplifies the accounting for income taxes by removing
certain exceptions to the current guidance, and improving the consistent application of and simplification of other areas of the guidance. The amendments in the ASU are
effective for fiscal years beginning after December 15, 2020, including interim periods therein. Early adoption is permitted. The amendment to the ASU will not have a material
impact to the Company.
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework-Changes to the Disclosure Requirements for Fair
Value Measurement. The ASU modifies the disclosure requirements for fair value measurements by removing, modifying or adding certain disclosures. The standard was
effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years with early adoption permitted. The ASU was adopted by the
Company in the first quarter of fiscal year 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related
disclosures.
F-12
In August 2018, the FASB issued ASU 2018-15, Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service
Contract. The ASU aligns the requirements of capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for
capitalizing implementation costs incurred to develop or obtain internal-use software. Adoption of the ASU is either retrospective or prospective. The Company adopted this
standard prospectively on January 1, 2020. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related
disclosures.
3. LIQUIDITY
The Company has experienced recurring losses and cash outflows from operating activities. As of December 31, 2020, the Company has an accumulated deficit of
$478.2 million. As of December 31, 2020, the Company had cash and cash equivalents of $25.5 million. The Company has been funded historically through sales of equity and
debt.
During the first quarter of 2020, the Company effectuated four sales of common stock to Keystone under the Purchase Agreement for a total of 216,412 shares
generating total gross proceeds of $0.6 million. The Company agreed not to sell any additional shares under the Purchase Agreement for a period of 90 days after the closing
date of the offering.
On February 14, 2020, the Company completed an underwritten offering of 10,638,298 shares of its common stock and warrants to purchase 10,638,298 shares of
common stock. Each common share and warrant were sold together for a combined public purchase price of $2.35 before underwriting discount and commission. The exercise
price of each warrant was $2.80 per share, the warrants were exercisable immediately, and they will expire February 12, 2027. The net proceeds to the Company from the
offering were $22.5 million, after offering expenses payable by the Company. In connection with this agreement, the Company agreed not to sell any additional shares under the
Keystone Purchase Agreement for a period of 90 days after the closing date of the offering. On November 19, 2020, the Company reduced the exercise price of the Warrants
from $2.80 per share to $0.10 per share effective November 20, 2020. As of December 31, 2020, 10,073,298 of these Warrants were exercised into shares of common stock for
proceeds of $1.0 million.
The Company entered into a promissory note for $3.6 million under the Paycheck Protection Program on April 12, 2020. Additional details are provided in Note 10.
In the second quarter of 2020 the Company took steps to reduce cash burn by reducing payroll expense, adopting a salary and wage reduction, and reducing
discretionary spending across the organization to minimal levels.
On December 23, 2020, the Company completed a registered direct offering of 5,450,000 shares of its common stock, par value $0.001 per share, pre-funded warrants
to purchase up to 5,238,043 shares of common stock and accompanying common warrants to purchase up to 10,688,043 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 $0.7485 and for each pre-
funded warrant and accompanying warrant was $0.7475. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each warrant
is exercisable for one share of the Company’s common stock at an exercise price of $0.624 per share. The net proceeds to the Company from the offering were $7.2 million,
after offering expenses payable by the Company.
Following the end of 2020, the Company closed on two additional offerings:
On January 14, 2021, the Company completed a registered direct offering of 6,670,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to
purchase up to 2,420,910 shares of common stock and accompanying common warrants to purchase up to 9,090,910 shares of common stock. Each share of common stock and
pre-funded warrant were sold together with a warrant. The combined offering price of each common share and accompanying warrant was $1.100 and for each pre-funded
warrant and accompanying warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. The Company
received gross proceeds of approximately $10.0 million in connection with the offering, before deducting placement agent fees and related offering expenses.
F-13
On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase up to 10,688,043 shares of common stock at an exercise
price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to
exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder common warrants to purchase up to 8,016,033 shares of the Company’s common
stock, par value $0.001 per share, at a price of $0.125. Each warrant is exercisable for one share of Common Stock at an exercise price of $1.20 per share. The warrants are
immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the
holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower
percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for
the registered direct offering in December 2020 warrants to purchase up to 6.0% of the aggregate number of warrants issued under the letter agreement (or warrants to purchase
up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the warrants. The Company received gross proceeds of
approximately $6.67 million from the exercise of the existing warrants and gross proceeds of approximately $1.0 million from the sale of the newly issued warrants, before
deducting placement agent fees and related offering expenses.
Based upon the current status of product development and commercialization plans, the Company believes that its existing cash and cash equivalents and equity
offerings completed subsequent to December 31, 2020 and prior to the filing of these financial statements will be adequate to satisfy its capital and operating needs for at least
the next 12 months from the date of filing. The Company will continue to pursue fundraising opportunities when available, but such financing may not be available in the future
on favorable terms, if at all. If adequate financing is not available, the Company may be required to delay, reduce the scope of, or eliminate one or more of its product
development programs, or be unable to continue operations over a longer term. The Company plans to meet its capital requirements primarily through issuances of equity
securities, debt financing, revenue from product sales or strategic partnership arrangements. Failure to generate revenue or raise additional capital would adversely affect the
Company’s ability to achieve its intended business objectives.
4. FAIR VALUE
In accordance 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. This methodology applies to the Company’s Level 1 investments,
which are composed of money market funds.
Level 2: Quoted prices for similar instruments that are directly or indirectly observable in the market. This methodology applies to the Company’s Level 2
investments, which are composed of corporate debt securities, commercial paper, and U.S. government debt securities.
Level 3: Significant unobservable inputs supported by little or no market activity. Financial instruments whose values are determined using pricing models,
discounted cash flow methodologies, or similar techniques, for which determination of fair value requires significant judgment or estimation. This methodology
applies to valuation of the Company’s common stock warrants, measurement of impairment, and Level 3 financial instruments, which are composed of
contingent consideration.
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. There
were no transfers within the hierarchy for any of the periods presented.
F-14
For the year ended December 31, 2020, the Company transferred all available-for-sale securities to cash accounts.
The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy as of
December 31, 2020 and 2019 (in thousands):
Liabilities
Common stock warrant liability
Total
Assets
Money market funds
Commercial paper
Corporate debt securities
U.S. government debt securities
Total
Liabilities
Contingent consideration
Total
Fair Value Measurement as of December 31, 2020
Level 1
Level 2
Level 3
Total
$
$
$
$
$
$
–
–
$
$
–
–
$
$
5,975
5,975
Fair Value Measurement as of December 31, 2019
Level 1
Level 2
Level 3
2,019
–
–
–
2,019
–
–
$
$
$
$
–
11,064
8,982
3,770
23,816
–
–
$
$
$
$
–
–
–
–
–
31
31
$
$
$
$
$
$
Total
5,975
5,975
2,019
11,064
8,982
3,770
25,835
31
31
The following table presents the change in fair value of the liability classified common stock warrants (in thousands):
Warrant liabilities
February 14, 2020 issuance
December 23, 2020 issuance
Total
Initial Fair
Value at
Issuance
Liability
Reduction
Due to
Exercises
(Gain) Loss
Upon Change
in Fair Value
Fair Value on
December 31,
2020
$
$
11,677
5,477
17,154
$
$
(8,265)
–
(8,265)
$
$
(3,084)
170
(2,914)
$
$
328
5,647
5,975
The Company uses the Monte Carlo valuation model to determine the fair value of the liability classified warrants issued during 2020. Input assumptions for these
freestanding instruments are as follows:
Stock price
Exercise price
Risk-free rate
Volatility
For the Year Ended
December 31, 2020
$
$
0.65 - 1.69
0.10 - 2.80
0.36 - 1.51%
93.4 - 99.7%
Remaining term (years)
5.0 - 7.0
$31,000 of contingent consideration outstanding as of December 31, 2019 was paid during the first quarter of 2020.
5. Cash Equivalents and Short-Term Investments
For the year ended December 31, 2020, the Company transferred all available-for-sale securities to cash accounts.
F-15
Cash equivalents and short-term investments consisted of the following as of December 31, 2019 (in thousands)
Cash equivalents
Money market funds
Commercial paper
U.S. government debt securities
Total cash equivalents (1)
Short-term investments
Commercial paper
Corporate debt securities
Total short-term investments
Total
Amortized Cost
Unrealized Gains
Unrealized
Losses
Market
Value
December 31, 2019
$
$
2,019
1,020
3,761
6,800
9,986
8,977
18,963
25,763
$
$
–
4
9
13
54
5
59
72
$
$
–
–
–
–
–
–
–
–
$
$
2,019
1,024
3,770
6,813
10,040
8,982
19,022
25,835
(1)
Included in cash and cash equivalents in the Company’s consolidated balance sheet as of December 31, 2019 in addition to $3.4 million of cash.
All investments of debt securities held as of December 31, 2019 had maturities of less than one year. For the year ended December 31, 2020 and 2019, the Company
recognized net realized gains on available-for-sale securities of $0.1 million and $0.5 million, respectively.
6. PROPERTY AND EQUIPMENT, NET
The following table presents the components of property and equipment, net (in thousands):
Machinery and equipment
Land and buildings
Computers and software
Leasehold improvements
Construction in progress
Furniture and equipment
Total property and equipment, gross
Accumulated depreciation
Total property and equipment, net
December 31, 2020
December 31, 2019
12,232
2,000
1,240
2,107
87
148
17,814
(7,264)
10,550
$
$
12,083
2,000
1,189
2,282
1,606
470
19,630
(4,719)
14,911
$
$
Depreciation and amortization expense for property and equipment, including assets acquired under financing leases was as follows (in thousands):
General and administrative expense
Research and development expense
Total depreciation and amortization expense
For the Year Ended
December 31,
2020
For the Year Ended
December 31,
2019
$
$
1,533
1,541
3,074
$
$
1,562
1,430
2,992
As a result of management’s restructuring efforts, management wrote down certain production assets and leasehold improvements due to asset abandonment in the
amount of $2.4 million and right of use assets due to abandonment in the amount of $0.4 million. The write-downs were recorded within the Company’s regenerative medicine
business segment and are included in restructuring and other charges in the accompanying consolidated statement of operations.
F-16
7. LEASES
The Company leases facilities and certain equipment under noncancelable leases that expire at various dates through August 2024. These leases require monthly lease
payments that may be subject to annual increases throughout the lease term. Certain of these leases may include options to extend or terminate the lease at the election of the
Company. These optional periods have not been considered in the determination of the right-of-use-assets or lease liabilities associated with these leases as the Company did
not consider it reasonably certain it would exercise the options.
Operating Leases
On December 27, 2017, the Company entered into a commercial lease agreement with Adcomp LLC, a Utah limited liability company, pursuant to which the Company
leased approximately 178,528 rentable square feet of warehouse, manufacturing, office, and lab space in Salt Lake City, Utah from the landlord. The initial term of the lease is
five years and it expires on November 30, 2022. The Company has a one-time option to renew for an additional five years. The initial base rent under this lease is $98,190 per
month ($0.55 per sq. ft.) for the first year of the initial lease term and increases 3.0% per annum thereafter. Because the rate implicit in the lease is not readily determinable, the
Company has used an incremental borrowing rate of 10% to determine the present value of the lease payments.
Effective July 15, 2018, the Company entered into a commercial lease agreement with Salt Lake City Corporation, pursuant to which the Company leased approximately
44,695 rentable square feet of office space at 123 Wright Brothers Drive in Salt Lake City, Utah. The initial term of the lease was two years and provided the option to extend
the term for an additional five years by agreement of the parties. The initial base rent under this lease was $39,108 per month for the first year of the initial lease term and
increased by 3.0% thereafter. Because the rate implicit in the lease is not readily determinable, the Company determined an incremental borrowing rate of 9% to determine the
present value of the lease payments. On January 11, 2019, the lease was amended to extend the initial lease term to September 30, 2020. The Company did not exercise the
option to extend the lease term and the lease expired September 30, 2020.
In April 2019, the Company entered into an operating lease to obtain 6,307 square feet of manufacturing, laboratory, and office space. The lease expires April 2024
and requires monthly lease payments subject to annual increases. During the third quarter of 2020, the Company initiated a business analysis to determine the long-term strategy
of the remote facility and cost to remain operational. During the fourth quarter of fiscal year 2020, it was determined that the Company would cease operations and vacate the
facility. As a result, the Company determined that the approved plan to vacate the lease represented a triggering event requiring the long-lived assets attributable to the disposal
group be assessed for impairment. Given the facts and circumstances, the Company determined that the carrying value of the related assets of the disposal group were not
recoverable. As a result, the carrying values of $0.6 million, $0.1 million, $0.1 million and $0.4 million respectively for leasehold improvements, construction in progress,
equipment, and right of use assets, were reduced to $0 as of December 31, 2020.
Financing Leases
In November 2018 and April 2019, the Company entered into financing leases primarily for laboratory equipment used in research and development activities. The
financing leases have remaining terms that range from 15 to 40 months as of December 31, 2020 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.
As of December 31 2020, the maturities of operating and finance lease liabilities were as follows (in thousands):
Year ending December 31:
2021
2022
2023
2024
Total lease payments
Less:
Imputed interest
Total
Supplemental balance sheet information related to leases was as follows (in thousands):
Finance leases
F-17
Finance lease right-of-use assets included within property and equipment, net
Current finance lease liabilities included within other current liabilities
Non-current finance lease liabilities included within other long-term liabilities
Total
Operating leases
Current operating lease liabilities included within other current liabilities
Operating lease liabilities – non current
Total
The components of lease expense was as follows (in thousands):
Operating lease costs included within operating costs and expenses
Finance lease costs:
Amortization of right of use assets
Interest on lease liabilities
Total
Supplemental cash flow information related to leases was as follows (in thousands):
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash out flows from operating leases
Operating cash out flows from finance leases
Financing cash out flows from finance leases
Lease liabilities arising from obtaining right-of-use assets:
Finance leases
Lease payments made in prior period reclassified to property and equipment
Operating leases
Remeasurement of operating lease liability due to lease modification
F-18
Operating leases
Finance leases
$
1,694
1,345
132
87
3,258
(297)
2,961
$
656
405
336
42
1,439
(172)
1,267
December 31, 2020
December 31, 2019
1,301
556
711
1,267
December 31, 2020
1,485
1,476
2,961
$
$
$
$
$
2,177
508
1,267
1,775
December 31, 2019
1,746
2,994
4,740
For the Year Ended
December 31, 2020
For the Year Ended
December 31, 2019
2,428
698
151
849
2,173
654
152
806
For the Year Ended
December 31,
2020
For the Year Ended
December 31,
2019
2,070
151
508
–
–
–
154
$
$
$
$
$
$
$
2,100
152
453
2,043
535
936
–
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
$
As of December 31, 2020, the weighted average remaining operating lease term is 2.1 years and the weighted average discount rate used to determine the operating
lease liability was 9.75%. The weighted average remaining finance lease term is 2.6 years and the weighted average discount rate used to determine the finance lease liability
was 9.78%.
8. INTANGIBLE ASSETS
Intangible assets, net, consist of the following (in thousands):
Non-compete agreement
Customer contracts and relationships
Trade names and trademarks
Backlog
Total intangible assets, gross
Accumulated amortization
Total intangible assets, net
December 31, 2020
$
$
410 $
534
101
12
1,057
(515)
542 $
December 31, 2019
410
534
101
12
1,057
(326)
731
Amortization expense for the years ended December 31, 2020 and December 31, 2019 was approximately $0.2 million for each period.
The future amortization of intangible assets is expected to be as follows (in thousands):
Year ending December 31:
2021
2022
2023
2024
2025
Thereafter
$
$
189
121
87
87
35
23
542
9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
The following table presents the major components of accounts payable and accrued expenses (in thousands):
Accounts payable
Salaries and other compensation
Legal and accounting
Accrued severance
Benefit plan accrual
Other
Total accounts payable and accrued expenses
December 31, 2020
December 31, 2019
$
$
1,193 $
1,129
241
330
659
596
4,148 $
1,689
1,462
1,404
1,053
557
930
7,095
Accrued severance as of December 31, 2020 and December 31, 2019 consists of accrued compensation owed to Dr. Denver Lough, a former officer and director, under
a settlement terms agreement dated August 21, 2019 (Note 18).
Other current liabilities are primarily comprised of the current portion of operating lease liabilities and finance lease liabilities. The short-term lease components are
disclosed in Note 7 above.
F-19
10. 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. On October 26,
2020, the Borrower was advised that the Lender approved the application, and that the Lender was submitting the application to the SBA for a final decision. The Company
classified the principal balance of the PPP loan within “Current portion of long-term notes payable” and “Long-term notes payable” on the consolidated balance sheet as of
December 31, 2020. If the Borrower’s application for forgiveness of the PPP loan is not approved or approved only in part, it will be obligated to repay the unforgiven portion
of the loan after the SBA makes its decision on the application for forgiveness. No assurance has been provided that the Company will obtain forgiveness of the Loan in whole
or in part. The SBA adopted a procedure for auditing all PPP loans over $2 million and pursuant to that procedure the Company completed the SBA’s form requesting
information surrounding the Borrower’s original application for the Loan and information on use of the Loan proceeds, which was submitted to the SBA in December 2020.
The Borrower has yet to receive any response from the SBA. If the SBA makes a determination pursuant to its audit of the Borrower that it was not eligible to obtain the Loan
or did not use the Loan for the purposes contemplated by the CARES Act, it is likely the Borrower will be required to promptly repay the Loan in full and may be subject to
additional charges or penalties.
11. SALE OF COMMON STOCK, WARRANTS AND PRE- FUNDED WARRANTS
On April 10, 2019, the Company completed an underwritten offering providing for the issuance and sale of 3,418,918 shares of the Company’s common stock, par
value $0.001 per share, at an offering price of $8.51 per share, for net proceeds of approximately $27.9 million, after deducting offering expenses payable by the Company.
On December 5, 2019, the Company entered into the Purchase Agreement with Keystone pursuant to which Keystone has agreed to purchase from the Company up to
$25.0 million of shares of its common stock, subject to certain limitations including a minimum stock price of $2.00, at the direction of the Company from time to time during
the 36-month term of the Purchase Agreement. Concurrently, the Company entered into a Registration Rights Agreement with Keystone, pursuant to which it agreed to register
the sales of its common stock pursuant to the Purchase Agreement under the Company’s existing shelf registration statement on Form S-3 or a new registration statement. On
December 19, 2019, the Company sold 54,090 shares under the Purchase Agreement at a purchase price of $2.31 per share, for total proceeds of $0.1 million. During the first
quarter of 2020, the Company effectuated four additional sales of common stock to Keystone under the Purchase Agreement for a total of 216,412 shares generating total gross
proceeds of $0.6 million. The Company agreed not to sell any additional shares under the Purchase Agreement for a period of 90 days after the closing date of the offering.
F-20
On February 14, 2020, the Company completed an underwritten offering of 10,638,298 shares of its common stock and warrants to purchase 10,638,298 shares of
common stock. Each common share and warrant were sold together for a combined public purchase price of $2.35 before underwriting discount and commission. The exercise
price of each warrant is $2.80 per share, the warrants were exercisable immediately, and they will expire February 12, 2027. On November 19, 2020, the Company reduced the
exercise price of the warrants from $2.80 per share to $0.10 per share effective November 20, 2020. As of December 31, 2020, 10,073,298 of these warrants were exercised
into shares of common stock for 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 issuance, upon change in exercise price, and again at
December 31, 2020 using the following inputs:
Stock price
Exercise price
Risk-free rate
Volatility
Remaining term (years)
February 14, 2020
November 20, 2020
December 31, 2020
$
$
$
$
1.69
2.80
1.51%
93.4%
7.0
$
$
0.92
0.10
0.53%
99.4%
6.2
0.68
0.10
0.52%
98.9%
6.1
On December 23, 2020, the Company completed a registered direct offering of 5,450,000 shares of its common stock, par value $0.001 per share, pre-funded warrants
to purchase up to 5,238,043 shares of common stock and accompanying common warrants to purchase up to 10,688,043 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 $0.7485 and for each pre-
funded warrant and accompanying warrant was $0.7475. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full in January 2021. Each warrant
is exercisable for one share of the Company’s common stock at an exercise price of $0.624 per share. The warrants are immediately exercisable and will expire five years from
the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding
common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed
9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering warrants to purchase up to 6.0% of
the aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 641,283 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 $0.9356 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 accompanying common warrants and placement agent warrants using the Monte Carlo simulation model at issuance and again at December 31, 2020 using the
following inputs:
Accompanying common warrants:
Stock price
Exercise price
Risk-free rate
Volatility
Remaining term (years)
Placement agent warrants:
Stock price
Exercise price
Risk-free rate
Volatility
Remaining term (years)
F-21
The following table summarizes warrant activity for the year ended December 31, 2020.
Transaction
February 14, 2020 common warrants
December 23, 2020 common warrants
December 23, 2020 placement agent warrants
Total
December 23, 2020
December 31, 2020
$
$
$
$
December 23, 2020
$
$
$
$
0.65
0.62
0.38%
99.7%
5.0
0.65
0.94
0.38%
99.7%
5.0
0.68
0.62
0.36%
96.2%
5.0
0.68
0.94
0.36%
96.2%
5.0
December 31, 2020
Warrants
Issued
Warrants
Exercised
Outstanding
December 31,
2020
10,638,298
10,688,043
641,283
21,967,624
10,073,298
–
–
10,073,298
565,000
10,688,043
641,283
11,894,326
For information regarding warrants issued or exercised subsequent to December 31, 2020, see Subsequent Events below.
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 Compensation Committee of the Board will administer the 2020 Plan, including determining which eligible participants will
receive awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 3,000,000 shares of common stock are issuable
pursuant to awards under the 2020 Plan. No grants of awards may be made under the 2020 Plan after the later of December 19, 2029, or the tenth anniversary of the latest
material amendment of the 2020 Plan and no grants of incentive stock options may be made after October 25, 2029. On November 19, 2020, the 2020 Stock Option and
Incentive Plan was amended to add 2,000,000 common shares to the number of shares available for awards. As of December 31, 2020, the Company had 2,092,556 shares
available for future issuances under the 2020 Plan.
2019 Plan
On October 5, 2018, the Company’s Board approved the Company’s 2019 Equity Incentive Plan (the “2019 Plan”). The 2019 Plan provides for the grant of incentive
stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights and other types of stock-based awards to the Company’s employees,
officers, directors and consultants. The Compensation Committee of the Board will administer the 2019 Plan, including determining which eligible participants will receive
awards, the number of shares of common stock subject to the awards and the terms and conditions of such awards. Up to 3,000,000 shares of common stock are issuable
pursuant to awards under the 2019 Plan. Unless earlier terminated by the Board, the 2019 Plan shall terminate at the close of business on October 5, 2028. As of December 31,
2020, the Company had 314,734 shares available for future issuances under the 2019 Plan.
2017 Plan
On December 1, 2016, the Company’s Board approved the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The purpose of the 2017 Plan is to promote the
success of the Company and to increase stockholder value by providing an additional means through the grant of awards to attract, motivate, retain and reward selected
employees, consultants and other eligible persons. The 2017 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock
units, stock appreciation rights and other types of stock-based awards to the Company’s employees, officers, directors and consultants. The Compensation Committee of the
Board will administer the 2017 Plan, including determining which eligible participants will receive awards, the number of shares of common stock subject to the awards and the
terms and conditions of such awards. Up to 7,300,000 shares of common stock are issuable pursuant to awards under the 2017 Plan. Unless earlier terminated by the Board, the
2017 Plan shall terminate at the close of business on December 1, 2026. As of December 31, 2020, the Company had 1,195,767 shares available for future issuances under the
2017 Plan.
F-22
A summary of the Company’s employee and non-employee stock option activity is presented below:
Outstanding - December 31, 2019
Granted
Exercised (1)
Forfeited
Outstanding – December 31, 2020
Options exercisable, December 31, 2020
Number of
shares
Weighted-Average
Exercise Price
4,529,988
1,896,558
(10,208)
(1,621,771)
4,794,567
3,509,574
$
$
$
$
$
$
15.26
1.23
3.08
14.35
10.03
12.60
(1) The number of exercised options includes shares withheld on behalf of employees to satisfy minimum statutory tax withholding requirements.
During the years ended December 31, 2020 and 2019, the estimated weighted-average grant-date fair value of options granted was $0.91 and $9.14, per share,
respectively. The intrinsic value of options exercised for the years ended December 31, 2020 and 2019 was $0 and $3.5 million, respectively. During the years ended December
31, 2020 and 2019, the estimated total grant-date fair value of options vested was $8.4 million and $32.0 million, respectively.
The aggregate intrinsic value of options outstanding and exercisable at December 31, 2020 was $0. The weighted average remaining contractual term of options
outstanding and exercisable at December 31, 2020 was 6.95 years.
Employee Stock Purchase Plan (ESPP)
In May 2018, the Company adopted the Employee Stock Purchase Plan (“ESPP”). The Company has initially reserved 500,000 shares of common stock for purchase
under the ESPP. The initial offering period began January 1, 2019 and ended on June 30, 2019 with the first purchase date. Subsequent offering periods will automatically
commence on each January 1 and July 1 and will have a duration of six months ending with a purchase date of 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.
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:
Option grants
Risk free annual interest rate
Expected volatility
Expected term of options (years)
Assumed dividends
ESPP
For the Year
Ended
December 31,
2020
0.2% - 1.7%
94.3% - 100.9%
4.4 - 4.6
-
For the Year
Ended
December 31
2019
1.4% - 2.7%
80.8% - 97.5%
5.0 - 7.0
-
Risk free annual interest rate
Expected volatility
Expected term of options (years)
Assumed dividends
Restricted Stock
0.2% - 1.6%
100.5% - 143.2%
0.5
-
2.1% - 2.5%
76.6% - 88.9%
0.5
-
F-23
A summary of the Company’s employee and non-employee restricted stock activity is presented below:
Unvested - December 31, 2019
Granted
Vested (1)
Forfeited
Unvested – December 31, 2020
Number of shares
1,843,001
3,676,504
(1,955,348)
(95,188)
3,468,969
(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, 2020 and 2019 was $1.18 and $4.74 per share,
respectively. The total fair value of restricted stock vested during the years ended December 31, 2020 and 2019 was approximately $9.0 million and $12.4 million, respectively.
As of December 31, 2020, there was approximately $2.6 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 2.0 years.
Stock-Based Compensation Expense
Total stock-based compensation expense related to stock options, restricted stock awards, and ESPP was as follows (in thousands):
General and administrative expense
Research and development expense
Sales and marketing expense
Total stock-based compensation expense
For the
Year Ended
December 31,
2020
For the
Year Ended
December 31,
2019
$
$
5,879
943
436
7,258
$
$
27,692
2,643
1,067
31,402
As of December 31, 2020, there was approximately $0.8 million of unrecognized compensation cost related to stock option awards, which is expected to be recognized
over a remaining weighted-average vesting period of 1.9 years.
Stock-based compensation related to the ESPP for the year ended December 31, 2020 was $64,000. A total of 97,445 shares of common stock were purchased at a
weighted-average purchase price of $0.76 for total proceeds of $0.1 million pursuant to the ESPP during the year ended December 31, 2020.
13. 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 ($19,500 for calendar year 2020). 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, 2020 and 2019, respectively.
F-24
14. 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):
Current:
Federal
State
Deferred:
Federal
State
Change in valuation allowance
Total provision (benefit) for income taxes
For the
Year Ended
December 31,
2020
For the
Year Ended
December 31,
2019
$
$
$
–
–
(593)
(79)
672
–
$
–
–
(19,057)
(8,595)
27,652
–
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):
Tax (benefit) at federal statutory rate
State income taxes, net of federal income taxes
For the Year
Ended December 31,
2020
For the Year
Ended December 31,
2019
Amount
$
(8,999)
(79)
Percent of
Pretax Loss
Amount
Percent of
Pretax Loss
$
21%
– %
(19,423)
(8,595)
21%
9%
Effect of warrant liability
Effect of other permanent items
Effect of stock compensation
Change in valuation allowance
Other
(209)
65
9,032
672
(482)
–
$
1%
– %
(21)%
(2)%
1 %
–%
$
–
418
129
27,652
(181)
–
–%
–%
–%
(30)%
%
–%
The components of deferred income tax assets (liabilities) were as follows (in thousands):
Leases
Depreciation and amortization
Compensation expense not deductible until options are exercised
All other temporary differences
Net operating loss carry forward
Less valuation allowance
Deferred tax asset (liability)
As of December 31,
2020
As of December 31,
2019
132
(784)
9,494
488
41,766
(51,096)
–
$
$
38
(956)
18,295
934
32,113
(50,424)
–
$
$
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.
F-25
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, 2020 amounts to approximately $158.6 million. Of this amount, $38.5 million will expire between 2037 and 2038 and $120.1 million will
have an indefinite life. Approximately $168.6 million for state income taxes will begin to expire starting in 2032.
The Company files income tax returns in the U.S. and various states. As of December 31, 2020, the Company had no unrecognized tax benefits, which would impact
its tax rate if recognized. As of December 31, 2020, the Company had no accrual for the potential payment of penalties. As of December 31, 2020, 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.
15. NET LOSS PER SHARE ATTRIBUTABLE TO COMMON STOCKHOLDERS
The following tables present reconciliations for the numerators and denominators of basic and diluted net loss per share for the years ended December 31, 2020 and
2019.
Numerator:
Net loss, primary
Gain from change in fair value of warrant liabilities
Net loss, diluted
Denominator:
Basic weighted average number of common shares (1)
Potentially dilutive effect of warrants
Diluted weighted average number of common shares
December 31,
2020
December 31,
2019
$
$
(42,854)
2,914
(45,768)
$
$
(92,493)
–
(92,493)
December 31,
2020
December 31,
2019
38,779,316
588,074
39,367,390
24,966,355
–
24,966,355
(1)
In December 2020, the Company sold 5,450,000 shares of common stock as well as pre-funded warrants to purchase up to 5,238,043 shares of common stock. The
shares of common stock associated with the pre-funded warrants are considered contingently issuable shares and therefore are outstanding for the purposes of
computing 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.
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:
Stock options
Unvested restricted stock grants
16. RESTRUCTURING AND OTHER CHARGES
December 31,
2020
December 31,
2019
4,794,567
3,468,969
4,529,988
1,843,001
In the second quarter of 2020, management approved several actions as part of a restructuring plan designed to improve operational efficiency and financial results.
Management approved a reduction in force, which affected 40 of the 126 employees in the regenerative medicine business segment, or approximately 31.7% of that workforce.
The Company did not make any change in the workforce of its contract services segment. Total severance expense recorded for the year ended December 31, 2020 was $ 1.0
million. All severance was paid during 2020. Included in the restructuring plan, management recorded $ 1.5 million of asset abandonments within the Company’s regenerative
medicine business segment related to the restructuring.
F-26
In the fourth quarter of 2020, management recorded $0.9 million in write-downs related to the abandonment of certain production assets and leasehold improvements
and $0.4 million in charges related to the abandonment of right of use assets. The charges were recorded within the Company’s regenerative medicine business segment and are
included in restructuring and other charges in the accompanying consolidated statement of operations.
17. COMMITMENTS AND CONTINGENCIES
Contingencies
On June 26, 2018, a class action complaint alleging violations of the Federal securities laws was filed in the United States District Court, District of Utah, by Jose
Moreno against the Company and two directors of the Company, Case No. 2:18-cv-00510-JNP (the “Moreno Complaint”). On July 6, 2018, a similar complaint was filed in the
same court against the same defendants by Yedid Lawi, Case No. 2:18-cv-00541-PMW (the “Lawi Complaint”). On November 28, 2018, the Court consolidated the Moreno
and Lawi cases under the caption In re PolarityTE, Inc. Securities Litigation with Case No. 2:18-cv-00510 (the “Consolidated Securities Litigation”). The gravamen of the
consolidated complaint in the Consolidated Securities Litigation was that defendants made statements or disseminated information to the public through reports filed with the
Securities and Exchange Commission and other channels that contained material misstatements or omissions in violation of Sections 10 and 20(a) of the Exchange Act and Rule
10b-5 adopted thereunder, specifically that the defendants misrepresented the status of one of the Company’s patent applications while touting the unique nature of the
Company’s technology and its effectiveness. The Company filed a motion to dismiss the consolidated complaint on June 3, 2019. Plaintiffs’ opposition to the Company’s
motion to dismiss was filed on August 2, 2019, and the Company filed a reply to the opposition on September 13, 2019. Following a hearing on the Company’s motion to
dismiss the Court issued an order on November 22, 2020, dismissing the complaint in the Consolidated Securities Litigation with prejudice.
In November 2018, a shareholder derivative lawsuit was filed in the United States District Court, District of Utah, with the caption Monther v. Lough, et al., case no.
2:18-cv-00791-TC, alleging violations of the Exchange Act, breach of fiduciary duty, and unjust enrichment on the part of certain officers and directors based on the facts and
circumstances recited in the Consolidated Securities Litigation. On November 26, 2018, the court issued an order staying all proceedings until after the disposition of motions to
dismiss the Consolidated Securities Litigation. After disposition of the Consolidated Securities Litigation described above the parties to the shareholder derivative lawsuit
agreed to dismiss the lawsuit without prejudice and the lawsuit was dismissed on January 29, 2021.
Other Matters
In the ordinary course of business, the Company may become involved in lawsuits, claims, investigations, proceedings, and threats of litigation relating to intellectual
property, commercial arrangements, employment, regulatory compliance, and other matters. Except as noted above, at December 31, 2020, 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 September 2, 2020, Arches Research, Inc., a subsidiary of PolarityTE, Inc. (“Arches”) entered into two agreements with Co-Diagnostics, Inc. (“Co-Diagnostics”).
The COVID-19 Laboratory Services Agreement between the parties provides that Arches will perform specimen testing services for customers referred by Co-Diagnostics to
Arches. Co-Diagnostics will arrange all logistics for delivering specimens to Arches for COVID-19 testing for those customers of Co-Diagnostics electing to use the service.
Arches bills Co-Diagnostics for the testing services and Co-Diagnostics manages all customer billing. The Rental Agreement for LGC Genomics Oktopure Extraction Machine
between Arches and Co-Diagnostics provides that Co-Diagnostics will make available to Arches the Oktopure high throughput extraction machine that Arches will use to
perform COVID-19 testing. The term of the agreement is 12 months, requires Arches to use Co-Diagnostics tests exclusively in the machine, and establishes for Arches a
minimum monthly purchase obligation, valued at approximately $1.1 million annually for Co-Diagnostics tests and related consumables used in the testing process.
F-27
18. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On August 21, 2019, the Company and Dr. Denver Lough, a principal shareholder and former officer and director, signed a settlement terms agreement that provides,
in part, that the Company pay to Dr. Lough $1,500,000 in cash on October 1, 2019 and an additional $1,500,000 in cash in equal monthly installments beginning November 1,
2019 and ending April 1, 2021. In addition, the Company agreed to award to Dr. Lough 200,000 restricted stock units that vest in 18 equal monthly installments beginning
October 1, 2019. The fair value of the restricted stock units was $0.8 million. The Company expensed the cash portion and equity portion of these awards upon Dr. Lough’s
termination. As of December 31, 2020, the Company has recorded a liability of $0.3 million related to future cash payments under the agreement.
In October 2018, the Company entered into an office lease covering approximately 7,250 square feet of rental space in the building located at 40 West 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 will occupy and pay for only 3,275 square feet of
space, and the Company is not obligated under the lease to pay for the remaining 3,975 square feet covered by the lease unless we elect to occupy that additional space. The
Company believes the terms of the lease are very favorable to us, and the Company obtained these favorable terms through the assistance of Peter A. Cohen, a director, which
he provided so that the company he owns, Peter A. Cohen, LLC (“Cohen LLC”), could sublease a portion of the office space.
In May 2020, the Company reduced the space from 6,232 to 4,554. During the fourth quarter of 2020, the Company increased the space leased from 4,554 square feet
to 5,500 square feet. The Company is using 1,099 square feet, and Cohen LLC is using approximately 4,401 square feet as of December 31, 2020. The monthly lease payment
for 5,500 square feet is $27,501. Of this amount $22,007 is allocated pro rata to Cohen, LLC based on square footage occupied. Additional lease charges for operating expenses
and taxes are allocated under the sublease based on the ratio of rent paid by the Company and Cohen LLC to total rent. Once the space is fully occupied, the Company will
reduce the overall annual lease rate for the Cohen LLC space to $58.60 per square foot. The Company recognized $0.3 million and $0.3 million of sublease income related to
this agreement for the years ended December 31, 2020 and December 31, 2019, respectively. The sublease income is included in other income, net in the accompanying
consolidated statement of operations. As of December 31, 2020, and December 31, 2019, there were no amounts due from the related party under this agreement.
19. SEGMENT REPORTING
The Company’s operations involve products and services which are managed separately. Accordingly, it operates in two segments: 1) regenerative medicine and 2)
contract services.
Certain information concerning the Company’s segments is presented in the following tables (in thousands):
Net revenues:
Reportable segments:
Regenerative medicine
Contract services
Total net revenues
Net loss:
Reportable segments:
Regenerative medicine
For the
Year Ended
December 31,
2020
For the
Year Ended
December 31,
2019
$
$
$
3,730
6,396
10,126
$
$
2,353
3,299
5,652
(42,815)
$
(91,259)
Contract services
Total net loss
Identifiable assets employed:
Reportable segments:
Regenerative medicine
Contract services
Total assets
20. SUBSEQUENT EVENTS
Pre-Funded Warrants Exercised
(39)
(42,854)
December 31, 2020
36,858
8,652
45,510
(1,234)
(92,493)
December 31, 2019
48,615
4,984
53,599
$
$
$
$
$
$
F-28
On December 23, 2020, the Company sold pre-funded warrants to purchase 5,238,043 shares of common stock at an exercise price of $0.001. As of January 7, 2021,
all pre-funded warrants had been exercised into shares of common stock for total proceeds of $5,000.
January 14, 2021 offering
On January 14, 2021, the Company completed a registered direct offering of 6,670,000 shares of its common stock, par value $0.001 per share, pre-funded warrants to
purchase up to 2,420,910 shares of Common Stock and accompanying common warrants to purchase up to 9,090,910 shares of Common Stock. Each share of common stock
and pre-funded warrant were sold together with a warrant. The combined offering price of each common share and accompanying warrant was $1.100 and for each pre-funded
warrant and accompanying warrant was $1.099. The pre-funded warrants had an exercise price of $0.001 each and were exercised in full on January 13, 2021. Each warrant is
exercisable for one share of the Company’s common stock at an exercise price of $1.20 per share. The warrants are immediately exercisable and will expire five years from the
date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the holder would own more than 4.99% of the outstanding common
stock immediately after exercise, which percentage may be changed at the holder’s election to a lower percentage at any time or to a higher percentage not to exceed 9.99%
upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for the registered direct offering warrants to purchase up to 6.0% of the
aggregate number of common stock shares and pre-funded warrants sold in the offering (or warrants to purchase up to 545,455 shares of common stock). The placement agent
warrants have substantially the same terms as the warrants, except that the placement agent warrants have an exercise price equal to 125% of the purchase price per share (or
$1.375 per share). The Company received gross proceeds of approximately $10.0 million in connection with the offering, before deducting placement agent fees and related
offering expenses.
January 22, 2021 exercise and subsequent offering
On January 22, 2021, the Company entered into a letter agreement with the holder of warrants to purchase up to 10,688,043 shares of common stock at an exercise
price of $0.624 per share that were issued to the holder in the registered direct offering that closed on December 23, 2020. Under the letter agreement the holder agreed to
exercise the 10,688,043 warrants in full and the Company agreed to issue and sell to the holder common warrants to purchase up to 8,016,033 shares of the Company’s common
stock, par value $0.001 per share, at a price of $0.125. Each warrant is exercisable for one share of Common Stock at an exercise price of $1.20 per share. The warrants are
immediately exercisable and will expire five years from the date of issuance. The holder of the warrants may not exercise any portion of the warrants to the extent that the
holder would own more than 4.99% of the outstanding common stock immediately after exercise, which percentage may be changed at the holder’s election to a lower
percentage at any time or to a higher percentage not to exceed 9.99% upon 61 days’ notice to the Company. The Company also issued to designees of the placement agent for
the registered direct offering in December 2020 warrants to purchase up to 6.0% of the aggregate number of warrants issued under the letter agreement (or warrants to purchase
up to 480,962 shares of common stock). The placement agent warrants have substantially the same terms as the warrants. In January 2021, the holder of the common warrants
exercised all 10,688,043 warrants at an exercise price of $0.624 per share resulting in gross proceeds of $6.67 million and gross proceeds of approximately $1.0 million from
the sale of the newly issued warrants, before deducting placement agent fees and related offering expenses.
“At the Market” Offering
On March 30, 2021, we entered into a sales agreement with Cantor, Fitzgerald & Co. (“Cantor”), to sell shares of our common stock having aggregate sales proceeds
of up to $50.0 million, from time to time, through an “at the market” equity offering program under which Cantor will act as sales agent.
Termination of Keystone Purchase Agreement
Pursuant to an Equity Purchase Agreement dated as of December 5, 2019 (the “Purchase Agreement”) that we entered into with Keystone Capital Partners, LLC
(“Keystone”), Keystone agreed to purchase up to $25.0 million of shares of our common stock, subject to certain limitations, at our direction from time to time during the 36-
month term of the Purchase Agreement. In anticipation of the “at the market” equity offering program described above, we provided notice to Keystone of our decision to
terminate the Purchase Agreement, which was effective on March 26, 2021.
F-29
PolarityTE, Inc.
Shares of Common Stock
(par value $0.001 per share)
Controlled Equity OfferingSM
Sales Agreement
Exhibit 1.1
Execution Version
March 30, 2021
Cantor Fitzgerald & Co.
499 Park Avenue
New York, NY 10022
Ladies and Gentlemen:
PolarityTE, Inc., a Delaware corporation (the “Company”), confirms its agreement (this “Agreement”) with Cantor Fitzgerald & Co. (the “Agent”), as follows:
1. Issuance and Sale of Shares. The Company agrees that, from time to time during the term of this Agreement, on the terms and subject to the conditions set forth
herein, it may issue and sell through the Agent, shares of common stock (the “Placement Shares”) of the Company, par value $0.001 per share (the “Common Stock”);
provided, however, that in no event shall the Company issue or sell through the Agent such number or dollar amount of Placement Shares that would (a) exceed the number or
dollar amount of shares of Common Stock registered on the effective Registration Statement (as defined below) pursuant to which the offering is being made, (b) exceed the
number of authorized but unissued shares of Common Stock (less shares of Common Stock issuable upon exercise, conversion or exchange of any outstanding securities of the
Company or otherwise reserved from the Company’s authorized capital stock), (c) exceed the number or dollar amount of shares of Common Stock permitted to be sold under
Form S-3 (including General Instruction I.B.6 thereof, if applicable) or (d) exceed the number or dollar amount of shares of Common Stock for which the Company has filed a
Prospectus Supplement (as defined below) (the lesser of (a), (b), (c) and (d), the “Maximum Amount”). Notwithstanding anything to the contrary contained herein, the parties
hereto agree that compliance with the limitations set forth in this Section 1 on the amount of Placement Shares issued and sold under this Agreement shall be the sole
responsibility of the Company and that the Agent shall have no obligation in connection with such compliance. The offer and sale of Placement Shares through the Agent will
be effected pursuant to the Registration Statement filed by the Company and which was declared effective by the Securities and Exchange Commission (the “Commission”) on
February 22, 2019, although nothing in this Agreement shall be construed as requiring the Company to use the Registration Statement to issue Common Stock.
The Company has filed, in accordance with the provisions of the Securities Act of 1933, as amended (the “Securities Act”) and the rules and regulations thereunder
(the “Securities Act Regulations”), with the Commission a registration statement on Form S-3 (File No. 333-229584), including a base prospectus, relating to certain securities,
including the Placement Shares to be issued from time to time by the Company, and which incorporates by reference documents that the Company has filed or will file in
accordance with the provisions of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), and the rules and regulations thereunder. The Company has prepared
a prospectus or a prospectus supplement to the base prospectus included as part of the registration statement, which prospectus or prospectus supplement relates to the Placement
Shares to be issued from time to time by the Company (the “Prospectus Supplement”). The Company will furnish to the Agent, for use by the Agent, copies of the prospectus
included as part of such registration statement, as supplemented by the Prospectus Supplement, relating to the Placement Shares to be issued from time to time by the Company.
The Company may file one or more additional registration statements from time to time that will contain a base prospectus and related prospectus or prospectus supplement, if
applicable (which shall be a Prospectus Supplement), with respect to the Placement Shares. Except where the context otherwise requires, such registration statement(s),
including all documents filed as part thereof or incorporated by reference therein, and including any information contained in a Prospectus (as defined below) subsequently filed
with the Commission pursuant to Rule 424(b) under the Securities Act Regulations or deemed to be a part of such registration statement pursuant to Rule 430B of the Securities
Act Regulations, is herein called the “Registration Statement.” The base prospectus or base prospectuses, including all documents incorporated therein by reference, included
in the Registration Statement, as it may be supplemented, if necessary, by the Prospectus Supplement, in the form in which such prospectus or prospectuses and/or Prospectus
Supplement have most recently been filed by the Company with the Commission pursuant to Rule 424(b) under the Securities Act Regulations, together with the then issued
Issuer Free Writing Prospectus(es) (as defined below), is herein called the “Prospectus.”
Any reference herein to the Registration Statement, any Prospectus Supplement, Prospectus or any Issuer Free Writing Prospectus shall be deemed to refer to and
include the documents, if any, incorporated by reference therein (the “Incorporated Documents”), including, unless the context otherwise requires, the documents, if any, filed
as exhibits to such Incorporated Documents. Any reference herein to the terms “amend,” “amendment” or “supplement” with respect to the Registration Statement, any
Prospectus Supplement, the Prospectus or any Issuer Free Writing Prospectus shall be deemed to refer to and include the filing of any document under the Exchange Act on or
after the most-recent effective date of the Registration Statement, or the date of the Prospectus Supplement, Prospectus or such Issuer Free Writing Prospectus, as the case may
be, and incorporated therein by reference. For purposes of this Agreement, all references to the Registration Statement, the Prospectus or to any amendment or supplement
thereto shall be deemed to include the most recent copy filed with the Commission pursuant to its Electronic Data Gathering Analysis and Retrieval system, or if applicable, the
Interactive Data Electronic Application system when used by the Commission (collectively, “EDGAR”).
-2-
2. Placements. Each time that the Company wishes to issue and sell Placement Shares hereunder (each, a “Placement”), it will notify the Agent by email notice (or
other method mutually agreed to by the parties) of the number of Placement Shares to be issued, the time period during which sales are requested to be made, any limitation on
the number of Placement Shares that may be sold in any one day and any minimum price below which sales may not be made (a “Placement Notice”), the form of which is
attached hereto as Schedule 1. The Placement Notice shall originate from any of the individuals from the Company set forth on Schedule 3 (with a copy to each of the other
individuals from the Company listed on such schedule), and shall be addressed to each of the individuals from the Agent set forth on Schedule 3, as such Schedule 3 may be
amended from time to time. The Placement Notice shall be effective unless and until (i) the Agent declines to accept the terms contained therein for any reason, in its sole
discretion, provided the Agent delivers written notice thereof to the Company within two (2) Business Days (as defined below) after receipt of such Placement Notice, (ii) the
entire amount of the Placement Shares thereunder have been sold, (iii) the Company suspends or terminates the Placement Notice or (iv) this Agreement has been terminated
under the provisions of Section 12. The amount of any discount, commission or other compensation to be paid by the Company to the Agent in connection with the sale of the
Placement Shares shall be calculated in accordance with the terms set forth in Schedule 2. It is expressly acknowledged and agreed that neither the Company nor the Agent will
have any obligation whatsoever with respect to a Placement or any Placement Shares unless and until the Company delivers a Placement Notice to the Agent and the Agent does
not decline such Placement Notice pursuant to the terms set forth above, and then only upon the terms specified therein and herein. In the event of a conflict between the terms
of this Agreement and the terms of a Placement Notice, the terms of the Placement Notice will control.
3 . Sale of Placement Shares by the Agent. Subject to the provisions of Section 5(a), the Agent, for the period specified in the Placement Notice, will use its
commercially reasonable efforts consistent with its normal trading and sales practices and applicable state and federal laws, rules and regulations and the rules of the Nasdaq
Capital Market (the “Exchange”), to sell the Placement Shares up to the amount specified in, and otherwise in accordance with the terms of, such Placement Notice. The Agent
will provide written confirmation to the Company no later than the opening of the Trading Day (as defined below) immediately following the Trading Day on which it has made
sales of Placement Shares hereunder setting forth the number of Placement Shares sold on such day, the compensation payable by the Company to the Agent pursuant to Section
2 with respect to such sales, and the Net Proceeds (as defined below) payable to the Company, with an itemization of the deductions made by the Agent (as set forth in Section
5(b)) from the gross proceeds that it receives from such sales. Subject to the terms of the Placement Notice, the Agent may sell Placement Shares by any method permitted by
law deemed to be an “at the market offering” as defined in Rule 415(a)(4) of the Securities Act Regulations, including sales made directly on or through the Exchange or any
other existing trading market for the Common Stock, in negotiated transactions at market prices prevailing at the time of sale or at prices related to such prevailing market prices
and/or any other method permitted by law. “Trading Day” means any day on which Common Stock is traded on the Exchange. While a Placement Notice is in effect, neither
the Agent nor any of its subsidiaries shall, for its own account, engage in (i) any short sale of any security of the Company, as defined in Regulation SHO under the Exchange
Act, or (ii) any market making bidding, stabilization or other trading activity with regard to the Common Stock or related derivative securities, in each case, if such activity
would be prohibited under Regulation M under the Exchange Act or other anti-manipulation rules under the Securities Act. For the avoidance of doubt, this restriction shall not
apply to transactions by or on behalf of any customer of the Agent or transactions by the Agent to facilitate any such transactions by or on behalf of any customer of the Agent.
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4. Suspension of Sales. The Company or the Agent may, upon notice to the other party in writing (including by email correspondence to each of the individuals of the
other party set forth on Schedule 3, if receipt of such correspondence is actually acknowledged by any of the individuals to whom the notice is sent, other than via auto-reply) or
by telephone (confirmed immediately by verifiable facsimile transmission or email correspondence to each of the individuals of the other party set forth on Schedule 3),
suspend any sale of Placement Shares (a “Suspension”); provided, however, that such Suspension shall not affect or impair any party’s obligations with respect to any
Placement Shares sold hereunder prior to the receipt of such notice. While a Suspension is in effect any obligation under Sections 7(l), 7(m), 7(n) and 7(o) with respect to the
delivery of certificates, opinions, or comfort letters to the Agent, shall be waived. Each of the parties agrees that no such notice under this Section 4 shall be effective against
any other party unless it is made to one of the individuals named on Schedule 3 hereto, as such Schedule may be amended from time to time.
5. Sale and Delivery to the Agent; Settlement.
(a) Sale of Placement Shares. On the basis of the representations and warranties herein contained and subject to the terms and conditions herein set forth, upon
the Agent’s acceptance of the terms of a Placement Notice, and unless the sale of the Placement Shares described therein has been declined, suspended, or otherwise terminated
in accordance with the terms of this Agreement, the Agent, for the period specified in the Placement Notice, will use its commercially reasonable efforts consistent with its
normal trading and sales practices and applicable law and regulations to sell such Placement Shares up to the amount specified, and otherwise in accordance with the terms of
such Placement Notice. The Company acknowledges and agrees that (i) there can be no assurance that the Agent will be successful in selling Placement Shares, (ii) the Agent
will incur no liability or obligation to the Company or any other person or entity if it does not sell Placement Shares for any reason other than a failure by the Agent to use its
commercially reasonable efforts consistent with its normal trading and sales practices and applicable law and regulations to sell such Placement Shares as required under this
Agreement and (iii) the Agent shall be under no obligation to purchase Placement Shares on a principal basis pursuant to this Agreement, except as otherwise agreed by the
Agent and the Company.
(b) Settlement of Placement Shares. Unless otherwise specified in the applicable Placement Notice, settlement for sales of Placement Shares will occur on the
third (3rd) Trading Day (or such earlier day as is industry practice for regular-way trading) following the date on which such sales are made (each, a “Settlement Date”). The
Agent shall notify the Company of each sale of Placement Shares no later than the opening of the Trading Day immediately following the Trading Day on which it has made
sales of Placement Shares hereunder. The amount of proceeds to be delivered to the Company on a Settlement Date against receipt of the Placement Shares sold (the “Net
Proceeds”) will be equal to the aggregate sales price received by the Agent, after deduction for (i) the Agent’s commission, discount or other compensation for such sales
payable by the Company pursuant to Section 2 hereof, and (ii) any transaction fees imposed by any Governmental Authority (as defined below) in respect of such sales.
(c) Delivery of Placement Shares. On or before each Settlement Date, the Company will, or will cause its transfer agent to, electronically transfer the
Placement Shares being sold by crediting the Agent’s or its designee’s account (provided the Agent shall have given the Company written notice of such designee at least one
Trading Day prior to the Settlement Date) at The Depository Trust Company through its Deposit and Withdrawal at Custodian System or by such other means of delivery as
may be mutually agreed upon by the parties hereto which in all cases shall be freely tradable, transferable, registered shares in good deliverable form. On each Settlement Date,
the Agent will deliver the related Net Proceeds in same day funds to an account designated by the Company on, or prior to, the Settlement Date. If the Company, or its transfer
agent (if applicable), defaults in its obligation to deliver Placement Shares on a Settlement Date, through no fault of the Agent, the Company agrees that in addition to, and in no
way limiting the rights and obligations set forth in Section 10(a) hereto, it will (i) hold the Agent harmless against any loss, claim, damage, or reasonable documented expense
(including reasonable documented legal fees and expenses), as incurred, arising out of or in connection with such default by the Company or its transfer agent (if applicable)
and (ii) pay to the Agent any commission, discount, or other compensation to which it would otherwise have been entitled absent such default.
-4-
(d) Denominations; Registration. Certificates for the Placement Shares, if any, shall be in such denominations and registered in such names as the Agent may
request in writing at least one full Business Day before the Settlement Date. The certificates for the Placement Shares, if any, will be made available by the Company for
examination and packaging by the Agent in The City of New York not later than noon (New York time) on the Business Day prior to the Settlement Date.
(e) Limitations on Offering Size. Under no circumstances shall the Company cause or request the offer or sale of any Placement Shares if, after giving effect
to the sale of such Placement Shares, the aggregate gross sales proceeds of Placement Shares sold pursuant to this Agreement would exceed the lesser of (A) together with all
sales of Placement Shares under this Agreement, the Maximum Amount, (B) the amount available for offer and sale under the currently effective Registration Statement and (C)
the amount authorized from time to time to be issued and sold under this Agreement by the Company’s board of directors, a duly authorized committee thereof or a duly
authorized executive committee, and notified to the Agent in writing. Under no circumstances shall the Company cause or request the offer or sale of any Placement Shares
pursuant to this Agreement at a price lower than the minimum price authorized from time to time by the Company’s board of directors, a duly authorized committee thereof or a
duly authorized executive committee. Further, under no circumstances shall the Company cause or permit the aggregate offering amount of Placement Shares sold pursuant to
this Agreement to exceed the Maximum Amount.
6. Representations and Warranties of the Company. The Company represents and warrants to, and agrees with the Agent that as of the date of this Agreement and as of
each Applicable Time (as defined below):
(a) Registration Statement and Prospectus. The Company and the transactions contemplated by this Agreement meet the requirements for and comply with the
applicable conditions set forth in Form S-3 (including General Instructions I.A and I.B) under the Securities Act as of the time the Registration Statement was filed and at the
time the Company’s most recent Annual Report on Form 10-K was filed with the Commission. The Registration Statement has been filed with the Commission and has been
declared effective by the Commission under the Securities Act prior to the issuance of any Placement Notices by the Company. The Prospectus Supplement will name the Agent
as the agent in the section entitled “Plan of Distribution.” The Company has not received, and has no notice of, any order of the Commission preventing or suspending the use
of the Registration Statement, or threatening or instituting proceedings for that purpose. The Registration Statement and the offer and sale of Placement Shares as contemplated
hereby meet the requirements of Rule 415 under the Securities Act and comply in all material respects with said Rule. Any statutes, regulations, contracts or other documents
that are required to be described in the Registration Statement or the Prospectus or that are required to be filed as exhibits to the Registration Statement have been so described
or filed. Copies of the Registration Statement, the Prospectus, and any such amendments or supplements and all documents incorporated by reference therein that were filed
with the Commission on or prior to the date of this Agreement have been delivered, or are available through EDGAR, to the Agent and its counsel. The Company has not
distributed and, prior to the later to occur of each Settlement Date and completion of the distribution of the Placement Shares, will not distribute any offering material in
connection with the offering or sale of the Placement Shares other than the Registration Statement and the Prospectus and any Issuer Free Writing Prospectus (as defined below)
to which the Agent has consented. The Common Stock is registered pursuant to Section 12(b) of the Exchange Act and is currently listed on the Exchange under the trading
symbol “PTE.” The Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Common Stock under the Exchange Act,
delisting the Common Stock from the Exchange, nor has the Company received any notification that the Commission or the Exchange is contemplating terminating such
registration or listing. To the Company’s knowledge, it is in compliance with all applicable listing requirements of the Exchange.
-5-
(b) No Misstatement or Omission. The Registration Statement, when it became or becomes effective, and the Prospectus, and any amendment or supplement
thereto, on the date of such Prospectus or amendment or supplement, conformed and will conform in all material respects with the requirements of the Securities Act. At each
Settlement Date, the Registration Statement and the Prospectus, as of such date, will conform in all material respects with the requirements of the Securities Act. The
Registration Statement, when it became or becomes effective, did not, and will not, contain an untrue statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements therein not misleading. The Prospectus and any amendment and supplement thereto, on the date thereof and at each
Applicable Time, did not or will not include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The documents incorporated by reference in the Prospectus or any Prospectus Supplement did not, and any further
documents filed and incorporated by reference therein will not, when filed with the Commission, contain an untrue statement of a material fact or omit to state a material fact
required to be stated in such document or necessary to make the statements in such document, in light of the circumstances under which they were made, not misleading. The
foregoing shall not apply to statements in, or omissions from, any such document made in reliance upon, and in conformity with, information furnished to the Company by the
Agent specifically for use in the preparation thereof.
(c) Market Capitalization. The Company is not a shell company (as defined in Rule 405 under the Securities Act) and has not been a shell company for at
least 12 calendar months previously and if it has been a shell company at any time previously, has filed current Form 10 information (as defined in Instruction I.B.6 of Form S-
3) with the Commission at least 12 calendar months previously reflecting its status as an entity that is not a shell company.
(d) Conformity with Securities Act and Exchange Act. The Registration Statement, the Prospectus, any Issuer Free Writing Prospectus or any amendment or
supplement thereto, and the documents incorporated by reference in the Registration Statement, the Prospectus or any amendment or supplement thereto, when such documents
were or are filed with the Commission under the Securities Act or the Exchange Act or became or become effective under the Securities Act, as the case may be, conformed or
will conform in all material respects with the requirements of the Securities Act and the Exchange Act, as applicable.
-6-
(e) Financial Information. The consolidated financial statements of the Company included or incorporated by reference in the Registration Statement and the
Prospectus, together with the related notes and schedules, present fairly, in all material respects, the consolidated financial position of the Company and the Subsidiaries (as
defined below) as of the dates indicated and the consolidated results of operations, cash flows and changes in stockholders’ equity of the Company for the periods specified and
have been prepared in compliance with the requirements of the Securities Act and Exchange Act and in conformity with GAAP (as defined below) applied on a consistent basis
during the periods involved; there are no financial statements (historical or pro forma) that are required to be included or incorporated by reference in the Registration Statement
or the Prospectus that are not included or incorporated by reference as required; the Company and the Subsidiaries (as defined below) do not have any material liabilities or
obligations, direct or contingent (including any off-balance sheet obligations), not described in the Registration Statement (excluding the exhibits thereto) and the Prospectus;
and all disclosures contained or incorporated by reference in the Registration Statement and the Prospectus regarding “non-GAAP financial measures” (as such term is defined
by the rules and regulations of the Commission) comply with Regulation G of the Exchange Act and Item 10 of Regulation S-K under the Securities Act, to the extent
applicable. The interactive data in eXtensible Business Reporting Language included or incorporated by reference in the Registration Statement and the Prospectus fairly
presents the information called for in all material respects and has been prepared in accordance with the Commission’s rules and guidelines applicable thereto.
(f) Conformity with EDGAR Filing. The Prospectus delivered to the Agent for use in connection with the sale of the Placement Shares pursuant to this
Agreement will be identical to the versions of the Prospectus created to be transmitted to the Commission for filing via EDGAR, except to the extent permitted by Regulation S-
T.
(g) Organization. The Company and each of its Subsidiaries are duly organized, validly existing as a corporation or limited liability company and in good
standing under the laws of their respective jurisdictions of organization. The Company and each of its Subsidiaries are duly licensed or qualified as a foreign corporation for
transaction of business and in good standing under the laws of each other jurisdiction in which their respective ownership or lease of property or the conduct of their respective
businesses requires such license or qualification, and have all corporate power and authority necessary to own or hold their respective properties and to conduct their respective
businesses as described in the Registration Statement and the Prospectus, except where the failure to be so qualified or in good standing or have such power or authority would
not, individually or in the aggregate, have a material adverse effect on or affecting the assets, business, operations, earnings, properties, condition (financial or otherwise),
prospects, stockholders’ equity or results of operations of the Company and the Subsidiaries taken as a whole, or prevent or materially interfere with consummation of the
transactions contemplated hereby (a “Material Adverse Effect”).
-7-
(h) Subsidiaries. The subsidiaries set forth on Schedule 4 are the Company’s only subsidiaries (any such subsidiaries that are significant subsidiaries, as such
term is defined in Rule 1-02 of Regulation S-X promulgated by the Commission, the “Subsidiaries”). Except as set forth in the Registration Statement and the Prospectus, the
Company owns, directly or indirectly, all of the equity interests of the Subsidiaries free and clear of any lien, charge, security interest, encumbrance, right of first refusal or
other restriction, and all the equity interests of the Subsidiaries are validly issued and are fully paid, nonassessable and free of preemptive and similar rights. No Subsidiary is
currently prohibited, directly or indirectly, from paying any dividends to the Company, from making any other distribution on such Subsidiary’s capital stock, from repaying to
the Company any loans or advances to such Subsidiary from the Company or from transferring any of such Subsidiary’s property or assets to the Company or any other
Subsidiary of the Company.
(i) No Violation or Default. Neither the Company nor any of its Subsidiaries is (i) in violation of its charter or by-laws or similar organizational documents;
(ii) in default, and no event has occurred that, with notice or lapse of time or both, would constitute such a default, in the due performance or observance of any term, covenant
or condition contained in any indenture, mortgage, deed of trust, loan agreement or other agreement or instrument to which the Company or any of its Subsidiaries is a party or
by which the Company or any of its Subsidiaries is bound or to which any of the property or assets of the Company or any of its Subsidiaries are subject; or (iii) in violation of
any law or statute or any judgment, order, rule or regulation of any Governmental Authority, except, in the case of each of clauses (ii) and (iii) above, for any such violation or
default that would not, individually or in the aggregate, have a Material Adverse Effect. To the Company’s knowledge, no other party under any material contract or other
agreement to which it or any of its Subsidiaries is a party is in default in any respect thereunder where such default would have a Material Adverse Effect.
(j) No Material Adverse Change. Subsequent to the respective dates as of which information is given in the Registration Statement, the Prospectus and the
Free Writing Prospectuses, if any (including any document deemed incorporated by reference therein), there has not been (i) any Material Adverse Effect or the occurrence of
any development that would reasonably be expected to have a Material Adverse Effect, (ii) any transaction which is material to the Company and the Subsidiaries taken as a
whole, (iii) any obligation or liability, direct or contingent (including any off-balance sheet obligations), incurred by the Company or any Subsidiary, which is material to the
Company and the Subsidiaries taken as a whole, (iv) any material change in the capital stock or outstanding long-term indebtedness of the Company or any of its Subsidiaries or
(v) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company or any Subsidiary, other than in each case above in the ordinary course
of business or as otherwise disclosed in the Registration Statement or Prospectus (including any document deemed incorporated by reference therein).
(k) Capitalization. The issued and outstanding shares of capital stock of the Company have been validly issued, are fully paid and nonassessable and, other
than as disclosed in the Registration Statement or the Prospectus, are not subject to any preemptive rights, rights of first refusal or similar rights. The Company has an
authorized, issued and outstanding capitalization as set forth in the Registration Statement and the Prospectus as of the dates referred to therein (other than the grant of
additional options under the Company’s existing stock option plans, or changes in the number of outstanding shares of Common Stock of the Company due to the issuance of
shares upon the exercise or conversion of securities exercisable for, or convertible into, Common Stock outstanding on the date hereof) and such authorized capital stock
conforms to the description thereof set forth in the Registration Statement and the Prospectus. The description of the securities of the Company in the Registration Statement and
the Prospectus is complete and accurate in all material respects. Except as disclosed in or contemplated by the Registration Statement or the Prospectus, as of the date referred to
therein, the Company does not have outstanding any options to purchase, or any rights or warrants to subscribe for, or any securities or obligations convertible into, or
exchangeable for, or any contracts or commitments to issue or sell, any shares of capital stock or other securities.
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(l) Authorization; Enforceability. The Company has full legal right, power and authority to enter into this Agreement and to perform the transactions
contemplated hereby. This Agreement has been duly authorized, executed and delivered by the Company and is a legal, valid and binding agreement of the Company
enforceable in accordance with its terms, except to the extent that enforceability may be limited by bankruptcy, insolvency, reorganization, moratorium or similar laws affecting
creditors’ rights generally and by general equitable principles.
(m) Authorization of Placement Shares. The Placement Shares, when issued and delivered pursuant to the terms approved by the board of directors of the
Company or a duly authorized committee thereof, or a duly authorized executive committee, against payment therefor as provided herein, will be duly and validly authorized
and issued and fully paid and nonassessable, free and clear of any pledge, lien, encumbrance, security interest or other claim, including any statutory or contractual preemptive
rights, resale rights, rights of first refusal or other similar rights, and will be registered pursuant to Section 12 of the Exchange Act. The Placement Shares, when issued, will
conform to the description thereof set forth in or incorporated into the Prospectus.
(n) No Consents Required. No consent, approval, authorization, order, registration or qualification of or with any Governmental Authority is required for the
execution, delivery and performance by the Company of this Agreement, the issuance and sale by the Company of the Placement Shares, except for such consents, approvals,
authorizations, orders and registrations or qualifications as may be required under applicable state securities laws or by the by-laws and rules of the Financial Industry
Regulatory Authority (“FINRA”) or the Exchange in connection with the sale of the Placement Shares by the Agent.
(o) No Preferential Rights. Except as set forth in the Registration Statement and the Prospectus, (i) no person, as such term is defined in Rule 1-02 of
Regulation S-X promulgated under the Securities Act (each, a “Person”), has the right, contractual or otherwise, to cause the Company to issue or sell to such Person any
Common Stock or shares of any other capital stock or other securities of the Company, (ii) no Person has any preemptive rights, resale rights, rights of first refusal, rights of co-
sale, or any other rights (whether pursuant to a “poison pill” provision or otherwise) to purchase any Common Stock or shares of any other capital stock or other securities of the
Company, (iii) no Person has the right to act as an underwriter or as a financial advisor to the Company in connection with the offer and sale of the Common Stock, and (iv) no
Person has the right, contractual or otherwise, to require the Company to register under the Securities Act any Common Stock or shares of any other capital stock or other
securities of the Company, or to include any such shares or other securities in the Registration Statement or the offering contemplated thereby, whether as a result of the filing or
effectiveness of the Registration Statement or the sale of the Placement Shares as contemplated thereby or otherwise.
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(p) Independent Public Accounting Firm. EisnerAmper LLP (the “Accountant”), whose report on the consolidated financial statements of the Company is
filed with the Commission as part of the Company’s most recent Annual Report on Form 10-K filed with the Commission and incorporated by reference into the Registration
Statement and the Prospectus, are and, during the periods covered by their report, were an independent registered public accounting firm within the meaning of the Securities
Act and the Public Company Accounting Oversight Board (United States). To the Company’s knowledge, the Accountant is not in violation of the auditor independence
requirements of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”) with respect to the Company.
(q) Enforceability of Agreements. All agreements between the Company and third parties expressly referenced in the Prospectus are legal, valid and binding
obligations of the Company enforceable in accordance with their respective terms, except to the extent that (i) enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting creditors’ rights generally and by general equitable principles and (ii) the indemnification provisions of certain agreements
may be limited by federal or state securities laws or public policy considerations in respect thereof.
(r) No Litigation. Except as set forth in the Registration Statement or the Prospectus, there are no actions, suits or proceedings by or before any Governmental
Authority pending, nor, to the Company’s knowledge, any audits or investigations by or before any Governmental Authority, to which the Company or a Subsidiary is a party or
to which any property of the Company or any of its Subsidiaries is the subject that, individually or in the aggregate, would have a Material Adverse Effect and, to the
Company’s knowledge, no such actions, suits, proceedings, audits or investigations are threatened or contemplated by any Governmental Authority or threatened by others; and
(i) there are no current or pending audits, investigations, actions, suits or proceedings by or before any Governmental Authority that are required under the Securities Act to be
described in the Prospectus that are not so described; and (ii) there are no statutes, regulations, contracts or other documents that are required under the Securities Act to be
described in the Registration Statement or the Prospectus or to be filed as exhibits to the Registration Statement that are not so described or filed as required.
(s) Consents and Permits. The Company and its Subsidiaries have made all filings, applications and submissions required by, possesses and is operating in
compliance with, all approvals, licenses, certificates, certifications, clearances, consents, grants, exemptions, marks, notifications, orders, permits and other authorizations issued
by, the appropriate federal, state or foreign Governmental Authority (including, without limitation, the United States Food and Drug Administration (the “ FDA”), the United
States Drug Enforcement Administration or any other foreign, federal, state, provincial, court or local government or regulatory authorities including self-regulatory
organizations engaged in the regulation of human cells, tissues, and cellular and tissue-based products regulated under Section 361 of the United States Public Health Service
Act (“361 HCT/Ps”)) necessary for the ownership or lease of their respective properties or to conduct its businesses as described in the Registration Statement and the
Prospectus (collectively, “Permits”), except for such Permits the failure of which to possess, obtain or make the same would not have a Material Adverse Effect; the Company
and its Subsidiaries are in compliance with the terms and conditions of all such Permits, except where the failure to be in compliance would not have a Material Adverse Effect;
all of the Permits are valid and in full force and effect, except where any invalidity, individually or in the aggregate, would not have a Material Adverse Effect; and neither the
Company nor any of its Subsidiaries has received any written notice relating to the limitation, revocation, cancellation, suspension, modification or non-renewal of any such
Permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect, or has any reason to believe that any
such license, certificate, permit or authorization will not be renewed in the ordinary course. To the extent required by applicable laws and regulations of the FDA, the Company
or the applicable Subsidiary has submitted to the FDA an Investigational New Drug Application or amendment or supplement thereto for each clinical trial it has conducted or
sponsored or is conducting or sponsoring; all such submissions were in material compliance with applicable laws and rules and regulations when submitted and no material
deficiencies have been asserted by the FDA with respect to any such submissions. The Company and each Subsidiary possess such valid and current certificates, authorizations
or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and neither the Company nor any
Subsidiary has received, or has any reason to believe that it will receive, any notice of proceedings relating to the revocation or modification of, or non-compliance with, any
such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, would have a Material Adverse Effect.
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(t) Regulatory Filings. None of the Company or any of its Subsidiaries has failed to file with the applicable Governmental Authority (including, without
limitation, the FDA, or any foreign, federal, state, provincial or local Governmental Authority performing functions similar to those performed by the FDA) any required filing,
declaration, listing, registration, report or submission, except for such failures that, individually or in the aggregate, would not have a Material Adverse Effect; except as
disclosed in the Registration Statement and the Prospectus, all such filings, declarations, listings, registrations, reports or submissions were in compliance with applicable laws
when filed and no deficiencies have been asserted by any applicable regulatory authority with respect to any such filings, declarations, listings, registrations, reports or
submissions, except for any deficiencies that, individually or in the aggregate, would not have a Material Adverse Effect. The Company has operated and currently is, in all
material respects, in compliance with the United States Federal Food, Drug, and Cosmetic Act and the Public Health Service Act, and all applicable rules, guidance regarding
the exercise of enforcement discretion related to 361 HCT/Ps, and regulations of the FDA and other federal, state, local and foreign Governmental Authority exercising
comparable authority, except where the failure to be in compliance would not have a Material Adverse Effect. The Company has no knowledge of any studies, tests or trials not
described in the Registration Statement and Prospectus the results of which reasonably call into question in any material respect the results of the studies, tests and trials
described in the Registration Statement and the Prospectus.
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(u) Intellectual Property. Except as disclosed in the Registration Statement and the Prospectus, the Company and its Subsidiaries own, possess, license or have
other rights to use all foreign and domestic patents, patent applications, trade and service marks, trade and service mark registrations, trade names, copyrights, licenses,
inventions, trade secrets, technology, Internet domain names, know-how and other intellectual property (collectively, the “ Intellectual Property”), necessary for the conduct of
their respective businesses as now conducted except to the extent that the failure to own, possess, license or otherwise hold adequate rights to use such Intellectual Property
would not, individually or in the aggregate, have a Material Adverse Effect. Except as disclosed in the Registration Statement and the Prospectus, (i) there are no rights of third
parties to any such Intellectual Property owned by the Company and its Subsidiaries; (ii) to the Company’s knowledge, there is no infringement by third parties of any such
Intellectual Property; (iii) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the Company’s and its
Subsidiaries’ rights in or to any such Intellectual Property, and the Company is unaware of any facts which could form a reasonable basis for any such action, suit, proceeding or
claim; (iv) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others challenging the validity or scope of any such Intellectual
Property; (v) there is no pending or, to the Company’s knowledge, threatened action, suit, proceeding or claim by others that the Company and its Subsidiaries infringe or
otherwise violate any patent, trademark, copyright, trade secret or other proprietary rights of others; (vi) to the Company’s knowledge, there is no third-party U.S. patent or
published U.S. patent application which contains claims for which an Interference Proceeding (as defined in 35 U.S.C. § 135) has been commenced against any patent or patent
application described in the Prospectus as being owned by or licensed to the Company; and (vii) the Company and its Subsidiaries have complied with the terms of each
agreement pursuant to which Intellectual Property has been licensed to the Company or such Subsidiary, and all such agreements are in full force and effect, except, in the case
of any of clauses (i)-(vii) above, for any such infringement by third parties or any such pending or threatened suit, action, proceeding or claim as would not, individually or in
the aggregate, have a Material Adverse Effect.
(v) Clinical Studies. The preclinical studies and tests and clinical trials described in the Registration Statement and the Prospectus were, and, if still pending,
are being conducted in all material respects in accordance with the experimental protocols, procedures and controls pursuant to, where applicable, accepted professional and
scientific standards for products or product candidates comparable to those being developed by the Company; the descriptions of such studies, tests and trials, and the results
thereof, contained in the Registration Statement and the Prospectus are accurate and complete in all material respects; the Company is not aware of any tests, studies or trials not
described in the Registration Statement and the Prospectus, the results of which reasonably call into question the results of the tests, studies and trials described in the
Registration Statement and the Prospectus; and the Company has not received any written notice or correspondence from the FDA or any foreign, state or local Governmental
Authority exercising comparable authority or any institutional review board or comparable authority requiring the termination, suspension, clinical hold or material
modification of any tests, studies or trials.
(w) No Material Defaults. Neither the Company nor any of the Subsidiaries has defaulted on any installment on indebtedness for borrowed money or on any
rental on one or more long-term leases, which defaults, individually or in the aggregate, would have a Material Adverse Effect. The Company has not filed a report pursuant to
Section 13(a) or 15(d) of the Exchange Act since the filing of its last Annual Report on Form 10-K, indicating that it (i) has failed to pay any dividend or sinking fund
installment on preferred stock or (ii) has defaulted on any installment on indebtedness for borrowed money or on any rental on one or more long-term leases, which defaults,
individually or in the aggregate, would have a Material Adverse Effect.
(x) Certain Market Activities. Neither the Company, nor any of its subsidiaries, has taken, directly or indirectly, any action designed to, or that has constituted
or might reasonably be expected to cause or result in, under the Exchange Act or otherwise, the stabilization or manipulation of the price of any security of the Company to
facilitate the sale or resale of the Placement Shares.
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(y) Broker/Dealer Relationships. Neither the Company nor any of the Subsidiaries (i) is required to register as a “broker” or “dealer” in accordance with the
provisions of the Exchange Act or (ii) directly or indirectly through one or more intermediaries, controls or is a “person associated with a member” or “associated person of a
member” (within the meaning set forth in the FINRA Manual).
offering and sale of the Placement Shares.
(z) No Reliance. The Company has not relied upon the Agent or legal counsel for the Agent for any legal, tax or accounting advice in connection with the
(aa) Taxes. The Company and each of its Subsidiaries have filed all federal, state, local and foreign tax returns which have been required to be filed and paid
all taxes shown thereon through the date hereof, to the extent that such taxes have become due and are not being contested in good faith, except where the failure to so file or
pay would not have a Material Adverse Effect. No tax deficiency has been determined adversely to the Company or any of its Subsidiaries which has had, or would have,
individually or in the aggregate, a Material Adverse Effect. The Company has no knowledge of any federal, state or other governmental tax deficiency, penalty or assessment
which has been or might be asserted or threatened against it which would have a Material Adverse Effect.
(bb) Title to Real and Personal Property. The Company and its Subsidiaries have good and marketable title in fee simple to all items of real property owned
by them, good and valid title to all personal property described in the Registration Statement or Prospectus as being owned by them that are material to the businesses of the
Company or such Subsidiary, in each case free and clear of all liens, encumbrances and claims, except those matters that (i) do not materially interfere with the use made and
proposed to be made of such property by the Company and any of its Subsidiaries or (ii) would not, individually or in the aggregate, have a Material Adverse Effect. Any real or
personal property described in the Registration Statement or the Prospectus as being leased by the Company and any of its Subsidiaries is held by them under valid, existing and
enforceable leases, except those that (A) do not materially interfere with the use made or proposed to be made of such property by the Company or any of its Subsidiaries or (B)
would not, individually or in the aggregate, have a Material Adverse Effect. Each of the properties of the Company and its Subsidiaries complies with all applicable codes, laws
and regulations (including, without limitation, building and zoning codes, laws and regulations and laws relating to access to such properties), except for such failures to comply
that would not, individually or in the aggregate, reasonably be expected to interfere in any material respect with the use made and proposed to be made of such property by the
Company and its Subsidiaries or otherwise have a Material Adverse Effect. None of the Company or its subsidiaries has received from any Governmental Authority any notice
of any condemnation of, or zoning change affecting, the properties of the Company and its Subsidiaries, and the Company knows of no such condemnation or zoning change
which is threatened, except for such that would not reasonably be expected to interfere in any material respect with the use made and proposed to be made of such property by
the Company and its Subsidiaries or otherwise have a Material Adverse Effect, individually or in the aggregate.
-13-
(cc) Environmental Laws. The Company and its Subsidiaries (i) are in compliance with any and all applicable federal, state, local and foreign laws, rules,
regulations, decisions and orders relating to the protection of human health and safety, the environment or hazardous or toxic substances or wastes, pollutants or contaminants
(collectively, “Environmental Laws”); (ii) have received and are in compliance with all permits, licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses as described in the Registration Statement and the Prospectus; and (iii) have not received notice of any actual or potential liability
for the investigation or remediation of any disposal or release of hazardous or toxic substances or wastes, pollutants or contaminants, except, in the case of any of clauses (i), (ii)
or (iii) above, for any such failure to comply or failure to receive required permits, licenses, other approvals or liability as would not, individually or in the aggregate, have a
Material Adverse Effect.
(dd) Periodic Review of Costs of Environmental Compliance. In the ordinary course of its business, the Company conducts a periodic review of the effect of
Environmental Laws on the business, operations and properties of the Company and its subsidiaries, in the course of which it identifies and evaluates associated costs and
liabilities (including, without limitation, any capital or operating expenditures required for clean-up, closure of properties or compliance with Environmental Laws or any
permit, license or approval, any related constraints on operating activities and any potential liabilities to third parties). No facts or circumstances have come to the Company’s
attention in connection with any such reviews that could result in costs or liabilities that would, individually or in the aggregate, have a Material Adverse Effect.
(ee) Disclosure Controls. The Company and each of its Subsidiaries maintain systems of internal accounting controls sufficient to provide reasonable
assurance that (i) transactions are executed in accordance with management’s general or specific authorizations; (ii) transactions are recorded as necessary to permit preparation
of financial statements in conformity with generally accepted accounting principles and to maintain asset accountability; (iii) access to assets is permitted only in accordance
with management’s general or specific authorization; and (iv) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate
action is taken with respect to any differences. The Company’s internal control over financial reporting is effective and the Company is not aware of any material weaknesses in
its internal control over financial reporting (in each case, other than as set forth in the Registration Statement or Prospectus). Since the date of the latest audited financial
statements of the Company included in the Prospectus, there has been no change in the Company’s internal control over financial reporting that has materially affected, or is
reasonably likely to materially affect, the Company’s internal control over financial reporting (other than as set forth in the Registration Statement or Prospectus). The Company
has established disclosure controls and procedures (as defined in Exchange Act Rules 13a-15 and 15d-15) for the Company and designed such disclosure controls and
procedures to ensure that material information relating to the Company and each of its Subsidiaries is made known to the certifying officers by others within those entities,
particularly during the period in which the Company’s Annual Report on Form 10-K or Quarterly Report on Form 10-Q, as the case may be, is being prepared. The Company’s
certifying officers have evaluated the effectiveness of the Company’s disclosure controls and procedures as of the last day of the period covered by the Form 10-K for the fiscal
year most recently ended (such date, the “Evaluation Date”). The Company presented in its Form 10-K for the fiscal year most recently ended the conclusions of the certifying
officers about the effectiveness of the disclosure controls and procedures based on their evaluations as of the Evaluation Date and the disclosure controls and procedures are
effective as of the Evaluation Date. Since the Evaluation Date, there have been no significant changes in the Company’s internal controls (as such term is defined in Item 307(b)
of Regulation S-K under the Securities Act) or, to the Company’s knowledge, in other factors that could significantly affect the Company’s internal controls.
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(ff) Sarbanes-Oxley. There is and has been no failure on the part of the Company or any of the Company’s directors or officers, in their capacities as such, to
comply in all material respects with any applicable provisions of the Sarbanes-Oxley Act and the rules and regulations promulgated thereunder. Each of the principal executive
officer and the principal financial officer of the Company (or each former principal executive officer of the Company and each former principal financial officer of the
Company as applicable) has made all certifications required by Sections 302 and 906 of the Sarbanes-Oxley Act with respect to all reports, schedules, forms, statements and
other documents required to be filed by it or furnished by it to the Commission. For purposes of the preceding sentence, “principal executive officer” and “principal financial
officer” shall have the meanings given to such terms in the Sarbanes-Oxley Act.
payments in connection with the transactions herein contemplated, except as may otherwise exist with respect to the Agent pursuant to this Agreement.
(gg) Finder’s Fees. Neither the Company nor any of the Subsidiaries has incurred any liability for any finder’s fees, brokerage commissions or similar
Company, is threatened which would have a Material Adverse Effect.
(hh) Labor Disputes. No labor disturbance by or dispute with employees of the Company or any of its Subsidiaries exists or, to the knowledge of the
(ii) Investment Company Act. Neither the Company nor any of the Subsidiaries is or, after giving effect to the offering and sale of the Placement Shares, will
be required to register as an “investment company” or an entity “controlled” by an “investment company,” as such terms are defined in the Investment Company Act of 1940, as
amended (the “Investment Company Act”).
(jj) Operations. The operations of the Company and its Subsidiaries are and have been conducted at all times in compliance with applicable financial record
keeping and reporting requirements of the Currency and Foreign Transactions Reporting Act of 1970, as amended, the money laundering statutes of all jurisdictions to which
the Company or its Subsidiaries are subject, the rules and regulations thereunder and any related or similar rules, regulations or guidelines, issued, administered or enforced by
any Governmental Authority (collectively, the “ Money Laundering Laws”); and no action, suit or proceeding by or before any Governmental Authority involving the
Company or any of its Subsidiaries with respect to the Money Laundering Laws is pending or, to the knowledge of the Company, threatened.
(kk) Off-Balance Sheet Arrangements. There are no transactions, arrangements and other relationships between and/or among the Company, and/or any of its
affiliates and any unconsolidated entity, including, but not limited to, any structural finance, special purpose or limited purpose entity (each, an “Off-Balance Sheet
Transaction”) that would affect materially the Company’s liquidity or the availability of or requirements for its capital resources, including those Off-Balance Sheet
Transactions described in the Commission’s Statement about Management’s Discussion and Analysis of Financial Conditions and Results of Operations (Release Nos. 33-8056;
34-45321; FR-61), required to be described in the Prospectus which have not been described as required.
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(ll) ERISA. To the knowledge of the Company, each material employee benefit plan, within the meaning of Section 3(3) of the Employee Retirement Income
Security Act of 1974, as amended (“ERISA”), that is maintained, administered or contributed to by the Company or any of its affiliates for employees or former employees of
the Company and any of its Subsidiaries has been maintained in material compliance with its terms and the requirements of any applicable statutes, orders, rules and
regulations, including but not limited to ERISA and the Internal Revenue Code of 1986, as amended (the “ Code”); no prohibited transaction, within the meaning of Section 406
of ERISA or Section 4975 of the Code, has occurred which would result in a material liability to the Company with respect to any such plan excluding transactions effected
pursuant to a statutory or administrative exemption; and for each such plan that is subject to the funding rules of Section 412 of the Code or Section 302 of ERISA, no
“accumulated funding deficiency” as defined in Section 412 of the Code has been incurred, whether or not waived, and the fair market value of the assets of each such plan
(excluding for these purposes accrued but unpaid contributions) exceeds the present value of all benefits accrued under such plan determined using reasonable actuarial
assumptions.
transaction.
(mm) Underwriter Agreements. The Company is not a party to any agreement with an agent or underwriter for any other “at the market” or continuous equity
(nn) Forward-Looking Statements. Each financial or operational projection or other “forward-looking statement” (as defined by Section 27A of the Securities
Act or Section 21E of the Exchange Act) contained in the Registration Statement or the Prospectus (i) was so included by the Company in good faith and with reasonable basis
after due consideration by the Company of the underlying assumptions, estimates and other applicable facts and circumstances and (ii) is accompanied by meaningful
cautionary statements identifying those factors that could cause actual results to differ materially from those in such forward-looking statement. No such statement was made
with the knowledge of an executive officer or director of the Company that is was false or misleading.
(oo) Agent Purchases. The Company acknowledges and agrees that Agent has informed the Company that the Agent may, to the extent permitted under the
Securities Act and the Exchange Act, purchase and sell Common Stock for its own account while this Agreement is in effect, provided, that (i) no such purchase or sales shall
take place while a Placement Notice is in effect (except to the extent the Agent may engage in sales of Placement Shares purchased or deemed purchased from the Company as
a “riskless principal” or in a similar capacity) and (ii) the Company shall not be deemed to have authorized or consented to any such purchases or sales by the Agent.
(pp) Margin Rules. Neither the issuance, sale and delivery of the Placement Shares nor the application of the proceeds thereof by the Company as described in
the Registration Statement and the Prospectus will violate Regulation T, U or X of the Board of Governors of the Federal Reserve System or any other regulation of such Board
of Governors.
(qq) Insurance. The Company and each of its Subsidiaries carry, or are covered by, insurance in such amounts and covering such risks as the Company and
each of its Subsidiaries reasonably believe are adequate for the conduct of their properties and as is customary for companies engaged in similar businesses in similar industries.
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(rr) Compliance with Anti-Corruption Laws. (i) None of the Company or its subsidiaries or affiliates, or any director, officer, or employee thereof, or, to the
Company’s knowledge, any agent or representative of the Company or of any of its subsidiaries or affiliates, has taken or will take any action in furtherance of an offer,
payment, promise to pay, or authorization or approval of the payment, giving or receipt of money, property, gifts or anything else of value, directly or indirectly, to any
government official (including any officer or employee of a government or government-owned or controlled entity or of a public international organization, or any person
acting in an official capacity for or on behalf of any of the foregoing, or any political party or party official or candidate for political office) in order to influence official action,
or to any person in violation of any applicable anti-corruption laws; (ii) the Company and its subsidiaries and affiliates have conducted their businesses in compliance with
applicable anti-corruption laws and have instituted and maintained and will continue to maintain policies and procedures reasonably designed to promote and achieve
compliance with such laws and with the representations and warranties contained herein; and (iii) neither the Company nor its subsidiaries will use, directly or indirectly, the
proceeds of the offering in furtherance of an offer, payment, promise to pay, or authorization of the payment or giving of money, or anything else of value, to any person in
violation of any applicable anti-corruption laws.
(ss) Compliance with Anti-Money Laundering Laws. The operations of the Company and its subsidiaries are and have been conducted at all times in material
compliance with all applicable financial recordkeeping and reporting requirements, including those of the Bank Secrecy Act, as amended by Title III of the Uniting and
Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (USA PATRIOT Act), and the applicable anti-money
laundering statutes of jurisdictions where the Company and its subsidiaries conduct business, the rules and regulations thereunder and any related or similar rules, regulations or
guidelines, issued, administered or enforced by any governmental agency (collectively, the “Anti-Money Laundering Laws”), and no action, suit or proceeding by or before
any court or governmental agency, authority or body or any arbitrator involving the Company or any of its subsidiaries with respect to the Anti-Money Laundering Laws is
pending or, to the best knowledge of the Company, threatened.
in Rules 164 and 433 under the Securities Act in connection with the offering of the Placement Shares.
(tt) Status Under the Securities Act. The Company was not and is not an ineligible issuer as defined in Rule 405 under the Securities Act at the times specified
(uu) No Misstatement or Omission in an Issuer Free Writing Prospectus. Each Issuer Free Writing Prospectus, as of its issue date and as of each Applicable
Time, did not, does not and will not include any information that conflicted, conflicts or will conflict with the information contained in the Registration Statement or the
Prospectus, including any incorporated document deemed to be a part thereof that has not been superseded or modified. The foregoing sentence does not apply to statements in
or omissions from any Issuer Free Writing Prospectus based upon and in conformity with written information furnished to the Company by the Agent specifically for use
therein.
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(vv) No Conflicts. Neither the execution of this Agreement, nor the issuance, offering or sale of the Placement Shares, nor the consummation of any of the
transactions contemplated herein and therein, nor the compliance by the Company with the terms and provisions hereof and thereof will conflict with, or will result in a breach
of, any of the terms and provisions of, or has constituted or will constitute a default under, or has resulted in or will result in the creation or imposition of any lien, charge or
encumbrance upon any property or assets of the Company pursuant to the terms of any contract or other agreement to which the Company may be bound or to which any of the
property or assets of the Company is subject, except (i) such conflicts, breaches or defaults as may have been waived and (ii) such conflicts, breaches and defaults that would
not have a Material Adverse Effect; nor will such action result (x) in any violation of the provisions of the organizational or governing documents of the Company, or (y) in any
violation of the provisions of any statute or any order, rule or regulation applicable to the Company or of any Governmental Authority having jurisdiction over the Company.
affiliate or representative of the Company or any of its subsidiaries, is an individual or entity (“Person”) that is, or is owned or controlled by one or more Persons that are:
(ww) Sanctions. (i) None of the Company, any of its subsidiaries, or any director, officer, or employee thereof, or, to the Company’s knowledge, any agent,
(A) the subject of any sanctions administered or enforced by the U.S. Department of Treasury’s Office of Foreign Assets Control (“OFAC”), the
United Nations Security Council (“UNSC”), the European Union (“EU”), Her Majesty’s Treasury (“HMT”), or other relevant sanctions authority (collectively,
“Sanctions”), or
(B) located, organized or resident in a country or territory that is the subject of Sanctions (including, without limitation, Crimea, Cuba, Iran, North
Korea, Sudan and Syria).
subsidiary, joint venture partner or other Person:
(ii) The Company will not, directly or indirectly, use the proceeds of the offering, or lend, contribute or otherwise make available such proceeds to any
(A) to fund or facilitate any activities or business of or with any Person or in any country or territory that, at the time of such funding or facilitation, is
the subject of Sanctions; or
(B) in any other manner that will result in a violation of Sanctions by any Person (including any Person participating in the offering, whether as
underwriter, advisor, investor or otherwise).
transactions with any Person, or in any country or territory, that at the time of the dealing or transaction is or was the subject of Sanctions.
(iii) The Company and its subsidiaries have not knowingly engaged in, are not now knowingly engaged in, and will not engage in, any dealings or
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(xx) Compliance with Laws. Each of the Company and its Subsidiaries: (A) is and at all times has been in compliance with all statutes, rules, or regulations
applicable to the ownership, testing, development, manufacture, packaging, processing, use, distribution, marketing, labeling, promotion, sale, offer for sale, storage, import,
export or disposal of any product manufactured or distributed by the Company or its Subsidiaries related to 361 HCT/Ps (“Applicable Laws”), except as would not,
individually or in the aggregate, have a Material Adverse Effect; (B) except as disclosed in the Registration Statement or the Prospectus, has not received any FDA Form 483,
notice of adverse finding, warning letter, untitled letter or other correspondence or notice from the FDA or any other Governmental Authority alleging or asserting
noncompliance with any Applicable Laws or any licenses, certificates, approvals, clearances, authorizations, permits and supplements or amendments thereto required by any
such Applicable Laws (“Authorizations”); (C) possesses all material Authorizations and such Authorizations are valid and in full force and effect and are not in material
violation of any term of any such Authorizations; (D) except as disclosed in the Registration Statement or the Prospectus, has not received notice of any claim, action, suit,
proceeding, hearing, enforcement, investigation, arbitration or other action from any Governmental Authority or third party alleging that any product operation or activity is in
violation of any Applicable Laws or Authorizations and has no knowledge that any such Governmental Authority or third party is considering any such claim, litigation,
arbitration, action, suit, investigation or proceeding; (E) has not received notice that any Governmental Authority has taken, is taking or intends to take action to limit, suspend,
modify or revoke any Authorizations or exceptions from such Authorizations that may be in effect with respect to stated policies of enforcement discretion for 361 HCT/Ps, and
has no knowledge that any such Governmental Authority is considering such action; (F) has filed, obtained, maintained or submitted all material reports, documents, forms,
notices, applications, records, claims, submissions and supplements or amendments as required by any Applicable Laws or Authorizations and that all such reports, documents,
forms, notices, applications, records, claims, submissions and supplements or amendments were complete and correct on the date filed (or were corrected or supplemented by a
subsequent submission); and (G) has not, either voluntarily or involuntarily, initiated, conducted, or issued or caused to be initiated, conducted or issued, any recall, market
withdrawal or replacement, safety alert, post sale warning, “dear healthcare provider” letter, or other notice or action relating to the alleged lack of safety or efficacy of any
product or any alleged product defect or violation and, to the Company’s knowledge, no third party has initiated, conducted or intends to initiate any such notice or action.
(yy) Statistical and Market-Related Data. All statistical, demographic and market-related data included in the Registration Statement or the Prospectus are
based on or derived from sources that the Company believes to be reliable and accurate or represent the Company’s good faith estimates that are made on the basis of data
derived from such sources.
(zz) Stock Exchange Listing. The Placement Shares are registered pursuant to Section 12(b) or 12(g) of the Exchange Act and are listed on the Exchange, and
the Company has taken no action designed to, or likely to have the effect of, terminating the registration of the Placement Shares under the Exchange Act or delisting the
Placement Shares from the Exchange, nor has the Company received any notification that the Commission or the Exchange is contemplating terminating such registration or
listing. To the Company’s knowledge, it is in compliance with all applicable listing requirements for the listing of the Placement Shares on the Exchange.
other person required to be described in the Registration Statement or the Prospectus that have not been described as required thereunder.
(aaa) Related-Party Transactions. There are no business relationships or related-party transactions involving the Company or any of its subsidiaries or any
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(bbb) FINRA Matters. All of the information provided to the Agent or to counsel for the Agent by the Company or its officers and directors, and to the
Company’s knowledge, its counsel and the holders of any securities (debt or equity) or options to acquire any securities of the Company in connection with this Agreement is
true, complete, correct and compliant with FINRA’s rules and any letters, filings or other supplemental information provided to FINRA by the Company and its officers and
directors and, to the Company’s knowledge, its counsel and the holders of any securities (debt or equity) or options to acquire any securities of the Company in connection with
this Agreement pursuant to FINRA’s rules is true, complete and correct.
(ccc) No Rights to Purchase Preferred Stock. The issuance and sale of the Placement Shares as contemplated hereby will not cause any holder of any shares of
capital stock, securities convertible into or exchangeable or exercisable for capital stock or options, warrants or other rights to purchase capital stock or any other securities of
the Company to have any right to acquire any shares of preferred stock of the Company.
(ddd) No Contract Terminations. Except as set forth in the Registration Statement and the Prospectus, neither the Company nor any of its subsidiaries has
sent or received any communication regarding termination of, or intent not to renew, any of the contracts or agreements referred to or described in the Registration Statement or
the Prospectus (other than the Company’s employment agreements), and no such termination or non-renewal has been threatened by the Company or any of its subsidiaries or,
to the Company’s knowledge, any other party to any such contract or agreement, which threat of termination or non-renewal has not been rescinded as of the date hereof.
(eee) Dividend Restrictions. No subsidiary of the Company is prohibited or restricted, directly or indirectly, from paying dividends to the Company, or from
making any other distribution with respect to such subsidiary’s equity securities or from repaying to the Company or any other subsidiary of the Company any amounts that
may from time to time become due under any loans or advances to such subsidiary from the Company or from transferring any property or assets to the Company or to any
other subsidiary.
(fff) IT Systems and Data. (i)(x) There has been no security breach or other compromise of or relating to any of the Company’s or any of its subsidiaries’
information technology and computer systems, networks, hardware, software, data (including the data of their respective customers, employees, suppliers, vendors and any third
party data maintained by or on behalf of them), equipment or technology (collectively, “IT Systems and Data”) that would, individually or in the aggregate, have a Material
Adverse Effect and (y) neither the Company nor any of its subsidiaries has been notified of, and has no knowledge of any event or condition that would reasonably be expected
to result in, any security breach or other compromise to its IT Systems and Data; (ii) the Company and each of its subsidiaries is presently in compliance with all applicable
laws or statutes and all judgments, orders, rules and regulations of any court or arbitrator or governmental or regulatory authority, internal policies and contractual obligations
relating to the privacy and security of IT Systems and Data and to the protection of such IT Systems and Data from unauthorized use, access, misappropriation or modification,
except as would not, in the case of this clause (ii), individually or in the aggregate, be reasonably expected to have a Material Adverse Effect; and (iii) the Company and its
subsidiaries have implemented backup and disaster recovery technology consistent with industry standards and practices.
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Any certificate signed by an officer of the Company and delivered to the Agent or to counsel for the Agent pursuant to or in connection with this Agreement shall be
deemed to be a representation and warranty by the Company, as applicable, to the Agent as to the matters set forth therein.
The Company has a reasonable basis for making each of the representations set forth in this Section 6. The Company acknowledges that the Agent and, for purposes of
the opinions to be delivered pursuant to Section 7 hereof, counsel to the Company and counsel to the Agent, will rely upon the accuracy and truthfulness of the foregoing
representations and hereby consents to such reliance.
7. Covenants of the Company. The Company covenants and agrees with the Agent that:
(a) Registration Statement Amendments. After the date of this Agreement and during any period in which a Prospectus relating to any Placement Shares is
required to be delivered by the Agent under the Securities Act (including in circumstances where such requirement may be satisfied pursuant to Rule 172 under the Securities
Act or similar rule), (i) the Company will notify the Agent promptly of the time when any subsequent amendment to the Registration Statement, other than documents
incorporated by reference, has been filed with the Commission and/or has become effective or any subsequent supplement to the Prospectus has been filed and of any request
by the Commission for any amendment or supplement to the Registration Statement or Prospectus or for additional information, (ii) the Company will prepare and file with the
Commission, promptly upon the Agent’s request, any amendments or supplements to the Registration Statement or Prospectus that, in the Agent’s reasonable opinion, may be
necessary or advisable in connection with the distribution of the Placement Shares by the Agent ( provided, however, that the failure of the Agent to make such request shall not
relieve the Company of any obligation or liability hereunder, or affect the Agent’s right to rely on the representations and warranties made by the Company in this Agreement
and provided, further, that the only remedy the Agent shall have with respect to the failure to make such filing shall be to cease making sales under this Agreement until such
amendment or supplement is filed); (iii) the Company will not file any amendment or supplement to the Registration Statement or Prospectus relating to the Placement Shares
or a security convertible into the Placement Shares unless a copy thereof has been submitted to the Agent within a reasonable period of time before the filing and the Agent has
not reasonably objected thereto in writing within two (2) Business Days (provided, however, that the failure of the Agent to make such objection shall not relieve the Company
of any obligation or liability hereunder, or affect the Agent’s right to rely on the representations and warranties made by the Company in this Agreement, and the Company has
no obligation to provide the Agent any advance copy of such filing or to provide the Agent an opportunity to object to such filing if such filing does not name the Agent and
does not reference the transactions contemplated hereby; provided, further, that the only remedy the Agent shall have with respect to the failure by the Company to obtain such
consent shall be to cease making sales under this Agreement) and the Company will furnish to the Agent at the time of filing thereof a copy of any document that upon filing is
deemed to be incorporated by reference into the Registration Statement or Prospectus, except for those documents available via EDGAR; and (iv) the Company will cause each
amendment or supplement to the Prospectus to be filed with the Commission as required pursuant to the applicable paragraph of Rule 424(b) of the Securities Act or, in the case
of any document to be incorporated therein by reference, to be filed with the Commission as required pursuant to the Exchange Act, within the time period prescribed (the
determination to file or not file any amendment or supplement with the Commission under this Section 7(a), based on the Company’s reasonable opinion or reasonable
objections, shall be made exclusively by the Company).
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(b) Notice of Commission Stop Orders. The Company will advise the Agent, promptly after it receives notice or obtains knowledge thereof, of the issuance or
threatened issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement, of the suspension of the qualification of the Placement
Shares for offering or sale in any jurisdiction, or of the initiation or threatening of any proceeding for any such purpose; and it will promptly use its commercially reasonable
efforts to prevent the issuance of any stop order or to obtain its withdrawal if such a stop order should be issued. The Company will advise the Agent promptly after it receives
any request by the Commission for any amendments to the Registration Statement or any amendment or supplements to the Prospectus or any Issuer Free Writing Prospectus or
for additional information related to the offering of the Placement Shares or for additional information related to the Registration Statement, the Prospectus or any Issuer Free
Writing Prospectus; provided, however, that the Company may delay any such amendment or supplement if, in the reasonable judgment of the Company, it is in the best
interests of the Company to do so.
(c) Delivery of Prospectus; Subsequent Changes. During any period in which a Prospectus relating to the Placement Shares is required to be delivered by the
Agent under the Securities Act with respect to the offer and sale of the Placement Shares (including in circumstances where such requirement may be satisfied pursuant to Rule
172 under the Securities Act or similar rule), the Company will comply in all material respects with all requirements imposed upon it by the Securities Act, as from time to time
in force, and to file on or before their respective due dates all reports and any definitive proxy or information statements required to be filed by the Company with the
Commission pursuant to Sections 13(a), 13(c), 14, 15(d) or any other provision of or under the Exchange Act. If the Company has omitted any information from the
Registration Statement pursuant to Rule 430B under the Securities Act, it will use its best efforts to comply with the provisions of and make all requisite filings with the
Commission pursuant to said Rule 430B and to notify the Agent promptly of all such filings. If during such period any event occurs as a result of which the Prospectus as then
amended or supplemented would include an untrue statement of a material fact or omit to state a material fact necessary to make the statements therein, in the light of the
circumstances then existing, not misleading, or if during such period it is necessary to amend or supplement the Registration Statement or Prospectus to comply with the
Securities Act, the Company will promptly notify the Agent to suspend the offering of Placement Shares during such period and the Company will promptly amend or
supplement the Registration Statement or Prospectus (at the expense of the Company) so as to correct such statement or omission or effect such compliance.
Shares to be listed on the Exchange.
(d) Listing of Placement Shares. On or prior to the date of the first Placement Notice, the Company will use its reasonable best efforts to cause the Placement
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(e) Delivery of Registration Statement and Prospectus. The Company will furnish to the Agent and its counsel (at the expense of the Company) copies of the
Registration Statement, the Prospectus (including all Incorporated Documents) and all amendments and supplements to the Registration Statement or Prospectus that are filed
with the Commission during any period in which a Prospectus relating to the Placement Shares is required to be delivered under the Securities Act (including all documents
filed with the Commission during such period that are deemed to be incorporated by reference therein), in each case as soon as reasonably practicable and in such quantities as
the Agent may from time to time reasonably request and, at the Agent’s request, will also furnish copies of the Prospectus to each exchange or market on which sales of the
Placement Shares may be made; provided, however, that the Company shall not be required to furnish any document (other than the Prospectus) to the Agent to the extent such
document is available on EDGAR.
(f) Earning Statement. The Company will make generally available to its security holders as soon as practicable, but in any event not later than 15 months
after the end of the Company’s current fiscal quarter, an earning statement covering a 12-month period that satisfies the provisions of Section 11(a) and Rule 158 of the
Securities Act.
(g) Use of Proceeds. The Company will use the Net Proceeds as described in the Prospectus in the section entitled “Use of Proceeds.”
(h) Notice of Other Sales. Without the prior written consent of the Agent, the Company will not, directly or indirectly, offer to sell, sell, contract to sell, grant
any option to sell or otherwise dispose of any Common Stock (other than the Placement Shares offered pursuant to this Agreement) or securities convertible into or
exchangeable for Common Stock, warrants or any rights to purchase or acquire, Common Stock during the period beginning on the third (3rd) Trading Day immediately prior to
the date on which any Placement Notice is delivered to the Agent hereunder and ending on the third (3rd) Trading Day immediately following the final Settlement Date with
respect to Placement Shares sold pursuant to such Placement Notice (or, if the Placement Notice has been terminated or suspended prior to the sale of all Placement Shares
covered by a Placement Notice, the date of such suspension or termination); and will not directly or indirectly in any other “at the market” or continuous equity transaction offer
to sell, sell, contract to sell, grant any option to sell or otherwise dispose of any Common Stock (other than the Placement Shares offered pursuant to this Agreement) or
securities convertible into or exchangeable for Common Stock, warrants or any rights to purchase or acquire, Common Stock prior to the sixtieth (60th) day immediately
following the termination of this Agreement; provided, however, that such restrictions will not be required in connection with the Company’s issuance or sale of (i) Common
Stock, options to purchase Common Stock or Common Stock issuable upon the exercise of options, restricted stock awards, restricted stock units or other equity awards settled
in Common Stock issued pursuant to any employee or director equity compensation plan, stock ownership plan or dividend reinvestment plan (but not Common Stock subject
to a waiver to exceed plan limits in its dividend reinvestment plan) of the Company whether now in effect or hereafter implemented, (ii) Common Stock issuable upon
conversion of securities or the exercise of warrants, options or other rights in effect or outstanding, and disclosed in filings by the Company available on EDGAR or otherwise
in writing to the Agent and (iii) Common Stock or securities convertible into or exchangeable for shares of Common Stock as consideration for mergers, acquisitions, other
business combinations or strategic alliances occurring after the date of this Agreement which are not issued for capital raising purposes.
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(i) Change of Circumstances. The Company will, at any time during the pendency of a Placement Notice, advise the Agent promptly after it shall have
received notice or obtained knowledge thereof, of any information or fact that would alter or affect in any material respect any opinion, certificate, letter or other document
required to be provided to the Agent pursuant to this Agreement.
(j) Due Diligence Cooperation. The Company will cooperate with any reasonable due diligence review conducted by the Agent or its representatives in
connection with the transactions contemplated hereby, including, without limitation, providing information and making available documents and senior corporate officers,
during regular business hours and at the Company’s principal offices, as the Agent may reasonably request.
(k) Required Filings Relating to Placement of Placement Shares. The Company agrees that on such dates as the Securities Act shall require, the Company will
(i) file a prospectus supplement with the Commission under the applicable paragraph of Rule 424(b) under the Securities Act, which prospectus supplement will set forth, within
the relevant period, the amount of Placement Shares sold through the Agent, the Net Proceeds to the Company and the compensation payable by the Company to the Agent with
respect to such Placement Shares, and (ii) deliver such number of copies of each such prospectus supplement to each exchange or market on which such sales were effected as
may be required by the rules or regulations of such exchange or market.
the Company:
(l) Representation Dates; Certificate. During the term of this Agreement, (1) on or prior to the date of the first Placement Notice and (2) thereafter, each time
(i) files the Prospectus relating to the Placement Shares or amends or supplements (other than a prospectus supplement relating solely to an offering of securities other
than the Placement Shares) the Registration Statement or the Prospectus relating to the Placement Shares by means of a post-effective amendment, sticker, or supplement
but not by means of incorporation of documents by reference into the Registration Statement or the Prospectus relating to the Placement Shares;
(ii) files an annual report on Form 10-K under the Exchange Act (including any Form 10-K/A containing amended financial information or a material amendment to the
previously filed Form 10-K);
(iii) files its quarterly reports on Form 10-Q under the Exchange Act; or
(iv) files a current report on Form 8-K containing amended financial information (other than information “furnished” pursuant to Items 2.02 or 7.01 of Form 8-K or to
provide disclosure pursuant to Item 8.01 of Form 8-K relating to the reclassification of certain properties as discontinued operations in accordance with Statement of
Financial Accounting Standards No. 144) under the Exchange Act (each date of filing of one or more of the documents referred to in clauses (i) through (iv) shall be a
“Representation Date”);
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the Company shall furnish the Agent (but in the case of clause (iv) above only if the Agent reasonably determines that the information contained in such Form 8-K is material)
with a certificate dated the Representation Date, in the form attached hereto as Schedule 7(l), modified, as necessary, to relate to the Registration Statement and the Prospectus
as amended or supplemented. The requirement to provide a certificate under this Section 7(l) shall be automatically waived for any Representation Date occurring (1) at a time a
Suspension is in effect, which waiver shall continue until the earlier to occur of the date the Company delivers instructions for the sale of Placement Shares hereunder (which for
such calendar quarter shall be considered a Representation Date) and the next occurring Representation Date and (2) at a time when the Sales Agent is not in possession of a
Placement Notice, which waiver shall continue until the date the Company delivers a Placement Notice. Notwithstanding the foregoing, if the Company subsequently decides to
sell Placement Shares following a Representation Date when a Suspension was in effect and did not provide the Agent with a certificate under this Section 7(l), then before the
Company delivers the Placement Notice or the Agent sells any Placement Shares pursuant to such instructions, the Company shall provide the Agent with a certificate in
conformity with this Section 7(l) dated as of the date that the Placement Notice is delivered.
(m) Opinions of Company Counsel. (1) On or prior to the date of the first Placement Notice and (2) thereafter, within five (5) Trading Days of each
Representation Date with respect to which the Company is obligated to deliver a certificate pursuant to Section 7(l) for which no waiver is applicable and excluding the date of
this Agreement, the Company shall cause to be furnished to the Agent the opinion and negative assurance letter of each of King & Spalding LLP, counsel for the Company, or
other counsel satisfactory to the Agent, and the opinion of the Chief Legal Officer of the Company, dated as of such date, in form and substance reasonably satisfactory to the
Agent and its counsel, substantially similar to the forms previously provided to the Agent and its counsel, modified, as necessary, to relate to the Registration Statement and the
Prospectus as then amended or supplemented; provided, however, the Company shall be required to furnish to the Agent no more than one opinion hereunder per calendar
quarter; provided, further, that in lieu of such opinions for subsequent Representation Dates, counsel may furnish the Agent with a letter (a “Reliance Letter”) to the effect that
the Agent may rely on a prior opinion delivered under this Section 7(m) to the same extent as if it were dated the date of such letter (except that statements in such prior opinion
shall be deemed to relate to the Registration Statement and the Prospectus as amended or supplemented as of the date of the Reliance Letter).
(n) Opinion of Intellectual Property Counsel. (1) On or prior to the date of the first Placement Notice and (2) within five (5) Trading Days of each
Representation Date with respect to which the Company is obligated to deliver a certificate pursuant to Section 7(l) for which no waiver is applicable and excluding the date of
this Agreement, the Company shall cause to be furnished to the Agent a written opinion of Crowell & Moring LLP, counsel for the Company with respect to intellectual
property matters, dated as of such date, in form and substance reasonably satisfactory to the Agent and its counsel.
(o) Comfort Letter. (1) On or prior to the date of the first Placement Notice and (2) within five (5) Trading Days of each Representation Date with respect to
which the Company is obligated to deliver a certificate pursuant to Section 7(l) for which no waiver is applicable and excluding the date of this Agreement, the Company shall
cause its independent registered public accounting firm to furnish the Agent letters (the “Comfort Letters”), dated the date the Comfort Letter is delivered, which shall meet the
requirements set forth in this Section 7(o); provided, that if requested by the Agent, the Company shall cause a Comfort Letter to be furnished to the Agent within ten (10)
Trading Days of the date of occurrence of any material transaction or event, including the restatement of the Company’s financial statements. The Comfort Letter from the
Company’s independent registered public accounting firm shall be in a form and substance satisfactory to the Agent, (i) confirming that they are an independent registered
public accounting firm within the meaning of the Securities Act and the PCAOB, (ii) stating, as of such date, the conclusions and findings of such firm with respect to the
financial information and other matters ordinarily covered by accountants’ “comfort letters” to underwriters in connection with registered public offerings (the first such letter,
the “Initial Comfort Letter”) and (iii) updating the Initial Comfort Letter with any information that would have been included in the Initial Comfort Letter had it been given on
such date and modified as necessary to relate to the Registration Statement and the Prospectus, as amended and supplemented to the date of such letter.
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(p) Market Activities. The Company will not, directly or indirectly, (i) take any action designed to cause or result in, or that constitutes or would reasonably
be expected to constitute, the stabilization or manipulation of the price of any security of the Company to facilitate the sale or resale of Common Stock or (ii) sell, bid for, or
purchase Common Stock in violation of Regulation M, or pay anyone any compensation for soliciting purchases of the Placement Shares other than the Agent.
be or become, at any time prior to the termination of this Agreement, required to register as an “investment company,” as such term is defined in the Investment Company Act.
(q) Investment Company Act. The Company will conduct its affairs in such a manner so as to reasonably ensure that neither it nor any of its Subsidiaries will
(r) No Offer to Sell. Other than an Issuer Free Writing Prospectus approved in advance by the Company and the Agent in its capacity as agent hereunder,
neither the Agent nor the Company (including its agents and representatives, other than the Agent in its capacity as such) will make, use, prepare, authorize, approve or refer to
any written communication (as defined in Rule 405 under the Securities Act), required to be filed with the Commission, that constitutes an offer to sell or solicitation of an offer
to buy Placement Shares hereunder.
(s) Blue Sky and Other Qualifications. The Company will use its commercially reasonable efforts, in cooperation with the Agent, to qualify the Placement
Shares for offering and sale, or to obtain an exemption for the Placement Shares to be offered and sold, under the applicable securities laws of such states and other jurisdictions
(domestic or foreign) as the Agent may designate and to maintain such qualifications and exemptions in effect for so long as required for the distribution of the Placement
Shares (but in no event for less than one year from the date of this Agreement); provided, however, that the Company shall not be obligated to file any general consent to service
of process or to qualify as a foreign corporation or as a dealer in securities in any jurisdiction in which it is not so qualified or to subject itself to taxation in respect of doing
business in any jurisdiction in which it is not otherwise so subject. In each jurisdiction in which the Placement Shares have been so qualified or exempt, the Company will file
such statements and reports as may be required by the laws of such jurisdiction to continue such qualification or exemption, as the case may be, in effect for so long as required
for the distribution of the Placement Shares (but in no event for less than one year from the date of this Agreement).
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(t) Sarbanes-Oxley Act. The Company and the Subsidiaries will maintain and keep accurate books and records reflecting their assets and maintain internal
accounting controls in a manner designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external
purposes in accordance with generally accepted accounting principles and including those policies and procedures that (i) pertain to the maintenance of records that in
reasonable detail accurately and fairly reflect the transactions and dispositions of the assets of the Company, (ii) provide reasonable assurance that transactions are recorded as
necessary to permit the preparation of the Company’s consolidated financial statements in accordance with generally accepted accounting principles, (iii) that receipts and
expenditures of the Company are being made only in accordance with management’s and the Company’s directors’ authorization, and (iv) provide reasonable assurance
regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company’s assets that could have a material effect on its financial statements.
The Company and the Subsidiaries will maintain such controls and other procedures, including, without limitation, those required by Sections 302 and 906 of the Sarbanes-
Oxley Act, and the applicable regulations thereunder that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the Commission’s rules and forms, including, without limitation,
controls and procedures designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is
accumulated and communicated to the Company’s management, including its principal executive officer and principal financial officer, or persons performing similar functions,
as appropriate to allow timely decisions regarding required disclosure and to ensure that material information relating to the Company or the Subsidiaries is made known to
them by others within those entities, particularly during the period in which such periodic reports are being prepared.
(u) Secretary’s Certificate; Further Documentation. On or prior to the date of the first Placement Notice, the Company shall deliver to the Agent a certificate
of the Secretary of the Company and attested to by an executive officer of the Company, dated as of such date, certifying as to (i) the Restated Certificate of Incorporation of the
Company, (ii) the Restated Bylaws of the Company, (iii) the resolutions of the Board of Directors of the Company authorizing the execution, delivery and performance of this
Agreement and the issuance of the Placement Shares and (iv) the incumbency of the officers duly authorized to execute this Agreement and the other documents contemplated
by this Agreement. Within five (5) Trading Days of each Representation Date with respect to which the Company is obligated to deliver a certificate pursuant to Section 7(l) for
which no waiver is applicable, the Company shall have furnished to the Agent such further information, certificates and documents as the Agent may reasonably request.
8. Payment of Expenses. The Company will pay all expenses incident to the performance of its obligations under this Agreement, including without limitation (i) the
preparation and filing of the Registration Statement, including any fees required by the Commission, and the printing or electronic delivery of the Prospectus as originally filed
and of each amendment and supplement thereto, in such number as the Agent shall deem necessary, (ii) the printing and delivery to the Agent of this Agreement and such other
documents as may be required in connection with the offering, purchase, sale, issuance or delivery of the Placement Shares, (iii) the preparation, issuance and delivery of the
certificates, if any, for the Placement Shares to the Agent, including any stock or other transfer taxes and any capital duties, stamp duties or other duties or taxes payable upon
the sale, issuance or delivery of the Placement Shares to the Agent, (iv) the fees and disbursements of the counsel, accountants and other advisors to the Company, (v) the fees
and expenses of counsel to the Agent in an amount not to exceed $50,000 in connection with the execution of this Agreement, (vi) the qualification or exemption of the
Placement Shares under state securities laws in accordance with the provisions of Section 7(s) hereof, including filing fees, but excluding fees of the Agent’s counsel, (vii) the
printing and delivery to the Agent of copies of any Permitted Issuer Free Writing Prospectus and the Prospectus and any amendments or supplements thereto in such number as
the Agent shall deem necessary, (viii) the preparation, printing and delivery to the Agent of copies of any blue sky survey, (ix) the fees and expenses of the transfer agent and
registrar for the Common Stock, (x) the filing and other fees incident to any review by FINRA of the terms of the sale of the Placement Shares including the fees of the Agent’s
counsel (subject to the cap, set forth in clause (v) above), and (xi) the fees and expenses incurred in connection with the listing of the Placement Shares on the Exchange.
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9 . Conditions to the Agent’s Obligations. The obligations of the Agent hereunder with respect to a Placement will be subject to the continuing accuracy and
completeness of the representations and warranties made by the Company herein, to the due performance by the Company of its obligations hereunder, to the completion by the
Agent of a due diligence review satisfactory to it in its reasonable judgment, and to the continuing satisfaction (or waiver by the Agent in its sole discretion) of the following
additional conditions:
issued to the Agent and not yet sold by the Agent and (ii) sale of all Placement Shares contemplated to be issued by any Placement Notice.
(a) Registration Statement Effective. The Registration Statement shall have become effective and shall be available for the (i) resale of all Placement Shares
(b) No Material Notices. None of the following events shall have occurred and be continuing: (i) receipt by the Company of any request for additional
information from the Commission during the period of effectiveness of the Registration Statement, the response to which would require any post-effective amendments or
supplements to the Registration Statement or the Prospectus; (ii) the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or
the initiation of any proceedings for that purpose; (iii) receipt by the Company of any notification with respect to the suspension of the qualification or exemption from
qualification of any of the Placement Shares for sale in any jurisdiction or the initiation or threatening of any proceeding for such purpose; or (iv) the occurrence of any event
that makes any material statement made in the Registration Statement or the Prospectus or any material document incorporated or deemed to be incorporated therein by
reference untrue in any material respect or that requires the making of any changes in the Registration Statement, the Prospectus or documents so that, in the case of the
Registration Statement, it will not contain any materially untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary to make
the statements therein not misleading and, that in the case of the Prospectus, it will not contain any materially untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary to make the statements therein, in the light of the circumstances under which they were made, not misleading.
(c) No Misstatement or Material Omission. The Agent shall not have advised the Company that the Registration Statement or Prospectus, or any amendment
or supplement thereto, contains an untrue statement of fact that in the Agent’s reasonable opinion is material, or omits to state a fact that in the Agent’s reasonable opinion is
material and is required to be stated therein or is necessary to make the statements therein not misleading.
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(d) Material Changes. Except as contemplated in the Prospectus, or disclosed in the Company’s reports filed with the Commission, there shall not have been
any material adverse change in the authorized capital stock of the Company or any Material Adverse Effect or any development that would reasonably be expected to cause a
Material Adverse Effect, or a downgrading in or withdrawal of the rating assigned to any of the Company’s securities (other than asset backed securities) by any “nationally
recognized statistical rating organization,” as such term is defined in Section 3(a)(62) of the Exchange Act, that it has under surveillance or review its rating of any of the
Company’s securities (other than asset backed securities), the effect of which, in the case of any such action by such nationally recognized statistical rating organization
described above, in the reasonable judgment of the Agent (without relieving the Company of any obligation or liability it may otherwise have), is so material as to make it
impracticable or inadvisable to proceed with the offering of the Placement Shares on the terms and in the manner contemplated in the Prospectus.
(e) Legal Opinions. The Agent shall have received the opinions of counsel required to be delivered pursuant to Sections 7(m) and 7(n) on or before the date
on which such delivery of such opinions is required pursuant to Sections 7(m) and 7(n).
delivery of such Comfort Letter is required pursuant to Section 7(o).
(f) Comfort Letter. The Agent shall have received the Comfort Letter required to be delivered pursuant to Section 7(o) on or before the date on which such
delivery of such certificate is required pursuant to Section 7(l).
(g) Representation Certificate. The Agent shall have received the certificate required to be delivered pursuant to Section 7(l) on or before the date on which
the Exchange.
(h) No Suspension. Trading in the Common Stock shall not have been suspended on the Exchange and the Common Stock shall not have been delisted from
(i) Other Materials. On each date on which the Company is required to deliver a certificate pursuant to Section 7(l), the Company shall have furnished to the
Agent such appropriate further information, opinions, certificates, letters and other documents as the Agent may reasonably request. All such opinions, certificates, letters and
other documents will be in compliance with the provisions hereof.
been filed prior to the issuance of any Placement Notice hereunder shall have been made within the applicable time period prescribed for such filing by Rule 424.
(j) Securities Act Filings Made. All filings with the Commission with respect to the Placement Shares required by Rule 424 under the Securities Act to have
(k) Approval for Listing. The Placement Shares shall either have been (i) approved for listing on the Exchange, subject only to notice of issuance, or (ii) the
Company shall have filed an application for listing of the Placement Shares on the Exchange at, or prior to, the issuance of any Placement Notice and the Exchange shall have
reviewed such application and not provided any objections thereto.
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Agent as described in the Prospectus.
(l) FINRA. If applicable, FINRA shall have raised no objection to the terms of this offering and the amount of compensation allowable or payable to the
(m) No Termination Event. There shall not have occurred any event that would permit the Agent to terminate this Agreement pursuant to Section 12(a).
10. Indemnification and Contribution.
(a) Company Indemnification. The Company agrees to indemnify and hold harmless the Agent, its affiliates and their respective partners, members, directors,
officers, employees and agents and each person, if any, who controls the Agent within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act as
follows:
(i) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, joint or several, arising out of or based upon any untrue
statement or alleged untrue statement of a material fact contained in the Registration Statement (or any amendment thereto), or the omission or alleged omission therefrom of a
material fact required to be stated therein or necessary to make the statements therein not misleading, or arising out of any untrue statement or alleged untrue statement of a
material fact included in any related Issuer Free Writing Prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom
of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading;
(ii) against any and all loss, liability, claim, damage and expense whatsoever, as incurred, joint or several, to the extent of the aggregate amount paid
in settlement of any litigation, or any investigation or proceeding by any Governmental Authority, commenced or threatened, or of any claim whatsoever based upon any such
untrue statement or omission, or any such alleged untrue statement or omission; provided that (subject to Section 10(d) below) any such settlement is effected with the written
consent of the Company, which consent shall not unreasonably be delayed or withheld; and
(iii) against any and all expense whatsoever, as incurred (including the fees and disbursements of counsel), reasonably incurred in investigating,
preparing or defending against any litigation, or any investigation or proceeding by any Governmental Authority, commenced or threatened, or any claim whatsoever based
upon any such untrue statement or omission, or any such alleged untrue statement or omission (whether or not a party), to the extent that any such expense is not paid under (i)
or (ii) above,
provided, however, that this indemnity agreement shall not apply to any loss, liability, claim, damage or expense to the extent arising out of any untrue statement or omission or
alleged untrue statement or omission made solely in reliance upon and in conformity with the Agent Information (as defined below).
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(b) Agent Indemnification. Agent agrees to indemnify and hold harmless the Company and its directors and each officer of the Company who signed the
Registration Statement, and each person, if any, who controls the Company within the meaning of Section 15 of the Securities Act or Section 20 of the Exchange Act against any
and all loss, liability, claim, damage and expense described in the indemnity contained in Section 10(a), as incurred, but only with respect to untrue statements or omissions, or
alleged untrue statements or omissions, made in the Registration Statement (or any amendments thereto), the Prospectus (or any amendment or supplement thereto) or any Issuer
Free Writing Prospectus (or any amendment or supplement thereto) in reliance upon and in conformity with information relating to the Agent and furnished to the Company in
writing by the Agent expressly for use therein. The Company hereby acknowledges that the only information that the Agent has furnished to the Company expressly for use in
the Registration Statement, the Prospectus or any Issuer Free Writing Prospectus (or any amendment or supplement thereto) are the statements set forth in the seventh paragraph
under the caption “Plan of Distribution” in the Prospectus (the “Agent Information”).
(c) Procedure. Any party that proposes to assert the right to be indemnified under this Section 10 will, promptly after receipt of notice of commencement of
any action against such party in respect of which a claim is to be made against an indemnifying party or parties under this Section 10, notify each such indemnifying party of the
commencement of such action, enclosing a copy of all papers served, but the omission so to notify such indemnifying party will not relieve the indemnifying party from (i) any
liability that it might have to any indemnified party otherwise than under this Section 10 and (ii) any liability that it may have to any indemnified party under the foregoing
provision of this Section 10 unless, and only to the extent that, such omission results in the forfeiture of substantive rights or defenses by the indemnifying party. If any such
action is brought against any indemnified party and it notifies the indemnifying party of its commencement, the indemnifying party will be entitled to participate in and, to the
extent that it elects by delivering written notice to the indemnified party promptly after receiving notice of the commencement of the action from the indemnified party, jointly
with any other indemnifying party similarly notified, to assume the defense of the action, with counsel reasonably satisfactory to the indemnified party, and after notice from the
indemnifying party to the indemnified party of its election to assume the defense, the indemnifying party will not be liable to the indemnified party for any legal or other
expenses except as provided below and except for the reasonable costs of investigation subsequently incurred by the indemnified party in connection with the defense. The
indemnified party will have the right to employ its own counsel in any such action, but the fees, expenses and other charges of such counsel will be at the expense of such
indemnified party unless (1) the employment of counsel by the indemnified party has been authorized in writing by the indemnifying party, (2) the indemnified party has
reasonably concluded (based on advice of counsel) that there may be legal defenses available to it or other indemnified parties that are different from or in addition to those
available to the indemnifying party, (3) a conflict or potential conflict exists (based on advice of counsel to the indemnified party) between the indemnified party and the
indemnifying party (in which case the indemnifying party will not have the right to direct the defense of such action on behalf of the indemnified party) or (4) the indemnifying
party has not in fact employed counsel to assume the defense of such action or counsel reasonably satisfactory to the indemnified party, in each case, within a reasonable time
after receiving notice of the commencement of the action; in each of which cases the reasonable fees, disbursements and other charges of counsel will be at the expense of the
indemnifying party or parties. It is understood that the indemnifying party or parties shall not, in connection with any proceeding or related proceedings in the same jurisdiction,
be liable for the reasonable fees, disbursements and other charges of more than one separate firm (plus local counsel) admitted to practice in such jurisdiction at any one time for
all such indemnified party or parties. All such fees, disbursements and other charges will be reimbursed by the indemnifying party promptly as they are incurred. An
indemnifying party will not, in any event, be liable for any settlement of any action or claim effected without its written consent. No indemnifying party shall, without the prior
written consent of each indemnified party, settle or compromise or consent to the entry of any judgment in any pending or threatened claim, action or proceeding relating to the
matters contemplated by this Section 10 (whether or not any indemnified party is a party thereto), unless such settlement, compromise or consent (1) includes an express and
unconditional release of each indemnified party, in form and substance reasonably satisfactory to such indemnified party, from all liability arising out of such litigation,
investigation, proceeding or claim and (2) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party.
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(d) Settlement Without Consent if Failure to Reimburse. If an indemnified party shall have requested an indemnifying party to reimburse the indemnified
party for reasonable fees and expenses of counsel, such indemnifying party agrees that it shall be liable for any settlement of the nature contemplated by Section 10(a)(ii)
effected without its written consent if (1) such settlement is entered into more than 45 days after receipt by such indemnifying party of the aforesaid request, (2) such
indemnifying party shall have received notice of the terms of such settlement at least 30 days prior to such settlement being entered into and (3) such indemnifying party shall
not have reimbursed such indemnified party in accordance with such request prior to the date of such settlement.
(e) Contribution. In order to provide for just and equitable contribution in circumstances in which the indemnification provided for in the foregoing paragraphs
of this Section 10 is applicable in accordance with its terms but for any reason is held to be unavailable or insufficient from the Company or the Agent, the Company and the
Agent will contribute to the total losses, claims, liabilities, expenses and damages (including any investigative, legal and other expenses reasonably incurred in connection with,
and any amount paid in settlement of, any action, suit or proceeding or any claim asserted) to which the Company and the Agent may be subject in such proportion as shall be
appropriate to reflect the relative benefits received by the Company on the one hand and the Agent on the other hand. The relative benefits received by the Company on the one
hand and the Agent on the other hand shall be deemed to be in the same proportion as the total net proceeds from the sale of the Placement Shares (before deducting expenses)
received by the Company bear to the total compensation (before deducting expenses) received by the Agent from the sale of Placement Shares on behalf of the Company. If, but
only if, the allocation provided by the foregoing sentence is not permitted by applicable law, the allocation of contribution shall be made in such proportion as is appropriate to
reflect not only the relative benefits referred to in the foregoing sentence but also the relative fault of the Company, on the one hand, and the Agent, on the other hand, with
respect to the statements or omission that resulted in such loss, claim, liability, expense or damage, or action in respect thereof, as well as any other relevant equitable
considerations with respect to such offering. Such relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a
material fact or omission or alleged omission to state a material fact relates to information supplied by the Company or the Agent, the intent of the parties and their relative
knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and the Agent agree that it would not be just and equitable if
contributions pursuant to this Section 10(e) were to be determined by pro rata allocation or by any other method of allocation that does not take into account the equitable
considerations referred to herein. The amount paid or payable by an indemnified party as a result of the loss, claim, liability, expense, or damage, or action in respect thereof,
referred to above in this Section 10(e) shall be deemed to include, for the purpose of this Section 10(e), any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any such action or claim to the extent consistent with Section 10(c) hereof. Notwithstanding the foregoing provisions of this
Section 10(e), the Agent shall not be required to contribute any amount in excess of the commissions received by it under this Agreement and no person found guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this Section 10(e), any person who controls a party to this Agreement within the meaning of the Securities Act, and any officers, directors,
partners, employees or agents of the Agent, will have the same rights to contribution as that party, and each director of the Company and each officer of the Company who
signed the Registration Statement will have the same rights to contribution as the Company, subject in each case to the provisions hereof. Any party entitled to contribution,
promptly after receipt of notice of commencement of any action against such party in respect of which a claim for contribution may be made under this Section 10(e), will
notify any such party or parties from whom contribution may be sought, but the omission to so notify will not relieve that party or parties from whom contribution may be
sought from any other obligation it or they may have under this Section 10(e) except to the extent that the failure to so notify such other party materially prejudiced the
substantive rights or defenses of the party from whom contribution is sought. Except for a settlement entered into pursuant to the last sentence of Section 10(c) hereof, no party
will be liable for contribution with respect to any action or claim settled without its written consent if such consent is required pursuant to Section 10(c) hereof.
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11. Representations and Agreements to Survive Delivery. The indemnity and contribution agreements contained in Section 10 of this Agreement and all representations
and warranties of the Company herein or in certificates delivered pursuant hereto shall survive, as of their respective dates, regardless of (i) any investigation made by or on
behalf of the Agent, any controlling persons, or the Company (or any of their respective officers, directors, employees or controlling persons), (ii) delivery and acceptance of the
Placement Shares and payment therefor or (iii) any termination of this Agreement.
12. Termination.
(a) The Agent may terminate this Agreement, by notice to the Company, as hereinafter specified at any time (1) if there has been, since the time of execution
of this Agreement or since the date as of which information is given in the Prospectus, any change, or any development or event involving a prospective change, in the
condition, financial or otherwise, or in the business, properties, earnings, results of operations or prospects of the Company and its Subsidiaries considered as one enterprise,
whether or not arising in the ordinary course of business, which individually or in the aggregate, in the sole judgment of the Agent is material and adverse and makes it
impractical or inadvisable to market the Placement Shares or to enforce contracts for the sale of the Placement Shares, (2) if there has occurred any material adverse change in
the financial markets in the United States or the international financial markets, any outbreak of hostilities or escalation thereof or other calamity or crisis or any change or
development involving a prospective change in national or international political, financial or economic conditions, in each case the effect of which is such as to make it, in the
judgment of the Agent, impracticable or inadvisable to market the Placement Shares or to enforce contracts for the sale of the Placement Shares, (3) if trading in the Common
Stock has been suspended or limited by the Commission or the Exchange, or if trading generally on the Exchange has been suspended or limited, or minimum prices for trading
have been fixed on the Exchange, (4) if any suspension of trading of any securities of the Company on any exchange or in the over-the-counter market shall have occurred and
be continuing, (5) if a major disruption of securities settlements or clearance services in the United States shall have occurred and be continuing, or (6) if a banking moratorium
has been declared by either U.S. Federal or New York authorities. Any such termination shall be without liability of any party to any other party except that the provisions of
Section 8 (Payment of Expenses), Section 10 (Indemnification and Contribution), Section 11 (Representations and Agreements to Survive Delivery), Section 17 (Governing
Law and Time; Waiver of Jury Trial) and Section 18 (Consent to Jurisdiction) hereof shall remain in full force and effect notwithstanding such termination. If the Agent elects to
terminate this Agreement as provided in this Section 12(a), the Agent shall provide the required notice as specified in Section 13 (Notices).
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(b) The Company shall have the right, by giving three (3) days’ notice as hereinafter specified to terminate this Agreement in its sole discretion at any time
after the date of this Agreement. Any such termination shall be without liability of any party to any other party except that the provisions of Section 8, Section 10, Section 11,
Section 17 and Section 18 hereof shall remain in full force and effect notwithstanding such termination.
(c) The Agent shall have the right, by giving three (3) days’ notice as hereinafter specified to terminate this Agreement in its sole discretion at any time after
the date of this Agreement. Any such termination shall be without liability of any party to any other party except that the provisions of Section 8, Section 10, Section 11, Section
17 and Section 18 hereof shall remain in full force and effect notwithstanding such termination.
(d) Unless earlier terminated pursuant to this Section 12, this Agreement shall automatically terminate upon the issuance and sale of all of the Placement
Shares on the terms and subject to the conditions set forth herein except that the provisions of Section 8, Section 10, Section 11, Section 17 and Section 18 hereof shall remain in
full force and effect notwithstanding such termination.
(e) This Agreement shall remain in full force and effect unless terminated pursuant to Sections 12(a), (b), (c) or (d) above or otherwise by mutual agreement of
the parties; provided, however, that any such termination by mutual agreement shall in all cases be deemed to provide that Section 8, Section 10, Section 11, Section 17 and
Section 18 shall remain in full force and effect.
(f) Any termination of this Agreement shall be effective on the date specified in such notice of termination; provided, however, that such termination shall not
be effective until the close of business on the date of receipt of such notice by the Agent or the Company, as the case may be. If such termination shall occur prior to the
Settlement Date for any sale of Placement Shares, such Placement Shares shall settle in accordance with the provisions of this Agreement.
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13. Notices. All notices or other communications required or permitted to be given by any party to any other party pursuant to the terms of this Agreement shall be in
writing, unless otherwise specified, and if sent to the Agent, shall be delivered to:
Cantor Fitzgerald & Co.
499 Park Avenue
New York, NY 10022
Attention: Capital Markets
Facsimile: (212) 307-3730
Cantor Fitzgerald & Co.
499 Park Avenue
New York, NY 10022
Attention: General Counsel
Facsimile: (212) 829-4708
and:
with a copy to:
Covington & Burling LLP
The New York Times Building
620 Eighth Avenue
New York, NY 10018-1405
Attention: Brian K. Rosenzweig
and if to the Company, shall be delivered to:
PolarityTE, Inc.
1960 S. 4250 West
Salt Lake City, UT 84104
Attention: Cameron Hoyler, General Counsel
with a copy to:
King & Spalding LLP
601 California Avenue #100
Palo Alto, CA 94304
Attention: Laura Bushnell
Each party to this Agreement may change such address for notices by sending to the parties to this Agreement written notice of a new address for such purpose. Each
such notice or other communication shall be deemed given (i) when delivered personally or by verifiable facsimile transmission (with an original to follow) on or before 4:30
p.m., New York City time, on a Business Day or, if such day is not a Business Day, on the next succeeding Business Day, (ii) by Electronic Notice as set forth in the next
paragraph, (iii) on the next Business Day after timely delivery to a nationally-recognized overnight courier or (iv) on the Business Day actually received if deposited in the U.S.
mail (certified or registered mail, return receipt requested, postage prepaid). For purposes of this Agreement, “Business Day” shall mean any day on which the Exchange and
commercial banks in the City of New York are open for business.
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An electronic communication (“Electronic Notice”) shall be deemed written notice for purposes of this Section 13 if sent to the electronic mail address specified by the
receiving party under separate cover. Electronic Notice shall be deemed received at the time the party sending Electronic Notice receives verification of receipt by the receiving
party. Any party receiving Electronic Notice may request and shall be entitled to receive the notice on paper, in a nonelectronic form (“ Nonelectronic Notice”) which shall be
sent to the requesting party within ten (10) days of receipt of the written request for Nonelectronic Notice.
14. Successors and Assigns. This Agreement shall inure to the benefit of and be binding upon the Company and the Agent and their respective successors and the
parties referred to in Section 10 hereof. References to any of the parties contained in this Agreement shall be deemed to include the successors and permitted assigns of such
party. Nothing in this Agreement, express or implied, is intended to confer upon any party other than the parties hereto or their respective successors and permitted assigns any
rights, remedies, obligations or liabilities under or by reason of this Agreement, except as expressly provided in this Agreement. Neither party may assign its rights or
obligations under this Agreement without the prior written consent of the other party; provided, however, that the Agent may assign its rights and obligations hereunder to an
affiliate thereof without obtaining the Company’s consent, so long as such affiliate is a registered broker-dealer and the Agent provides advanced notice of such assignment to
the Company.
15. Adjustments for Stock Splits. The parties acknowledge and agree that all share-related numbers contained in this Agreement shall be adjusted to take into account
any stock split, stock dividend or similar event effected with respect to the Placement Shares.
16. Entire Agreement; Amendment; Severability; Waiver. This Agreement (including all schedules and exhibits attached hereto and Placement Notices issued pursuant
hereto) constitutes the entire agreement and supersedes all other prior and contemporaneous agreements and undertakings, both written and oral, among the parties hereto with
regard to the subject matter hereof. Neither this Agreement nor any term hereof may be amended except pursuant to a written instrument executed by the Company and the
Agent. In the event that any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable as written by
a court of competent jurisdiction, then such provision shall be given full force and effect to the fullest possible extent that it is valid, legal and enforceable, and the remainder of
the terms and provisions herein shall be construed as if such invalid, illegal or unenforceable term or provision was not contained herein, but only to the extent that giving effect
to such provision and the remainder of the terms and provisions hereof shall be in accordance with the intent of the parties as reflected in this Agreement. No implied waiver by
a party shall arise in the absence of a waiver in writing signed by such party. No failure or delay in exercising any right, power, or privilege hereunder shall operate as a waiver
thereof, nor shall any single or partial exercise thereof preclude any other or further exercise thereof or the exercise of any right, power, or privilege hereunder.
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1 7 . GOVERNING LAW AND TIME; WAIVER OF JURY TRIAL . THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAWS. SPECIFIED
TIMES OF DAY REFER TO NEW YORK CITY TIME. EACH PARTY HEREBY IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY
APPLICABLE LAW, ANY AND ALL RIGHT TO TRIAL BY JURY IN ANY LEGAL PROCEEDING ARISING OUT OF OR RELATING TO THIS
AGREEMENT OR THE TRANSACTIONS CONTEMPLATED HEREBY.
18. CONSENT TO JURISDICTION. EACH PARTY HEREBY IRREVOCABLY SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE STATE
AND FEDERAL COURTS SITTING IN THE CITY OF NEW YORK, BOROUGH OF MANHATTAN, FOR THE ADJUDICATION OF ANY DISPUTE
HEREUNDER OR IN CONNECTION WITH ANY TRANSACTION CONTEMPLATED HEREBY, AND HEREBY IRREVOCABLY WAIVES, AND AGREES
NOT TO ASSERT IN ANY SUIT, ACTION OR PROCEEDING, ANY CLAIM THAT IT IS NOT PERSONALLY SUBJECT TO THE JURISDICTION OF ANY
SUCH COURT, THAT SUCH SUIT, ACTION OR PROCEEDING IS BROUGHT IN AN INCONVENIENT FORUM OR THAT THE VENUE OF SUCH SUIT,
ACTION OR PROCEEDING IS IMPROPER. EACH PARTY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS TO
PROCESS BEING SERVED IN ANY SUCH SUIT, ACTION OR PROCEEDING BY MAILING A COPY THEREOF (CERTIFIED OR REGISTERED MAIL,
RETURN RECEIPT REQUESTED) TO SUCH PARTY AT THE ADDRESS IN EFFECT FOR NOTICES TO IT UNDER THIS AGREEMENT AND AGREES
THAT SUCH SERVICE SHALL CONSTITUTE GOOD AND SUFFICIENT SERVICE OF PROCESS AND NOTICE THEREOF. NOTHING CONTAINED
HEREIN SHALL BE DEEMED TO LIMIT IN ANY WAY ANY RIGHT TO SERVE PROCESS IN ANY MANNER PERMITTED BY LAW.
19. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Delivery of an executed Agreement by one party to the other may be made by facsimile or electronic transmission.
20. Construction. The section and exhibit headings herein are for convenience only and shall not affect the construction hereof. References herein to any law, statute,
ordinance, code, regulation, rule or other requirement of any Governmental Authority shall be deemed to refer to such law, statute, ordinance, code, regulation, rule or other
requirement of any Governmental Authority as amended, reenacted, supplemented or superseded in whole or in part and in effect from time to time and also to all rules and
regulations promulgated thereunder.
21. Permitted Free Writing Prospectuses. The Company represents, warrants and agrees that, unless it obtains the prior written consent of the Agent, which consent
shall not be unreasonably withheld, condition or delayed, and the Agent represents, warrants and agrees that, unless it obtains the prior written consent of the Company, it has
not made and will not make any offer relating to the Placement Shares that would constitute an Issuer Free Writing Prospectus, or that would otherwise constitute a “free
writing prospectus,” as defined in Rule 405, required to be filed with the Commission. Any such free writing prospectus consented to by the Agent or by the Company, as the
case may be, is hereinafter referred to as a “Permitted Free Writing Prospectus.” The Company represents and warrants that it has treated and agrees that it will treat each
Permitted Free Writing Prospectus as an “issuer free writing prospectus,” as defined in Rule 433, and has complied and will comply with the requirements of Rule 433
applicable to any Permitted Free Writing Prospectus, including timely filing with the Commission where required, legending and record keeping. For the purposes of clarity, the
parties hereto agree that all free writing prospectuses, if any, listed in Exhibit 21 hereto are Permitted Free Writing Prospectuses.
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22. Absence of Fiduciary Relationship. The Company acknowledges and agrees that:
(a) the Agent is acting solely as agent in connection with the public offering of the Placement Shares and in connection with each transaction contemplated by
this Agreement and the process leading to such transactions, and no fiduciary or advisory relationship between the Company or any of its respective affiliates, stockholders (or
other equity holders), creditors or employees or any other party, on the one hand, and the Agent, on the other hand, has been or will be created in respect of any of the
transactions contemplated by this Agreement, irrespective of whether or not the Agent has advised or is advising the Company on other matters, and the Agent has no obligation
to the Company with respect to the transactions contemplated by this Agreement except the obligations expressly set forth in this Agreement;
Agreement;
(b) it is capable of evaluating and understanding, and understands and accepts, the terms, risks and conditions of the transactions contemplated by this
Agreement and it has consulted its own legal, accounting, regulatory and tax advisors to the extent it has deemed appropriate;
(c) neither the Agent nor its affiliates have provided any legal, accounting, regulatory or tax advice with respect to the transactions contemplated by this
(d) it is aware that the Agent and its affiliates are engaged in a broad range of transactions which may involve interests that differ from those of the Company
and the Agent and its affiliates have no obligation to disclose such interests and transactions to the Company by virtue of any fiduciary, advisory or agency relationship or
otherwise; and
(e) it waives, to the fullest extent permitted by law, any claims it may have against the Agent or its affiliates for breach of fiduciary duty or alleged breach of
fiduciary duty in connection with the sale of Placement Shares under this Agreement and agrees that the Agent and its affiliates shall not have any liability (whether direct or
indirect, in contract, tort or otherwise) to it in respect of such a fiduciary duty claim or to any person asserting a fiduciary duty claim on its behalf or in right of it or the
Company, employees or creditors of Company.
23. Definitions. As used in this Agreement, the following terms have the respective meanings set forth below:
“Applicable Time” means (i) each Representation Date and (ii) the time of each sale of any Placement Shares pursuant to this Agreement.
“Governmental Authority” means (i) any federal, provincial, state, local, municipal, national or international government or governmental authority, regulatory or
administrative agency, governmental commission, department, board, bureau, agency or instrumentality, court, tribunal, arbitrator or arbitral body (public or private); (ii) any
self-regulatory organization; or (iii) any political subdivision of any of the foregoing.
-38-
“Issuer Free Writing Prospectus” means any “issuer free writing prospectus,” as defined in Rule 433, relating to the Placement Shares that (1) is required to be filed
with the Commission by the Company, (2) is a “road show” that is a “written communication” within the meaning of Rule 433(d)(8)(i) whether or not required to be filed with
the Commission, or (3) is exempt from filing pursuant to Rule 433(d)(5)(i) because it contains a description of the Placement Shares or of the offering that does not reflect the
final terms, in each case in the form filed or required to be filed with the Commission or, if not required to be filed, in the form retained in the Company’s records pursuant to
Rule 433(g) under the Securities Act Regulations.
“knowledge” means, as it pertains to the Company, the actual knowledge of the officers and directors of the Company, together with the knowledge which they would
have had if they had conducted a reasonable inquiry of the relevant persons into the relevant subject matter.
“Rule 164,” “Rule 172,” “Rule 405,” “Rule 415,” “Rule 424,” “Rule 424(b),” “Rule 430B,” and “Rule 433” refer to such rules under the Securities Act Regulations.
All references in this Agreement to financial statements and schedules and other information that is “contained,” “included” or “stated” in the Registration Statement
or the Prospectus (and all other references of like import) shall be deemed to mean and include all such financial statements and schedules and other information that is
incorporated by reference in the Registration Statement or the Prospectus, as the case may be.
All references in this Agreement to the Registration Statement, the Prospectus or any amendment or supplement to any of the foregoing shall be deemed to include the
copy filed with the Commission pursuant to EDGAR; all references in this Agreement to any Issuer Free Writing Prospectus (other than any Issuer Free Writing Prospectuses
that, pursuant to Rule 433, are not required to be filed with the Commission) shall be deemed to include the copy thereof filed with the Commission pursuant to EDGAR; and
all references in this Agreement to “supplements” to the Prospectus shall include, without limitation, any supplements, “wrappers” or similar materials prepared in connection
with any offering, sale or private placement of any Placement Shares by the Agent outside of the United States.
[Signature Page Follows]
-39-
If the foregoing correctly sets forth the understanding between the Company and the Agent, please so indicate in the space provided below for that purpose, whereupon
this letter shall constitute a binding agreement between the Company and the Agent.
Very truly yours,
POLARITYTE, INC.
/s/ David Seaburg
By:
Name: David Seaburg
Title:
Chief Executive Officer
ACCEPTED as of the date first-above written:
CANTOR FITZGERALD & CO.
/s/ Sage Kelly
By:
Name: Sage Kelly
Title:
Senior Managing Director, Head of Investment Banking
SCHEDULE 1
Form of Placement Notice
From:
PolarityTE, Inc.
To:
Cantor Fitzgerald & Co.
Attention: [●]
Subject:
Placement Notice
Date:
[●], 20[●]
Ladies and Gentlemen:
Pursuant to the terms and subject to the conditions contained in the Sales Agreement between PolarityTE, Inc., a Delaware corporation (the “Company”), and Cantor
Fitzgerald & Co. (“Agent”), dated March 30, 2021, the Company hereby requests that the Agent sell up to [●] of the Company’s common stock, par value $0.001 per share, at a
minimum market price of $[●] per share, during the time period beginning [month, day, time] and ending [month, day, time].
SCHEDULE 2
Compensation
The Company shall pay to the Agent in cash, upon each sale of Placement Shares pursuant to this Agreement, an amount equal to 4.0% of the aggregate gross proceeds
from each sale of Placement Shares.
In the event the total amount paid to the Agent under the foregoing paragraph is not at least $400,000 as of March 30, 2022, the Company will pay to the Agent the
difference between $400,000 and the total amount of commissions paid to the Agent as of that date and the amount so paid shall be credited against payments due to the Agent
under the foregoing paragraph after March 30, 2022. In the event the Agent terminates this Agreement prior to March 30, 2022 pursuant to Section 12(c) of this Agreement, the
obligation of the Company to make any payment to the Agent under this paragraph shall automatically become void and unenforceable and the Company shall have no liability
to the Agent in respect thereof. In the event the Company terminates this Agreement prior to March 30, 2022 pursuant to Section 12(b) of this Agreement, the Company shall
make payment of the amount provided for in this paragraph within three (3) Business Days of the date of termination.
The Company
Jacob Patterson, Chief Financial Officer (jacobpatterson@polarityte.com)
Cameron Hoyler, General Counsel (cameronhoyler@polarityte.com)
The Agent
Sameer Vasudev (svasudev@cantor.com)
Matthew Crawford (matthew.crawford@cantor.com)
With copies to:
CFControlledEquityOffering@cantor.com
SCHEDULE 3
Notice Parties
SCHEDULE 4
Subsidiaries
Incorporated by reference to Exhibit 21.1 of the Company’s most recently filed Form 10-K.
SCHEDULE 7(L)
Form of Representation Date Certificate Pursuant to Section 7(l)
The undersigned, the duly qualified and elected [●], of PolarityTE, Inc., a Delaware corporation (the “Company”), does hereby certify in such capacity and on behalf of
the Company, pursuant to Section 7(l) of the Sales Agreement, dated March 30, 2021 (the “Sales Agreement”), between the Company and Cantor Fitzgerald & Co., that to the
best of the knowledge of the undersigned:
(i) The representations and warranties of the Company in Section 6 of the Sales Agreement (A) to the extent such representations and warranties are subject to
qualifications and exceptions contained therein relating to materiality or Material Adverse Effect, are true and correct on and as of the date hereof with the same force and effect
as if expressly made on and as of the date hereof, except for those representations and warranties that speak solely as of a specific date and which were true and correct as of
such date, and (B) to the extent such representations and warranties are not subject to any qualifications or exceptions, are true and correct in all material respects as of the date
hereof as if made on and as of the date hereof, except for those representations and warranties that speak solely as of a specific date and which were true and correct in all
material respects as of such date; provided, however, that such representations and warranties also shall be qualified by the disclosure included or incorporated by reference in
the Registration Statement and Prospectus; and
(ii) The Company has complied in all material respects with all agreements and satisfied in all material respects all conditions on its part to be performed or satisfied
pursuant to the Sales Agreement at or prior to the date hereof.
Capitalized terms used herein without definition shall have the meanings given to such terms in the Sales Agreement.
Date: [●]
POLARITYTE, INC.
By:
Name:
Title:
Exhibit 21
None.
Permitted Free Writing Prospectus
Description of Capital Stock
Exhibit 4.13
The following description of our common stock and preferred stock, together with the additional information we include in any applicable prospectus supplements,
summarizes the material terms and provisions of our common stock and preferred stock. The following description of our capital stock does not purport to be complete and is
subject to, and qualified in its entirety by, our certificate of incorporation and bylaws, and by applicable law. We have filed copies of our certificate of incorporation and
bylaws with the SEC. The terms of our common stock and preferred stock may also be affected by Delaware law.
Authorized Capital Stock
Our authorized capital stock consists of 250,000,000 shares of common stock, par value $0.001 per share, and 25,000,000 shares of preferred stock, par value $0.001 per share.
As of March 15, 2021, we had 80,255,426 shares of common stock outstanding and no shares of preferred stock outstanding.
Common Stock
The holders of our common stock are entitled to one vote for each share held on all matters submitted to a vote of the stockholders. The holders of our common stock do not
have any cumulative voting rights. Holders of our common stock are entitled to receive ratably any dividends declared by our board of directors out of funds legally available
for that purpose, subject to any preferential dividend rights of any outstanding preferred stock. Our common stock has no preemptive rights, conversion rights or other
subscription rights or redemption or sinking fund provisions.
In the event of our liquidation, dissolution, or winding up, holders of our common stock will be entitled to share ratably in all assets remaining after payment of all debts and
other liabilities and any liquidation preference of any outstanding preferred stock. All outstanding shares are fully paid and non-assessable.
Preferred Stock
Our board of directors is authorized to issue up to 25,000,000 shares of undesignated preferred stock in one or more series without stockholder approval. Our board of directors
may determine the rights, preferences, privileges, and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences,
of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock in one or more series and determine the number of shares in the series and its rights and preferences is
to eliminate delays associated with a stockholder vote on specific issuances. Examples of rights and preferences that the board of directors may fix are:
●
●
●
●
●
●
●
●
dividend rights;
conversion rights;
voting rights;
preemptive rights;
terms of redemption;
liquidation preferences;
sinking fund terms; and
the number of shares constituting, or the designation of, such series, any or all of which may be greater than the rights of common stock.
The existence of authorized but unissued shares of undesignated preferred stock may enable our board of directors to render more difficult or to discourage an attempt to obtain
control of us by means of a merger, tender offer, proxy contest, or otherwise. For example, if in the due exercise of its fiduciary obligations, our board of directors were to
determine that a takeover proposal is not in the best interests of us or our stockholders, our board of directors could cause shares of preferred stock to be issued without
stockholder approval in one or more private offerings or other transactions that might dilute the voting or other rights of the proposed acquirer, stockholder, or stockholder
group. The rights of holders of our common stock described above, will be subject to, and may be adversely affected by, the rights of any preferred stock that we may designate
and issue in the future. The issuance of shares of undesignated preferred stock could decrease the amount of earnings and assets available for distribution to holders of shares of
common stock. The issuance may also adversely affect the rights and powers, including voting rights, of these holders and may have the effect of delaying, deterring, or
preventing a change in control of us.
Antitakeover Effects of Delaware Law and Provisions of our Restated Certificate of Incorporation and Amended and Restated Bylaws
Certain provisions of the Delaware General Corporation Law and of our restated certificate of incorporation and amended and restated bylaws could have the effect of delaying,
deferring or discouraging another party from acquiring control of us unless such takeover or change of control is approved by the board of directors. These provisions, which
are summarized below, are expected to discourage certain types of coercive takeover practices and inadequate takeover bids and, therefore, they might also inhibit temporary
fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions are also designed in part to encourage
anyone seeking to acquire control of us to first negotiate with our board of directors. These provisions might also have the effect of preventing changes in our management. It is
possible that these provisions could make it more difficult to accomplish transactions that stockholders might otherwise deem to be in their best interests. However, we believe
that the advantages gained by protecting our ability to negotiate with any unsolicited and potentially unfriendly acquirer outweigh the disadvantages of discouraging such
proposals, including those priced above the then-current market value of our common stock, because, among other reasons, the negotiation of such proposals could improve
their terms.
2
Delaware Takeover Statute. We are subject to the provisions of Section 203 of the Delaware General Corporation Law. In general, Section 203 prohibits a publicly held
Delaware corporation from engaging in a “business combination” with an “interested stockholder” for a three-year period following the time that this stockholder becomes an
interested stockholder, unless the business combination is approved in a prescribed manner. Under Section 203, a business combination between a corporation and an interested
stockholder is prohibited unless it satisfies one of the following conditions:
●
●
●
before the stockholder became interested, our board of directors approved either the business combination or the transaction which resulted in the stockholder becoming
an interested stockholder;
upon consummation of the transaction which resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting
stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the voting stock outstanding, shares owned by persons
who are directors and also officers, and employee stock plans, in some instances, but not the outstanding voting stock owned by the interested stockholder; or
at or after the time the stockholder became interested, the business combination was approved by our board of directors and authorized at an annual or special meeting of
the stockholders by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder.
Section 203 defines a business combination to include:
●
●
●
●
●
any merger or consolidation involving the corporation and the interested stockholder;
any sale, transfer, lease, pledge, exchange, mortgage or other disposition involving the interested stockholder of 10% or more of the assets of the corporation;
subject to exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder;
subject to exceptions, any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the
corporation beneficially owned by the interested stockholder; or
the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation.
In general, Section 203 defines an interested stockholder as any entity or person beneficially owning 15% or more of the outstanding voting stock of the corporation and any
entity or person affiliated with or controlling or controlled by the entity or person.
Provisions of our Restated Certificate of Incorporation and Amended and Restated Bylaws. Our restated certificate of incorporation and amended and restated bylaws include
several provisions that may have the effect of delaying, deferring or discouraging another party from acquiring control of us and encouraging persons considering unsolicited
tender offers or other unilateral takeover proposals to negotiate with our board of directors rather than pursue non-negotiated takeover attempts. These provisions include the
items described below.
Board composition and filling vacancies. In accordance with our restated certificate of incorporation, our board is divided into three classes serving staggered three-year terms,
with one class being elected each year. Our restated certificate of incorporation also provides that directors may be removed only for cause and then only by the affirmative vote
of the holders of two-thirds or more of the shares then entitled to vote at an election of directors. Furthermore, any vacancy on our board of directors, however occurring,
including a vacancy resulting from an increase in the size of our board, may only be filled by the affirmative vote of a majority of our directors then in office even if less than a
quorum.
3
No written consent of stockholders. Our restated certificate of incorporation provides that all stockholder actions are required to be taken by a vote of the stockholders at an
annual or special meeting, and that stockholders may not take any action by written consent in lieu of a meeting. This limit may lengthen the amount of time required to take
stockholder actions and would prevent the amendment of our bylaws or removal of directors by our stockholder without holding a meeting of stockholders.
Meetings of stockholders. Our bylaws provide that only a majority of the members of our board of directors then in office or stockholders holding at least one-quarter of the
voting power of all the then outstanding shares of our capital stock entitled to vote generally in the election of directors may call special meetings of stockholders and only those
matters set forth in the notice of the special meeting may be considered or acted upon at a special meeting of stockholders. Our bylaws limit the business that may be conducted
at an annual meeting of stockholders to those matters properly brought before the meeting.
Advance notice requirements. Our bylaws establish advance notice procedures regarding stockholder proposals pertaining to the nomination of candidates for election as
directors or new business to be brought before meetings of our stockholders. These procedures provide that notice of stockholder proposals must be timely given in writing to
our corporate secretary prior to the meeting at which the action is to be taken. Generally, to be timely, notice must be received at our principal executive offices not less than 45
days or more than 75 days prior to the first anniversary date of the annual meeting for the preceding year. The notice must contain certain information specified in our bylaws.
Amendment to certificate of incorporation and bylaws. As required by the Delaware General Corporation Law, any amendment of our restated certificate of incorporation must
first be approved by a majority of our board of directors, and if required by law or our restated certificate of incorporation, must thereafter be approved by a majority of the
outstanding shares entitled to vote on the amendment, and a majority of the outstanding shares of each class entitled to vote thereon as a class, except that the amendment of the
provisions relating to stockholder action, directors, amending our bylaws, limitation of liability and the amendment of our restated certificate of incorporation must be approved
by not less than two-thirds of the outstanding shares entitled to vote on the amendment, and a majority of the outstanding shares of each class entitled to vote thereon as a class.
Our bylaws may be amended by the affirmative vote of a majority vote of the directors then in office, subject to any limitations set forth in the bylaws; and may also be
amended by the affirmative vote of at least two-thirds of the voting power of all the then outstanding shares of our capital stock entitled to vote generally in the election of
directors, voting together as a single class.
4
Exhibit 5.1
King & Spalding LLP
601 South California Avenue
Suite 100
Palo Alto, CA 94304
Tel: +1 650 422 6700
www.kslaw.com
March 30, 2021
PolarityTE, Inc.
1960 S. 4250 West
Salt Lake City, Utah, 84104
Ladies and Gentlemen:
We have acted as counsel to PolarityTE, Inc., a Delaware corporation (the “Company”), in connection with the issuance and sale of up to $50,000,000 in aggregate
offering price of shares (the “Shares”) of the Company’s common stock, par value $0.001 per share (the “Common Stock”), pursuant to the Company’s Registration Statement
on Form S-3 (File No. 333-229584) (the “Registration Statement”), a base prospectus and related prospectus supplement, dated March 30, 2021 (the “Prospectus Supplement”),
and that certain Sales Agreement, dated March 30, 2021 (the “Sales Agreement”), between the Company and Cantor Fitzgerald & Co.
In so acting, we have examined and relied upon the accuracy of original, certified, conformed or photographic copies of such records, agreements, certificates and
other documents as we have deemed necessary or appropriate to enable us to render the opinions set forth below. In all such examinations, we have assumed the genuineness of
signatures on original documents and the conformity to such original documents of all documents submitted to us as certified, conformed or photographic copies and, as to
certificates of public officials, we have assumed the same to have been properly given and to be accurate. As to matters of fact material to this opinion, we have relied, without
independent verification, upon statements and representations of representatives of the Company and public officials.
Based upon the foregoing, and subject to the additional assumptions, qualifications and limitations set forth below, upon the completion of all Corporate Proceedings
(as defined below) relating to the Shares, when the Shares have been issued and delivered, and payment therefor in an amount not less than the par value of thereof made, in
accordance with the Corporate Proceedings and the terms of the Sales Agreement, we are of the opinion that the Shares will be validly issued, fully paid and non-assessable. In
rending the foregoing opinion, we have assumed that (i) upon issuance of any Shares, the total number of shares of Common Stock issued and outstanding will not exceed the
total number of shares of Common Stock that the Company is then authorized to issue under its certificate of incorporation and (ii) the terms on which any Shares are sold will
be authorized and approved by the board of directors of the Company, or one or more committees thereof established prior to the issuance thereof by the board of directors of
the Company with authority to issue and sell the Shares pursuant to the Sales Agreement (the “Corporate Proceedings”).
PolarityTE, Inc.
March 30, 2021
Page 2
This opinion is limited in all respects to the federal laws of the United States of America and the Delaware General Corporation Law, and no opinion is expressed with
respect to the laws of any other jurisdiction or any effect that such laws may have on the opinions expressed herein. This opinion is limited to the matters stated herein, and no
opinion is implied or may be inferred beyond the matters expressly stated herein.
This opinion is given as of the date hereof, and we assume no obligation to advise you after the date hereof of facts or circumstances that come to our attention or
changes in law that occur, which could affect the opinions contained herein. This opinion is being rendered for the benefit of the Company in connection with the matters
addressed herein.
We consent to the filing of this opinion as Exhibit 5.1 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2020 filed on March 30, 2021
to be incorporated by reference into the Registration Statement and to the reference to us under the caption “Legal Matters” in the Prospectus Supplement. In giving such
consent, we do not admit that we are in the category of persons whose consent is required under Section 7 of the Securities Act of 1933, as amended.
Very truly yours,
/s/ King & Spalding LLP
Exhibit 10.8
ARTICLE I - INTRODUCTION
POLARITYTE, INC.
CHANGE IN CONTROL COMPENSATION PLAN
Section 1.1 Background. The Board of Directors of PolarityTE, Inc. (the “Company”), has considered the effect a Change in Control of the Company may have on
certain Executives of the Company. The Board has determined that it is in the best interests of the Company and its shareholders to assure that the Company will have the
continued dedication of its Executives, notwithstanding the possibility, threat or occurrence of a Change in Control of the Company. The Board believes it is imperative to
diminish the inevitable distraction of its Executives by virtue of the personal uncertainties and risks, including personal financial risks, created by a pending or threatened
Change in Control of the Company.
Section 1.2 Purpose. This Plan is designed to encourage the Executives’ full attention and dedication to the Company currently and in the event of any threatened or
pending Change in Control transaction and, notwithstanding the outcome of any such proposed transaction, to assure fair treatment of such Executives in the event of a Change
in Control of the Company.
ARTICLE II - ESTABLISHMENT OF THE POLICY
Section 2.1 Applicability of Plan. The benefits provided by this Plan shall be available to all Executives who, at or after the Effective Date, meet the eligibility
requirements of Article IV hereof.
Section 2.2 Contractual Right to Benefits. Subject to the provisions of Article VIII hereof, this Plan establishes and vests in each Participant a contractual right to the
benefits to which he or she is entitled hereunder, enforceable by the Participant against the Company on the terms and subject to the conditions hereof.
ARTICLE III - DEFINITIONS AND CONSTRUCTION
Section 3.1 Definitions. The following terms shall have the following meanings when used in this Plan with initial capital letters:
(a) “Base Pay” of a Participant means the Participant’s annual base salary from the Company as in effect on the Termination Date; provided, however, that any
reductions in Base Pay following the date of the Change in Control will not be considered when determining Base Pay hereunder.
(b) “Board” means the Board of Directors of the Company.
(c) “Change in Control” of the Company shall be deemed to have occurred if the events set forth in any one of the following paragraphs shall have occurred:
(i) The acquisition by any Person of Beneficial Ownership of fifty percent (50%) or more of either (A) the then-outstanding shares of common stock of the
Company (the “Outstanding Company Common Stock”), or (B) the combined voting power of the then-outstanding voting securities of the Company entitled to vote
generally in the election of directors (the “Outstanding Company Voting Securities ”); provided, however, that for purposes of this subsection (i), the following
acquisitions shall not constitute a Change in Control: (aa) any acquisition directly from the Company, (bb) any acquisition by the Company, (cc) any acquisition by any
employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation controlled by the Company, or (dd) any acquisition by any
corporation pursuant to a transaction that complies with clauses (A), (B), and (C) of subsection (iv) of this Section 3.1(c); or
(ii) The acquisition by any Person other than the Grandfathered Person of Beneficial Ownership of thirty percent (30%) or more of either (A) the adjusted then-
outstanding shares of common stock of the Company (the “Adjusted Outstanding Company Common Stock”), or (B) the combined voting power of the adjusted then-
outstanding voting securities of the Company entitled to vote generally in the election of directors (the “Adjusted Outstanding Company Voting Securities ”); provided,
however, that for purposes of this subsection (i), the following acquisitions shall not constitute a Change in Control: (aa) any acquisition directly from the Company, (bb)
any acquisition by the Company, (cc) any acquisition by any employee benefit plan (or related trust) sponsored or maintained by the Company or any corporation
controlled by the Company, or (dd) any acquisition by any corporation pursuant to a transaction that complies with clauses (A), (B), and (C) of subsection (iv) of this
Section 3.1(c); or
(iii) Individuals who, as of the Effective Date, constitute the Board (the “Incumbent Board”) cease for any reason to constitute at least a majority of the Board;
provided, however, that any individual becoming a member of the Board subsequent to the Effective Date whose election, or nomination for election by the Company’s
shareholders, was approved by a vote of at least a majority of the members of the Board then comprising the Incumbent Board shall be considered as though such
individual were a member of the Incumbent Board, but excluding, for this purpose, any such individual whose initial assumption of office occurs as a result of an actual
or threatened election contest with respect to the election or removal of members of the Board or other actual or threatened solicitation of proxies or consents by or on
behalf of a Person other than the Board; or
(iv) Consummation of a reorganization, merger or consolidation of the Company or sale or other disposition of all or substantially all of the assets of the
Company or the acquisition by the Company of assets or stock of another entity (a “Business Combination”), in each case, unless, following such Business Combination,
(A) all or substantially all of the individuals and entities who were the Beneficial Owners, respectively, of the Outstanding Company Common Stock and Outstanding
Company Voting Securities immediately prior to such Business Combination beneficially own, directly or indirectly, more than eighty percent (80%) of, respectively,
the then-outstanding shares of common stock and the combined voting power of the then-outstanding voting securities entitled to vote generally in the election of
directors, as the case may be, of the corporation resulting from such Business Combination (including a corporation which as a result of such transaction owns the
Company or all or substantially all of the Company’s assets either directly or through one or more subsidiaries) in substantially the same proportions as their ownership,
immediately prior to such Business Combination of the Outstanding Company Common Stock and Outstanding Company Voting Securities, as the case may be, (B) no
Person (excluding any corporation resulting from such Business Combination or any employee benefit plan (or related trust) of the Company or such corporation
resulting from such Business Combination) beneficially owns, directly or indirectly, fifty percent (50%) or more of, respectively, the then-outstanding shares of common
stock of the corporation resulting from such Business Combination, or the combined voting power of the then-outstanding voting securities of such corporation except to
the extent that such ownership existed prior to the Business Combination, and (C) at least a majority of the members of the board of directors of the corporation resulting
from such Business Combination were members of the Incumbent Board at the time of the execution of the initial agreement, or of the action of the Board, providing for
such Business Combination.
2
For purposes of this Section 3.1(c), “Person” shall mean any individual, firm, corporation, partnership (general or limited), limited liability company, limited liability
partnership, association, unincorporated organization, trust or other legal entity and also (y) any syndicate or group deemed to be a Person under Section 13(d)(3) of the
Exchange Act and Rule 13d-5(b) thereunder and (z) any successor (by merger or otherwise) of any such firm, corporation, partnership (general or limited), limited liability
company, limited liability partnership, association, unincorporated organization, trust, or other group or entity.
(d) “Code” means the Internal Revenue Code of 1986, as amended.
(e) “Company” means PolarityTE, Inc., a Delaware corporation, and any successor thereto as provided in Section 7.1 hereof.
(f) “Effective Date” means August 6, 2019.
(g) “Exchange Act” means the Securities Exchange Act of 1934, as amended.
(h) “Executive” means any person who is the Company’s Chief Executive Officer, President, Chief Operating Officer, Chief Financial Officer, Chief Scientific
Officer, Chief Medical Officer Chief, Translational Medicine Officer, General Counsel, Chief Intellectual Property Officer, Chief Legal Officer, Senior Vice President of
Operations, and Vice President of Commercial Strategy.
(i) “Good Reason” means, without the express written consent of the Participant:
(i) the assignment to the Participant of any duties inconsistent in any substantial respect with the Participant’s position (including status, office or title),
authority or responsibilities as in effect during the 120-day period immediately preceding the Change in Control, which assignment results in a substantial diminution in
such position, authority or responsibilities or any other substantial adverse change in such position, authority or responsibilities, excluding an isolated, insubstantial and
inadvertent action not taken in bad faith and which is remedied by the Company as set forth below;
(ii) any failure by the Company to furnish the Participant with compensation (including Base Salary and Incentive Pay) and benefits at a level substantially
equal to or exceeding those received by the Participant from the Company or any Subsidiary during the 120-day period preceding the Change in Control, other than (A)
an insubstantial and inadvertent failure remedied by the Company as set forth below, (B) a reduction in the same type of compensation paid to Executives that is applied
to substantially all of the Executives of the Company in approximately the same percentage of that type of compensation, or (C) a reduction or modification of any
employee benefit program covering substantially all of the employees of the Company, which reduction or modification generally applies to all employees covered under
such program; or
3
(iii) the Company requiring the Participant to be based or to perform services at any office or location that is in excess of 30 miles from the principal location of
the Participant’s work during the 120-day period immediately preceding the Change in Control, except for travel reasonably required in the performance of the
Participant’s responsibilities.
Before a termination by the Participant under this Section 3.1(i) will constitute termination for Good Reason, the Participant must give the Company a Notice of Termination
within 30 calendar days of the occurrence of the event that constitutes Good Reason. Failure to provide such Notice of Termination within such 30-day period shall be
conclusive proof that the Participant shall not have Good Reason to terminate employment.
For purposes of this Section 3.1(i), Good Reason shall exist only if the Company fails to remedy the event or events constituting Good Reason within 30 calendar days after
receipt of the Notice of Termination from the Participant. If the Participant determines that Good Reason for termination exists and timely files a Notice of Termination, such
determination shall be presumed to be true and the Company will have the burden of proving that Good Reason does not exist.
(j) “Grandfathered Person” shall mean Denver Lough, his spouse, lineal descendants and his Affiliates and Associates, and any trusts or other entities whose principal
beneficiary is Denver Lough, his spouse, lineal descendants or his Affiliates and Associates.
(k) “Incentive Pay” means the target annual cash incentive award, if any, as notified to the Participant for the year in which the Termination Date occurs under the
annual bonus, incentive or other payment of cash compensation in addition to Base Pay, made or to be made in regard to services rendered in any fiscal year or other annual
measurement period pursuant to any bonus, incentive, performance, or similar agreement, policy, program or arrangement of the Company or any successor thereto.
(l) “Just Cause” means without the written consent of the Company, the Participant (i) participates in fraud or embezzlement, in each case related to the Company or
its Subsidiaries, (ii) intentionally engages in other unlawful or criminal activity of a serious nature in connection with his or her duties as an Executive that causes or may
reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or its Subsidiaries, (iii) enters a guilty plea with respect to
or is convicted of a felony that causes or may reasonably be expected to cause substantial economic injury to or substantial injury to the reputation of the Company or its
Subsidiaries, (iv) commits any intentional and deliberate breach of his or her duties that, individually or in the aggregate, are material in relation to the Participant’s overall
duties and cause or are reasonably expected to cause substantial economic injury to or substantial injury to the reputation of the Company or its Subsidiaries, or (v) materially
breaches any confidentiality or noncompete agreement entered into with the Company. The Company shall have the burden of proving that Just Cause exists. For purposes of
this Plan, the Participant shall not be deemed to have been terminated for “Just Cause” hereunder unless (A) the Participant receives a Notice of Termination setting forth the
grounds for the termination at least 30 calendar days prior to the specified Termination Date, (B) if requested by the Participant, the Participant (and/or the Participant’s counsel
or other representative) is granted a hearing before the Board, and (C) the Board determines, by resolution duly adopted by a majority of the members of the Board, that the
Participant violated one or more of the provisions of the definition of “Just Cause” set forth above.
4
(m) “Notice of Termination” means (i) a written notice of termination by the Company to the Participant for Just Cause, or (ii) a written notice of termination for Good
Reason by the Participant to the Company, in either case, setting forth in reasonable detail the specific reasons for termination and the facts and circumstances claimed to
provide a basis for termination of employment under the provision indicated.
(n) “Participant” means an Executive who meets the eligibility requirements of Article IV hereof, other than an Executive who has entered into a separate agreement
with the Company with terms that become operative upon the occurrence of a change in control of the Company as defined in the agreement with the Executive (other than a
stock option or performance share award agreement or other form of equity award agreement or participation document entered into pursuant to a Company-sponsored plan that
may incidentally refer to accelerated vesting or accelerated payment upon a change in control (as defined in such separate plan or document)).
(o) “Plan” means this Change in Control Compensation Plan.
(p) “Protection Period” means the period of time commencing on the date of the first occurrence of a Change in Control and continuing until the date that is six months
following the date of the first occurrence of the Change in Control.
(q) “Severance Payment” means the payment of severance compensation as provided in Article V hereof.
(r) “Subsidiary” means any corporation or other legal entity a majority of the securities of which are owned by the Company or another Subsidiary of the Company.
(r) “Termination Date” means, (i) with respect to a termination by the Company for Just Cause, the date on which the Participant’s employment is terminated as stated
in the Notice of Termination, and (ii) with respect to a termination by the Participant for Good Reason, the date that is 30 calendar days following the Company’s receipt of the
Notice of Termination, modified to the extent necessary to be consistent with the requirements of Section 3.2(c) below.
Section 3.2 Status of Plan/Applicable Law.
(a) This Plan is classified as a “payroll practice” and is not a “plan” that is subject to the provisions of the Employee Retirement Income Security Act of 1974, as
amended. The Plan will be interpreted and administered accordingly.
(b) This Plan shall in all respects be interpreted, enforced and governed in accordance with the laws of the state of Utah, without regard to principles of conflicts of
laws.
5
(c) Payment of amounts, including any Severance Payments, under this Plan are intended to comply with an exception to or exclusion from the requirements of Code
Section 409A to the maximum extent possible and, to the extent Code Section 409A is applicable to any payments or benefits, this Plan is intended to comply with the
requirements of Code Section 409A. Notwithstanding any other provision of this Plan to the contrary, this Plan shall be interpreted, operated and administered in a manner
consistent with such intentions. The payments or benefits to be made or provided under this Plan, including any Severance Payments, are intended to be exempt from the
requirements of Code Section 409A because they are (i) non-taxable benefits, (ii) welfare benefits within the meaning of Treas. Reg. Sec. 1.409A-1(a)(5), (iii) short-term
deferrals under Treas. Reg. Sec. 1.409A-1(b)(4), or (iv) payments under a separation pay plan within the meaning of Treas. Reg. Sec. 1.409A-1(b)(9). For purposes of Code
Section 409A, each payment under this Plan shall be treated as a separate payment. Without limiting the generality of the foregoing, and notwithstanding any other provision of
this Plan to the contrary, all references in this Plan to the termination of the Participant’s employment or separation from service (including the date of such termination or
separation or Termination Date) are intended to mean the Participant’s “separation from service,” within the meaning of Code Section 409A(a)(2)(A)(i). All reimbursements or
in-kind benefits to be made under this Plan that constitute deferred compensation subject to Code Section 409A shall be made in accordance with the requirements of Treas.
Reg. Sec. 1.409A-3(i)(1)(iv). If, at the time of Participant’s termination of employment, Participant is a “specified employee” within the meaning of Code Section 409A, then
any payment of an amount that is deferred compensation subject to Code Section 409A and payable on account of a separation from service shall be suspended and not made
until the first business day following the end of the six month period following the Participant’s termination of employment, or if earlier, upon the Participant’s date of death.
Section 3.3 Severability. If a provision of this Plan shall be held illegal or invalid, the illegality or invalidity shall not affect the remaining parts of this Plan and this
Plan shall be construed and enforced as if the illegal or invalid provision had not been included.
ARTICLE IV - ELIGIBILITY
Section 4.1 Participation. Each person who is an Executive on the Effective Date shall be a Participant on the Effective Date. Thereafter, each other person who
becomes an Executive prior to both (a) a Change in Control, and (b) unless specifically provided for by the Board at the time a Participant is elected as an Executive, the date a
notice of termination of the Plan is provided under Section 8.1(a), shall automatically become a Participant on the day on which such person becomes an Executive; provided,
however, that if the person has not been employed by the Company on a continuous full-time basis during the period of 90 days prior to such day, he or she will not become a
Participant until the day that 90 days of continuous full-time employment has been completed.
Section 4.2 Duration of Participation. A Participant shall cease to be a Participant and shall have no rights hereunder, without further action, when he or she ceases to
be an Executive, unless such Participant is then entitled to payment of a Severance Payment as provided in Section 5.1 hereof. A Participant entitled to a Severance Payment
shall remain a Participant in this Plan until the full amount of the Severance Payment has been paid to the Participant.
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ARTICLE V - SEVERANCE PAYMENTS
Section 5.1 Right to Severance Payment.
(a) Subject to Subsection (c) hereof, a Participant shall be entitled to receive from the Company a Severance Payment in the amount provided in Section 5.2 hereof if
there has been a Change in Control and if, after a Change in Control and within the Protection Period, (i) the Participant’s employment by the Company shall be terminated by
the Company without Just Cause, or (ii) the Participant shall terminate employment with the Company for Good Reason.
(b) Notwithstanding anything to the contrary contained in this Plan, any termination of employment of the Participant or removal of the Participant from the office or
position in the Company that occurs prior to a Change in Control, but which the Participant reasonably demonstrates occurred at the request of a third party who had taken steps
reasonably calculated to effect the Change in Control, shall be deemed to be a termination or removal of the Participant after a Change in Control for purposes of this Plan.
(c) Notwithstanding anything to the contrary contained in this Plan, a Participant shall not be entitled to receive any Severance Payment hereunder unless within 60
days of the Participant’s termination (i) he or she has signed and returned to the Company a release substantially in the form attached to this Plan as Attachment A, and (ii) any
applicable rescission period for such release has expired. The Company shall provide a form of release to the Participant not later than 5 days following the Participant’s
Termination Date.
Section 5.2 Amount of Severance Payment.
(a) Each Participant entitled to a Severance Payment under this Plan shall receive as such Severance Payment a lump sum cash payment in an amount equal to
(i) for any Participant who is designated as the Chief Operating Officer, President of Corporate Development, or Chief Financial Officer, the sum of (A) 1.5
multiplied by the greater of $400,000 or Base Pay, and (B) 1.5 multiplied by the greater of $400,000 or the target bonus established in an annual executive target bonus
plan in effect on the Termination Date; and
(ii) for any other Participant, (A) 1.0 multiplied by the greater of $350,000 or Base Pay, and (B) 1.0 multiplied by the greater of $350,000 or the target bonus
established in an annual executive target bonus plan in effect on the Termination Date;
provided, however, that the amount of such cash payment determined pursuant to this Section 5.2(a) shall be reduced by an amount equal to the aggregate amount of any other
cash payments in the nature of severance payments paid or payable by the Company or any Subsidiary pursuant to any agreement, policy, program, arrangement or requirement
of statutory or common law (other than this Plan or cash payments received in lieu of stock incentives) from the Company.
(b) The Participant shall not be required to mitigate damages or the amount of his or her Severance Payment by seeking other employment or otherwise, nor shall the
amount of such payment be reduced by any compensation earned by the Participant as a result of employment after the termination of his or her employment by the Company.
7
Section 5.3 Time of Severance Payment. The Severance Payment to which a Participant is entitled under Section 5.2(a) shall be paid to the Participant by the
Company in cash and in full on the 60th day following the Participant’s Termination Date. If a Participant should die before all amounts payable to him or her under this Plan
have been paid, such unpaid amounts shall be paid to the personal representative of the Participant’s estate.
Section 5.4 Liability for Payment. The Company shall be solely liable for and shall pay the Severance Payments (or cause the Severance Payments to be paid) to the
Participant.
ARTICLE VI - OTHER RIGHTS AND BENEFITS NOT AFFECTED
Section 6.1 Other Benefits. Neither the provisions of this Plan nor the Severance Payment provided for hereunder shall reduce or increase any amounts otherwise
payable, or in any other way affect a Participant’s rights as an employee of the Company, whether existing now or hereafter, under any benefit, incentive, retirement, stock
option, stock bonus, stock purchase or employment agreement, policy (other than this Plan), program or arrangement (collectively, the “Other Plans”), except to the extent
specifically provided in such Other Plans. Notwithstanding the generality of the foregoing, each Participant is entitled to receive any Base Salary accrued but unpaid as of the
Termination Date and any other bonus, incentive or other pay or employee benefits that are accrued but unpaid as of the Termination Date.
Section 6.2 Certain Limitations. This Plan does not constitute a contract of employment or impose on any Participant or the Company any obligation to retain any
Participant as an employee or in any other capacity, to change or not change the status, terms or conditions of any Participant’s employment, or to change or not change the
Company’s policies regarding termination of employment.
ARTICLE VII - SUCCESSORS SECTION
Section 7.1 Successors. Without limiting the obligations of any person or entity under applicable law, the Company shall require any successor or assignee, whether
direct or indirect, by purchase, reorganization, merger, consolidation or otherwise, to all or substantially all the business or assets of the Company, expressly and unconditionally
to assume and agree to perform the Company’s obligations under this Plan, in the same manner and to the same extent that the Company would be required to perform if no
such succession or assignment had taken place. In such event, the term “Company,” as used in this Plan, shall mean the Company as hereinbefore defined and any successor
assignee to the business or assets that by reason hereof becomes bound by the terms and provisions of this Plan.
ARTICLE VIII - DURATION, AMENDMENT AND TERMINATION
Section 8.1 Duration/Termination.
(a) This Plan will terminate as to all Participants: (i) if a Change in Control has not occurred, the date that is one year following the giving of notice to each Executive
who is a Participant on the date of the notice that the Board has determined (by resolution adopted by a majority of the members of the Board) that the Plan will terminate; and
(ii) if a Change in Control has occurred, the expiration of the Protection Period.
8
(b) Notwithstanding the foregoing, if a Change in Control occurs, this Plan shall continue in full force and effect, and shall not terminate or expire until after all
Participants who were Participants on the date of the Change in Control who became entitled to a Severance Payment hereunder shall have received such payment in full.
Section 8.2 Amendment. Unless a Change in Control has previously occurred, this Plan may be amended in any respect by resolution duly adopted by the Board;
provided, however, that no such amendment shall adversely affect the rights of a Participant under this Plan without the Participant’s consent unless such amendment does not
become effective until the date that is one year following the giving of notice to all Participants of the adoption of such amendment by the Board. If a Change in Control occurs,
notwithstanding the foregoing, this Plan no longer shall be subject to amendment, change, substitution, deletion or revocation in any respect.
Section 8.3 Form of Amendment/Termination. The form of any proper amendment or termination of this Plan shall be a written instrument signed by a duly authorized
officer or officers of the Company, certifying that the amendment or termination has been approved by the Board as provided in Sections 8.1 or 8.2 hereof. A proper
amendment of this Plan automatically shall effectuate a corresponding amendment to all Participants’ rights hereunder. A proper termination of this Plan automatically shall
effectuate a termination of all Participants’ rights and benefits hereunder without further action.
ARTICLE IX - MISCELLANEOUS SECTION
Section 9.1 Legal Fees and Expenses
(a) It is the intent of the Company that Participants not be required to incur any expenses associated with the enforcement of rights under this Plan because the cost and
expense thereof would substantially detract from the benefits intended to be extended to Participants hereunder. Accordingly, if the Company has failed to comply with any of
its obligations under this Plan or in the event that the Company or any other person takes any action to declare this Plan void or unenforceable, or institutes any litigation
designed to deny, or to recover from, a Participant the benefits intended to be provided to the Participant hereunder, the Company irrevocably authorizes the Participant from
time to time to retain counsel of his or her choice, at the expense of the Company, as hereafter provided, to represent the Participant in connection with the initiation or defense
of any legal action, whether by or against the Company, in any jurisdiction. The Company shall pay or cause to be paid and shall be solely responsible for any and all reasonable
attorneys’ fees and expenses incurred by the Participant in enforcing his or her rights hereunder individually (but not as a representative of any class) as a result of the
Company’s failure to perform this Plan or any provision hereof or as a result of the Company or any person contesting the validity or enforceability of this Plan or any provision
hereof.
(b) Notwithstanding any provision of the Plan to the contrary, all fees and expenses subject to payment or reimbursement pursuant to this Section 9.1 shall be paid not
later than the last day of the calendar month following the calendar month in which the Participant incurs such fees or expenses. The Participant shall be solely responsible for
timely providing to the Company sufficient proof of the fees and expenses to be paid or reimbursed pursuant to this Section.
9
Section 9.2 Withholding of Taxes . The Company may withhold from any amounts payable under this Plan all foreign, federal, state, or other taxes as the Company
reasonably determines are required pursuant to any law or government regulation or ruling.
Section 9.3 Successors.
(a) This Plan shall inure to the benefit of and be enforceable by the Participant’s personal or legal representatives, executors, administrators, successors, heirs,
distributees and/or legatees.
(b) The rights under this Plan are personal in nature and neither the Company nor any Participant shall, without the consent of the other, assign or transfer any rights or
obligations hereunder except as expressly provided in Sections 5.3 and 7.1 hereof. Without limiting the generality of the foregoing, the Participant’s right to receive a Severance
Payment hereunder shall not be assignable or transferable, whether by pledge, creation of a security interest or otherwise, other than by a transfer by his or her will or by the
laws of descent and distribution and, in the event of any attempted assignment or transfer contrary to this Section 9.3(b), the Company, shall have no liability to pay any amount
so attempted to be assigned or transferred.
(c) The Company and each Participant recognize that each party will have no adequate remedy at law for breach by the other of any of the agreements contained herein
and, in the event of any such breach, the Company, and each Participant hereby agree and consent that the other shall be entitled to a decree of specific performance, mandamus
or other appropriate remedy to enforce performance of this Plan.
Section 9.4 Notices. For all purposes of this Plan, all communications, including without limitation notices, consents, requests or approvals provided for herein, shall
be in writing and shall be deemed to have been duly given when delivered or five business days after having been mailed by registered or certified mail, return receipt
requested, postage prepaid, addressed to the Company (to the attention of the General Counsel of the Company), at its principal executive office and to any Participant at his or
her principal residence as shown in the relevant records of the Company, or to such other address as any party may have furnished to the other in writing and in accordance
herewith, except that notices of change of address shall be effective only upon receipt.
Adopted by Resolution of the Board of Directors on August 6, 2019, as amended through November 5, 2020.
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ATTACHMENT A
RELEASE
This Release (the “Release”) is required to be delivered by ________________ (“Executive”) as a condition of Executive’s receipt of severance and other benefits
under the PolarityTE, Inc., Change in Control Compensation Plan (the “Plan”).
1. Executive agrees that, in consideration of the severance and other benefits to which he/she is eligible under the terms of the Plan, Executive hereby releases and
forever discharges the Company, as well as its affiliates and all of their respective directors, officers, employees, members, agents, and attorneys (the “Released Parties”), of
and from any and all manner of actions and causes of action, suits, debts, claims, and demands whatsoever, in law or equity, known or unknown, asserted or unasserted, which
he/she ever had, now has, or hereafter may have on account of his/her employment with the Company, the termination of his/her employment with the Company, and/or any
other fact, matter, incident, claim, injury, event, circumstance, happening, occurrence, and/or thing of any kind or nature which arose or occurred prior to the date when he/she
executes this Agreement, including, but not limited to, any and all claims for wrongful termination; breach of any implied or express employment contract; unpaid
compensation of any kind; breach of any fiduciary duty and/or duty of loyalty; breach of any implied covenant of good faith and fair dealing; negligent or intentional infliction
of emotional distress; defamation; fraud; unlawful discrimination, harassment; or retaliation based upon age, race, sex, gender, sexual orientation, marital status, religion,
national origin, medical condition, disability, handicap, or otherwise; any and all claims arising under arising under Title VII of the Civil Rights Act of 1964, as amended
(“Title VII”); the Utah Anti-Discrimination Act, as amended; the Equal Pay Act of 1963, as amended (“EPA”); the Americans with Disabilities Act of 1990, as amended
(“ADA”); the Family and Medical Leave Act, as amended (“FMLA”); the Employee Retirement Income Security Act of 1974, as amended (“ERISA”); the Sarbanes-Oxley
Act of 2002, as amended (“SOX”); the Worker Adjustment and Retraining Notification Act of 1988, as amended (“ WARN”); and/or any other federal, state, or local law(s) or
regulation(s); any and all claims for damages of any nature, including compensatory, general, special, or punitive; and any and all claims for costs, fees, or other expenses,
including attorneys’ fees, incurred in any of these matters. The Company also acknowledges that Executive does not release or waive any claims, and that he/she retains any
rights he/she may have, to any vested 401(k) monies (if any) or benefits (if any), or any other benefit entitlement that is vested as of the Employment Termination Date pursuant
to the terms of any Company-sponsored benefit plan governed by ERISA. Nothing contained herein shall release the Company from its obligations set forth in this Agreement.
However, this general release and waiver of claims excludes, and the Executive does not waive, release, or discharge any right to file an administrative charge or complaint
with, or testify, assist, or participate in an investigation, hearing, or proceeding conducted by, the Equal Employment Opportunity Commission or other similar federal or state
administrative agencies, although the Executive waives any right to monetary relief related to any filed charge or administrative complaint. Executive is not waiving rights or
claims that otherwise cannot be waived by applicable law, including without limitation claims: (a) that may arise after the date of this Release, (b) for indemnification and/or
advanced expenses under applicable law, any directors and officers liability insurance, applicable certificate of incorporation or by-laws, (c) to enforce the Plan, (d) to exercise
vested equity awards determined as of the date hereof, (e) to benefits that have accrued and are payable pursuant to the Company’s employee benefit plans, including deferred
compensation plans, (f) for unemployment insurance benefits; (g) for workers’ compensation benefits related to any injury he/she sustained in the course of his/her duties for the
Company, (h) to rights under the Consolidated Omnibus Reconciliation Act of 1985, as amended, (“COBRA”), and (i) to his/her rights, if any, under the Uniformed Services
Employment and Reemployment Rights Act (USERRA) 38 U.S.C. § 4301, et seq.
11
[Without limiting the generality of Section 1, above, Executive acknowledges and agrees that he/she is waiving and releasing any rights he/she may have under the
Age Discrimination in Employment Act of 1967, as amended (the “ADEA”) (29 U.S. Code §621 et seq.), and that this waiver and release is knowing and voluntary. Executive
and the Company agree that this waiver and release does not apply to any rights or claims that may arise under the ADEA after Executive has executed this Agreement. Nothing
in this Agreement prevents or precludes Executive from challenging or seeking a determination in good faith of the validity of this Agreement under the ADEA, nor does it
impose any condition precedent, penalties or costs for doing so, unless specifically authorized by federal law. Executive acknowledges that the consideration given for this
Agreement is in addition to anything of value to which he/she was already entitled. The Company advises Executive in this Agreement to consult with an attorney prior to
executing this Agreement. Executive understands that insofar as this Release relates to Executive’s rights, if any, under the ADEA, it shall not become effective or enforceable
until seven days after he/she signs it. Executive acknowledges that he/she has been advised to consult with an attorney if he/she chooses before signing this Release. Executive
understands that he/she has the right to revoke this Release, insofar as it extends to Executive’s claims, if any, under the ADEA, by written notice of such to the Company within
seven (7) calendar days following his/her signing this Release. Any such revocation must be in writing and hand-delivered to the Company or, if sent by mail, postmarked
within the applicable revocation period, sent by certified mail, return receipt requested, and addressed to: PolarityTE, Inc., Attention: General Counsel, 123 N. Wright Brothers
Drive, Salt Lake City, Utah, 84106.][1]
2. Executive agrees not to sue any Releasee or participate in any lawsuit against a Releasee concerning any claim released under Section 1 above, or to challenge the
enforceability of this Release or the release given thereby. This covenant not to sue does not apply to any claim that Executive did not knowingly and voluntarily sign this
Release as required by the ADEA and the Older Workers Benefit Protection Act.
3. Notwithstanding the above, Executive is not waiving and is not being required to waive any right that cannot be waived under law, including the right to file an
administrative charge or participate in an administrative investigation or proceeding; provided, however, that Executive hereby waives all right to any monetary recovery should
any foreign, federal, state or other administrative agency pursue any claims on Executive’s behalf arising out of or related to employment with and/or termination of
employment with any of the Releasees.
4. Executive and the Company each agree to treat this Release as confidential and will not discuss or disclose, the terms of this Release, other than his/her immediate
family members, attorneys and financial advisors, or as required by law.
1 Retain this section if ADEA applicable to Executive.
12
5. Executive has been advised that this Release shall be executed by him/her no earlier than Executive’s termination date and no later than forty-five (45) days after
Executive’s Termination Date.
6. Executive expressly acknowledges and understands that this Release is not an admission of liability under any statute or otherwise by Company, and it does not
admit any violation of Executive’s legal rights.
7. The parties agree that this Release shall be binding upon and inure to the benefit of Executive’s assigns, heirs, executors and administrators as well as all Releasees.
8. This Release shall in all respects be interpreted, enforced and governed in accordance with the laws of the state of Utah, without regard to principles of conflicts of
laws, and furthermore, any dispute regarding this Release shall be subject to the exclusive jurisdiction of any court of competent jurisdiction located in Salt Lake County, Utah.
9. The language of all parts of this Release shall in all cases be construed as a whole, according to its fair meaning, and not strictly for or against any of the parties. In
the event that one or more provisions of this Release shall for any reason be held to be illegal or unenforceable, this Release shall be revised only to the extent necessary to
make the Release or such provision(s) legal and enforceable.
EXECUTIVE
Print Name:
Date
13
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We consent to the incorporation by reference in the Registration Statements of PolarityTE, Inc. on Form S-3 (No. 333-229584) and Form S-8 (Nos. 333-251795, 333-237189,
333-227721, 333-225264, and 333-211959) of our report dated March 30, 2021, on our audits of the consolidated financial statements as of December 31, 2020 and 2019 and
for each of the years then ended, which report is included in this Annual Report on Form 10-K to be filed on or about March 30, 2021.
Exhibit 23.1
/s/ EisnerAmper LLP
EISNERAMPER LLP
Iselin, NJ
March 30, 2021
EXHIBIT 31.1
I, David Seaburg, certify that:
1. I have reviewed this Annual Report on Form 10-K of PolarityTE, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15 (f) and 15 d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 30, 2021
/s/ David Seaburg
Chief Executive Officer
(Principal Executive Officer)
EXHIBIT 31.2
I, Jacob Patterson, certify that:
1. I have reviewed this Annual Report on Form 10-K of PolarityTE, Inc.;
CERTIFICATION
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition,
results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-
15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rule 13a-15 (f) and 15 d-15(f)) for the registrant and we have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this
annual report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles;
c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure
controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d) disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over
financial reporting; and
5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors
and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrant’s ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial
reporting.
Date: March 30, 2021
/s/ Jacob Patterson
Chief Financial Officer
(Principal Financial Officer)
Certification Pursuant to Rule 13a-14(b) and Section 1350, Chapter 63 of Title 18, United States Code
Pursuant to Section 1350, Chapter 63 of Title 18, United States Code, the undersigned officers of PolarityTE, Inc. (the “Company”), do hereby certify, to such officers’
knowledge, that:
The Annual Report on Form 10-K for the period ending December 31, 2020 (the “Form 10-K”) of the Company fully complies with the requirements of Section 13(a)
or 15(d) of the Securities Exchange Act of 1934, and the information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Exhibit 32.1
Date: March 30, 2021
/s/ David Seaburg
David Seaburg
Chief Executive Officer
/s/ Jacob Patterson
Jacob Patterson
Chief Financial Officer