REGENETP, INC. 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 above in 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 theSEC , 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. 35 OverviewPolarityTE is a clinical stage biotechnology company developing regenerative tissue products and biomaterials. Until the end ofApril 2022 ,PolarityTE also operated a pre-clinical research business.PolarityTE's 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. Since the beginning of 2017, we have incurred substantial operating losses and our operations have been financed primarily by public equity financings. The clinical trials for SkinTE and the regulatory process will likely result in an increase in our costs in the foreseeable future, we expect we will continue to incur substantial operating losses as we pursue an IND and BLA, and we expect to seek financing from external sources over the foreseeable future to fund our operations.
Regenerative Tissue Product
Our first regenerative tissue product is SkinTE. OnJuly 23, 2021 , we submitted an IND for SkinTE to the FDA through our subsidiary, PTE-MD, as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. FDA approval of the IND was given inJanuary 2022 , which allowed us to commence the first of two pivotal studies needed to support a BLA. Our first pivotal study under our IND is the COVER DFUs Trial. We expect to incur significant operating costs in the next three to four calendar years as we pursue the regulatory process for SkinTE with the FDA, conduct clinical trials and studies, and pursue product research, all while operating our business and incurring continuing fixed costs related to the maintenance of our assets and business. We expect to incur significant losses in the future, and those losses could be more severe due to unforeseen expenses, difficulties, complications, delays, and other unknown events. 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 licensure for SkinTE.
Beginning in 2017, we developed internally a laboratory and research capability to advance the development of SkinTE and related technologies, which we operated through our subsidiary,Arches Research, Inc. ("Arches"). At the beginning ofMay 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 operated through our subsidiary IBEX. ThroughArches and IBEX, we also offered research and laboratory testing services to unrelated third parties on a contract basis. As noted above,Arches offered COVID-19 testing from the end ofMay 2020 toAugust 2021 , when it discontinued the service. We sold the IBEX business and related real estate at the end ofApril 2022 . As a result of the foregoing developments, we have not been engaged in any revenue generating operating activity since the end ofApril 2022 and we do not expect to be engaged in any revenue generating activity unless and until we are successful in obtaining a BLA for SkinTE. Business Effects of COVID-19 We do not believe that COVID-19 had a significant impact on our business activities in 2022, which is consistent with the trend we observed in 2021 that the impact of the COVID-19 pandemic waned as a result of the broad distribution of vaccines and effects of sustained public health actions to mitigate the spread of disease. Nevertheless, a significant resurgence of COVID-19 attributable to a news strain of the disease or the rise of a new pandemic could adversely affect our employees, patients, clinicians, communities, and business operations, as well as theU.S. economy and financial markets. The full extent to which any such pandemic could directly or indirectly impact the timing and cost of pursuing FDA licensure of SkinTE under a BLA is highly uncertain and cannot be predicted. Recent Developments
OnDecember 27, 2022 , we issued a press release announcing that we signed a non-binding letter of intent (the "LOI") withMichael Brauser ("Brauser") for him to make an offer to acquire 100% of our outstanding equity interests at a proposed offering price of$1.03 per common share, which would be paid entirely in cash. Completion of the transaction was subject to Brauser conducting due diligence investigations, the negotiation and execution of definitive transaction documents, Brauser successfully acquiring a majority of the outstanding common stock of the Company, and other customary closing conditions. The LOI provided that Brauser would pursue due diligence and the parties would endeavor to negotiate the terms of the definitive transaction documents during the period endingMarch 15, 2022 . We and Brauser were unable to complete negotiation and drafting of definitive documents byMarch 15, 2023 , and the LOI terminated on that date. Even though the LOI terminated, new proposals for a potential transaction between us andMr. Brauser are under discussion, and we are also pursuing a process of evaluating our financial resources, product opportunities, and business plan with a view to advancing the interests of
our stockholders. 36
Liquidity and Capital Resources
Available Capital Resources and Potential Sources of Liquidity
As ofDecember 31, 2022 , we had$11.4 million in cash and cash equivalents and working capital of$11.2 million . As ofDecember 31, 2021 , we had$19.4 million in cash and cash equivalents, and working capital of$17.7 million . For each of the years endedDecember 31, 2022 and 2021, cash used in operating activities was$22.6 million , or an average of$1.9 million per month. As of the date of this annual report we do not expect that our cash and cash equivalents of$11.4 million as ofDecember 31, 2022 , will be sufficient to fund our current business plan including related operating expenses and capital expenditure requirements beyond the second calendar quarter of 2023. Accordingly, there is substantial doubt about our ability to continue as a going concern, as we do not believe that our cash and cash equivalents will be sufficient to fund our business plan for at least twelve months from the date of issuance of our annual financial statements in this report. We plan to address this condition by raising additional capital to finance our operations. AfterApril 2022 we have not engaged in any business activity that generates cash flows from operations, which in the past contributed to defraying our operating costs, and we do not expect we will be engaged in any operating business activity that would generate cash flow in the foreseeable future. Accordingly, we expect we will be dependent on obtaining capital from external sources to fund our operations over the next three to four years. 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 we may not be successful in obtaining additional financing. Therefore, it is not considered probable, as defined in applicable accounting standards, that our plan to raise additional capital will alleviate the substantial doubt regarding our ability to continue as a going concern.
Anticipated Uses of Capital Resources
As noted above, we are focused primarily on the advancement of our IND and subsequent BLA to attain a license to manufacture and distribute SkinTE. To that end, inJune 2021 we engaged a CRO to provide services for the COVER DFUs Trial at a cost of approximately$6.5 million consisting of$3.1 million of service fees and$3.4 million of estimated costs. In 2021 we prepaid$0.5 million , which will be applied to payment of the final invoice under the work order. Over the approximately three-year term of the COVER DFUs Trial the service provider will submit to us for payment monthly invoices for units of work stated in the work order that are completed and billable expenses incurred. We began enrolling subjects in our COVER DFUs at the end ofApril 2022 , and we believe we may be able to complete enrollment of 100 subjects sometime in the first six months of 2024. As enrollment increases, we expect our monthly CRO and related costs of conducting the trial will ramp up. Our expectation is that the second DFU clinical trial under the IND for SkinTE will be similar to the COVER DFUs Trial with respect to size, length of time to complete, and cost. To the extent we decide to pursue additional indications for the application of SkinTE, we expect we will need to submit separate IND applications for those indications and conduct additional clinical trials to support BLAs for those indications. 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, our most significant uses of cash to maintain our business going forward are expected to be compensation, costs of occupying, operating, and maintaining our facilities, and the costs associated with maintaining our status as a publicly traded company. During the 12-month period following the filing of this report our plan is to preserve the facilities, equipment, and staff we need to advance the COVER DFUs Trial and other work necessary for advancing the process for obtaining regulatory approval of SkinTE. With the acceptance of our IND for SkinTE and the beginning of the COVER DFUs Trial, we do not expect to have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff inApril 2022 . During the latter part of 2021 and intoFebruary 2022 , we engaged in discussions with certain third parties regarding potential M&A transactions and strategic initiatives. In the first quarter of 2022 we recognized$1.2 million of one-time costs for professional services associated with such M&A and strategic initiatives, which is in addition to$1.2 million of such costs recognized
in the fourth quarter of 2021. 37
Our actual capital requirements will depend on many factors, including the cost and timing of advancing our IND and subsequent BLA for the use of SkinTE on DFUs, the cost and timing of additional INDs and BLAs for other indications where SkinTE may be used, the cost and timing of clinical trials, the cost of establishing and maintaining our facilities in compliance with current good tissue practices and current good manufacturing practice requirements, and the cost and timing of advancing our product development initiatives related to SkinTE. Our projection of the period of time for which our financial resources will be adequate to support our operations is a forward-looking statement that involves risks and uncertainties, and actual results could vary materially. We will need to raise additional capital in the future to fund our effort to obtain FDA approval of SkinTE and maintain our operations. Any additional equity financing including financings involving convertible securities, if able to be obtained, may be highly dilutive, on unfavorable terms, or otherwise disadvantageous, to existing stockholders. Debt financing, if available, may involve restrictive covenants or require us to grant a security interest in our assets. If we elect to pursue collaborative arrangements, the terms of such arrangements may require us to relinquish rights to certain of our technologies, products, or marketing territories. Our failure to raise additional capital when needed, and on acceptable terms, would require us to reduce our operating expenses and would limit our ability to continue operations, any of which would have a material adverse effect on our business, financial condition, results of operation, and prospects. Results of Operations Changes in Our Operations
There have been significant changes in our operations affecting results of
operations for the year ended
OnJuly 23, 2021 , we submitted an IND for SkinTE to the FDA through our subsidiary, PTE-MD, as the first step in the regulatory process for obtaining licensure for SkinTE under Section 351 of the Public Health Service Act. FDA approval of the IND was given inJanuary 2022 , which allowed us to commence the first of two pivotal studies needed to support a BLA for SkinTE. We ceased selling SkinTE at the end ofMay 2021 , when the period of enforcement discretion previously announced by the FDA with respect to its IND and premarket approval requirements for regenerative medicine therapies, such as SkinTE, came to an end, and we do not expect to be able to commercialize SkinTE until our BLA is approved, which we believe will take at least three to four years. Consequently, we recognized products net revenues in 2021, and did not have any such revenues in 2022.Arches began offering COVID-19 testing services inMay 2020 under 30-day renewable testing agreements with multiple nursing home and pharmacy facilities in the state ofNew York controlled by a single company, which substantially added to our services net revenues in the first three months of 2021. When theNew York nursing homes and pharmacies adopted on-site employee testing at the end ofMarch 2021 , our COVID-19 testing revenues declined substantially, and inAugust 2021 , we decided to cease COVID-19 testing.Arches focused its research and development resources on supporting our IND and clinical trial efforts for the remainder of 2021. However, we do not expect we will have the same need for research and development staff associated with product development and, as a result, we reduced research and development staff inApril 2022 , and began to eliminate or sell certain items of equipment that had been leased or purchased for our research and development activity. At the beginning ofMay 2018 , we acquired IBEX. As described above, Utah CRO, our direct subsidiary, held all of the IBEX Shares and all the member interest of IBEX Property, which owned the Property used in IBEX operations. At the end ofApril 2022 , Utah CRO sold all the IBEX Shares to an unrelated third party in exchange for a promissory note in the principal amount of$0.4 million bearing simple interest at the rate of 10% per annum payable interest only on a quarterly basis and all principal and remaining accrued interest due on the five-year anniversary of the closing of the sale of the IBEX Shares. On the same day IBEX Property closed the sale of the Property to an affiliate of the same party that purchased the IBEX Shares and we realized net cash proceeds of$2.3 million , after deducting closing costs and advisory fees. Prior toApril 2022 , while we were exploring the opportunities for selling IBEX and IBEX Property, IBEX assumed a more passive approach to marketing its services, which resulted in a decline in IBEX services revenues in 2022 prior to the sale. Accordingly, our services net revenues were nominal from the beginning of 2022 through the sale of IBEX and the Property completed at the end ofApril 2022 , and services net revenues generated by IBEX ended permanently after the sale. 38 As a result of the foregoing developments, we made a number of changes to our operations that impacted our results of operations. These included reductions in our work force and reducing the services and infrastructure needed to support a larger work force and commercial sales effort.
Comparison of the years ended
For the Year Ended December 31, Increase (Decrease)
2022 2021 Amount Percent
Net revenues
Products $ - $ 3,076 $ (3,076 ) (100 )%
Services 814 6,328 (5,514 ) (87 )%
Total net revenues 814 9,404 (8,590 ) (91 )%
Cost of revenues
Products - 448 (448 ) (100 )%
Services 616 3,868 (3,252 ) (84 )%
Total costs of revenues 616 4,316 (3,700 ) (86 )%
Gross profit 198 5,088 (4,890 ) (96 )%
Operating costs and expenses
Research and development 11,048 14,182 (3,134 ) (22 )%
General and administrative 15,027 20,476 (5,449 ) (27 )%
Sales and marketing - 2,808 (2,808 ) (100 )%Restructuring and other charges 103 678 (575 ) (85 )% Gain on sale of property and equipment (4,000 ) - (4,000 ) (100 )% Impairment of assets held for sale 393 - 393 100 % Impairment of goodwill and intangible assets - 630 (630 ) (100 )% Total operating costs and expenses 22,571 38,774 (16,203 ) (42 )% Operating loss (22,373 ) (33,686 ) 11,313 34 % Other income (expense), net
Gain on extinguishment of debt - 3,612 (3,612 ) (100 )% Change in fair value of common stock warrant liability 14,468 4,995 9,473 190 % Inducement loss on sale of liability classified warrants - (5,197
) 5,197 100 % Interest expense, net (11 ) (127 ) 116 91 % Other income, net 83 216 (133 ) (62 )% Net loss $ (7,833 )$ (30,187 ) $ 22,354 74 %
Net Revenues and Gross Profit. We ceased commercial sales of SkinTE in the second calendar quarter of 2021 and sold the IBEX services business at the end ofApril 2022 , so we were not engaged in any revenue generating business activity atDecember 31, 2022 , and do not expect to generate operating revenues from any business activity for the foreseeable future. The decreases in revenues, cost of revenues, and gross profit for 2022 compared to the same periods in 2021 are consistent with our cessation of revenue-generating business activity.
Operating Costs and Expenses. Operating costs and expenses decreased
Research and development expenses decreased 22% for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . The decrease is primarily attributable to costs incurred in 2021 for completing our pre-IND diabetic foot ulcers trial, lab supplies for work on preparing the technical items for our IND, and consulting services for preparing our IND that did not recur in 2022, which was partially offset by an increase in research and development expenses primarily attributable to SkinTE manufacturing and overhead personnel redirecting their efforts following the cessation of SkinTE sales to research and development activities, manufacturing costs for SkinTE produced for use in the COVER DFUs Trial, and increased costs related to quality control supplies and infrastructure implemented for the COVER DFUs Trial. 39 The amount of general and administrative expenses decreased 27% for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . We effectuated a reduction in force for our commercial operations in the second quarter of 2021. Consequently, there were reductions in cash compensation, stock compensation, consulting fees, and travel expense. Furthermore, with the cessation of SkinTE sales we re-allocated manufacturing supplies and compensation from general and administrative expenses to research and development costs. These reductions were partially offset by professional fees incurred in connection with our pursuit of a strategic transaction in 2021 and the first two months of 2022 that did not materialize, and investment banking fees paid in connection with an at-the-market offering we terminated in the first quarter of 2022. In 2021 we incurred sales and marketing costs related to our commercial sales effort that did not recur in 2022. In connection with terminating commercial sales of SkinTE in 2021, we realized as a restructuring charge a loss on impairment of property and equipment in the amount of$0.4 million and a charge of$0.6 million for employee severance and revaluing of equity awards related to severance, which was offset by a gain of$0.3 million from early termination of an office/ laboratory lease inAugusta, Georgia .
In 2022 we realized a charge of
Pursuant to a transaction described under "Item 2. Properties," above, we closed onNovember 30, 2022 , transactions that had the effect of assigning a subsidiary we created to effectuate a purchase of real property we occupied inSalt Lake City, Utah , to an unrelated third party and our lease of a portion of that property from that subsidiary. In accordance with FASB ASC Topic 842, the transaction is accounted for as a sale and a leaseback and we are required to recognize a pre-tax gain on sale, which is the difference between the fair value of the property sold and the sale price, of$4.0 million , which is recorded within operating expenses on the consolidated statements of operations, even though we did not receive any net cash from the assignment of the subsidiary. Operating Loss and Net Loss. Operating loss decreased$11.3 million , or 34%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . Net loss decreased$22.4 million , or 74%, for the year endedDecember 31, 2022 , compared to the year endedDecember 31, 2021 . Warrants issued in connection with financings we completed in 2022, 2021 and 2020 are classified as liabilities and remeasured each period until settled, classified as equity, or expiration. As a result of the periodic remeasurement, we recorded a gain for change in fair value of common stock warrant liability of$14.5 million for the year endedDecember 31, 2022 , compared to a gain of$5.0 million for the year endedDecember 31, 2021 . For additional information on the change in fair value of common stock warrant liability please see Note 4 to the consolidated financial statements for the years endedDecember 31, 2022 and 2021, included in this report. We issued common stock purchase warrants inJanuary 2021 , as an inducement to holders of warrants issued inDecember 2020 to exercise those December warrants. As a result, we recognized an inducement loss of$5.2 million for the year endedDecember 31, 2021 . There was no similar inducement loss in 2022. OnApril 12, 2020 , PTE-MD (the "Borrower") entered into a promissory note evidencing an unsecured loan in the amount of$3.6 million (the "Loan") made to it under the Paycheck Protection Program ("PPP"). The PPP was established under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act") and is administered by theU.S. Small Business Administration . 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. PTE-MD applied for forgiveness of the Loan, which was granted inJune 2021 and resulted in a gain on extinguishment of debt in the amount of$3.6 million in 2021. There was no similar gain in 2022. As noted above, the transactions we closedNovember 30, 2022 , resulting in a disposition of the subsidiary we created to effectuate a purchase of real property we occupied inSalt Lake City, Utah , to an unrelated third party and our lease of a portion of that property from that subsidiary, we recognized a pre-tax gain on sale of$4.0 million , which is recorded within operating expenses on the consolidated statement of operations, even though we did not receive any net cash from the assignment of the subsidiary. There was no similar gain in 2021. Non-GAAP Financial Measure
The table below provides a reconciliation of adjusted net loss, which is a
non-GAAP measure that shows net loss before fair value adjustments relating to
our common stock warrant liability and warrant inducement loss to GAAP net loss.
We believe adjusted net loss is useful to investors because it eliminates the
effect of non-operating items that can significantly fluctuate from period to
period due to fair value remeasurements. For purposes of calculating non-GAAP
per share metrics, the same denominator is used as that which was used in
calculating net loss per share under GAAP. Other companies may calculate
adjusted net loss differently than we do. Adjusted net loss has limitations as
an analytical tool and you should not consider adjusted net loss in isolation or
as a substitute for our financial results prepared in accordance with GAAP.
40
Adjusted Net Loss Attributable to Common Stockholders
(in thousands - unaudited non-GAAP measure)
For the Year Ended
December 31,
2022 2021
GAAP net loss $ (7,833 ) $ (30,187 )
Change in fair value of common stock warrant
liability (14,468 ) (4,995 )
Inducement loss on sale of liability classified
warrants - 5,197
Non-GAAP adjusted net loss attributable to common stockholders - basic & diluted$ (22,301 ) $
(29,985 )
GAAP net loss per share attributable to common stockholders Basic*$ (1.14 ) $ (9.43 ) Diluted*$ (1.67 ) $ (9.43 ) Non-GAAP adjusted net loss per share attributable to common stockholders Basic and diluted*$ (3.25 ) $ (9.37 )
* Giving retroactive effect to the 1-for-25 reverse stock split effectuated on
Critical Accounting Policies and Estimates
Stock-Based Compensation. We measure all stock-based compensation to employees and non-employees using a fair value method. For stock options with graded vesting, we recognize compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards 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 theU.S. Treasury yield curve in effect at the time of the grant commensurate with the expected term of the option. The volatility factor is determined based on our historical stock prices. Forfeitures are recognized as they occur. The fair value of restricted stock grants is measured based on the fair market value of our common stock on the date of grant and amortized to compensation expense over the vesting period of, generally, six months to three years. 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.
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