10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT

PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended July 31, 2017

Commission File No. 000-51128

POLARITYTE, INC.

(Exact name of registrant as specified in its charter)

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

615 Arapeen Drive

Salt Lake City, UT 84108

(Address of principal executive offices)

Registrant’s Telephone Number, Including Area Code: (732) 225-8910

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)

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 [X] No [  ]

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (232.4.05 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [  ]

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

Large accelerated filer	[  ]		Accelerated filer	[  ]
Non-accelerated filer	[  ]	(Do not check if smaller reporting company)	Smaller reporting company	[X]
Emerging growth company	[  ]

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

As of September 12, 2017, there were 6,333,985 shares of the Registrant’s common stock outstanding.

INDEX

	Page
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of July 31, 2017 (unaudited) and October 31, 2016	1
Condensed Consolidated Statements of Operations for the three and nine months ended July 31, 2017 and 2016 (unaudited)	2
Condensed Consolidated Statement of Changes in Stockholders’ Equity for the nine months ended July 31, 2017 (unaudited)	3
Condensed Consolidated Statements of Cash Flows for the nine months ended July 31, 2017 and 2016 (unaudited)	4
Notes to Condensed Consolidated Financial Statements (unaudited)	5
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3. Quantitative and Qualitative Disclosures about Market Risk	22
Item 4. Controls and Procedures	22
PART II - OTHER INFORMATION
Item 1. Legal Proceedings	23
Item 1A. Risk Factors	23
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	23
Item 3. Defaults Upon Senior Securities	23
Item 4. Mine Safety Disclosures	24
Item 5. Other Information	24
Item 6. Exhibits	24
SIGNATURES	25

-i- 

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

POLARITYTE, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

	July 31,2017			October 31,2016
	(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	3,027		$	6,523
Prepaid expenses and other current assets		411			47
Receivable from Zift		60			-
Current assets related to discontinued operations		-			163
Total current assets		3,498			6,733
Non-current assets:
Property and equipment, net		2,073			18
Receivable from Zift, non-current		30			-
Total non-current assets		2,103			18
TOTAL ASSETS	$	5,601		$	6,751
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable and accrued expenses	$	1,439		$	474
Warrant liability		-			70
Current liabilities related to discontinued operations		-			810
Total current liabilities		1,439			1,354
Total liabilities		1,439			1,354
Commitments and Contingencies
STOCKHOLDERS’ EQUITY:
Convertible preferred stock - 10,000,000 shares authorized, 3,246,042 and 7,374,454 shares issued and outstanding at July 31, 2017 and October 31, 2016, aggregate liquidation preference $2,140 and $4,854, respectively		111,195			10,153
Common stock - $.001 par value; 250,000,000 shares authorized; 6,093,743 and 2,782,963 shares issued and outstanding at July 31, 2017 and October 31, 2016, respectively		6			3
Additional paid-in capital		142,358			123,417
Accumulated deficit		(249,397	)		(128,176	)
Total stockholders’ equity		4,162			5,397
TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY	$	5,601		$	6,751

See accompanying notes to condensed consolidated financial statements.

1 

POLARITYTE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

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

	For the three months ended						For the nine months ended
	July 31,						July 31,
	2017			2016			2017			2016
Operating costs and expenses
Research and development	$	1,641		$	-		$	3,424		$	-
Research and development – intellectual property acquired		-			-			104,693			-
General and administrative		3,629			1,880			12,757			3,531
		5,270			1,880			120,874			3,531
Operating loss		(5,270	)		(1,880	)		(120,874	)		(3,531	)
Other expenses (income)
Interest income		(3	)		(5	)		(10	)		(15	)
Change in fair value of warrant liability		-			(159	)		8			(133	)
Net loss from continuing operations		(5,267	)		(1,716	)		(120,872	)		(3,383	)
Loss from discontinued operations		(33	)		(770	)		(449	)		(851	)
Gain on sale of discontinued operations		100			-			100			-
Gain (loss) from discontinued operations, net		67			(770	)		(349	)		(851	)
Net loss		(5,200	)		(2,486	)		(121,221	)		(4,234	)
Special cash dividend attributable to preferred stockholders		-			-			-			(6,002	)
Net loss attributable to common stockholders	$	(5,200	)	$	(2,486	)	$	(121,221	)	$	(10,236	)
Net loss per share, basic and diluted:
Loss from continuing operations	$	(0.94	)	$	(0.65	)	$	(26.65	)	$	(1.73	)
Gain (loss) from discontinued operations		0.01			(0.29	)		(0.08	)		(0.43	)
Special cash dividend attributable to preferred stockholders		-			-			-			(3.06	)
Net loss attributable to common stockholders	$	(0.93	)	$	(0.94	)	$	(26.73	)	$	(5.22	)
Weighted average shares outstanding, basic and diluted:		5,568,072			2,631,640			4,534,967			1,960,643

See accompanying notes to condensed consolidated financial statements.

2 

POLARITYTE, INC.

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY

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

	Preferred Stock						Common Stock				Additional Paid-in		Accumulated			Total Stockholders’
	Number			Amount			Number		Amount		Capital		Deficit			Equity
Balance as of October 31, 2016		7,374,454		$	10,153			2,782,963	$	3	$	123,417	$	(128,176	)	$	5,397
Issuance of common stock in connection with:
Conversion of Series A preferred stock to common stock		(3,991,487	)		(976	)		761,798		1		975		-			-
Conversion of Series B preferred stock to common stock		(6,512	)		(549	)		108,543		-		549		-			-
Conversion of Series C preferred stock to common stock		(7,798	)		(609	)		146,346		-		609		-			-
Conversion of Series D preferred stock to common stock		(129,665	)		(1,517	)		216,106		-		1,517		-			-
Issuance of Series E preferred stock for research and development intellectual property		7,050			104,693			-		-		-		-			104,693
Proceeds from option exercises		-			-			231,404		-		1,123		-			1,123
Warrant exchange to common stock		-			-			56,250		-		78		-			78
Stock-based compensation expense		-			-			1,031,000		1		11,813		-			11,814
Shares issued for cash		-			-			759,333		1		2,277		-			2,278
Net loss		-			-			-		-		-		(121,221	)		(121,221	)
Balance as of July 31, 2017		3,246,042		$	111,195			6,093,743	$	6	$	142,358	$	(249,397	)	$	4,162

See accompanying notes to condensed consolidated financial statements.

3 

POLARITYTE, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited, in thousands)

	For the nine months ended July 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$	(121,221	)	$	(4,234	)
Loss from discontinued operations		349			851
Loss from continuing operations		(120,872	)		(3,383	)
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Depreciation and amortization		295			-
Stock based compensation expense		10,696			1,845
Research and development - intellectual property acquired		104,693			-
Change in fair value of warrant liability		8			(133	)
Offering costs expensed		-			21
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(364	)		(20	)
Accounts payable and accrued expenses		857			(46	)
Net cash used in continuing operating activities		(4,687	)		(1,716	)
Net cash provided by discontinued operating activities		33			163
Net cash used in operating activities		(4,654	)		(1,553	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment		(2,253	)		-
Net cash used in continuing investing activities		(2,253	)		-
Net cash provided by discontinued investing activities		10			-
Net cash used in investing activities		(2,243	)
CASH FLOWS FROM FINANCING ACTIVITIES
Special cash dividend		-			(10,000	)
Proceeds from stock options exercised		1,123			129
Net proceeds from the sale of common stock and warrants		-			1,406
Proceeds from the sale of common stock		2,278			-
Payments to Zift		-			(299	)
Net cash provided by (used in) financing activities		3,401			(8,764	)
Net decrease in cash and cash equivalents		(3,496	)		(10,317	)
Cash and cash equivalents - beginning of period		6,523			17,053
Cash and cash equivalents - end of period	$	3,027		$	6,736
Supplemental schedule of non-cash investing and financing activities:
Conversion of Series A preferred stock to common stock	$	976		$	401
Conversion of Series B preferred stock to common stock	$	549		$	-
Conversion of Series C preferred stock to common stock	$	609		$	-
Conversion of Series D preferred stock to common stock	$	1,517		$	140
Unpaid liability for acquisition of property and equipment	$	108		$	-
Warrant exchange for common stock shares	$	78		$	-
Common stock shares and warrants issued for offering costs	$	-		$	75

See accompanying notes to condensed consolidated financial statements.

4 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

Asset Acquisition and Name Change. On December 1, 2016, Majesco Entertainment Company (n/k/a PolarityTE, Inc.), a Delaware corporation (the “Company”) entered into an agreement to acquire the assets of Polarity NV (as defined below), a regenerative medicine company. The asset acquisition was subject to shareholder approval, which was received on March 10, 2017 and the transaction closed on April 7, 2017, as more fully described below. In January, 2017, the Company changed its name to “PolarityTE, Inc.”

On December 1, 2016, the Company appointed Dr. Denver Lough as Chief Executive Officer, Chief Scientific Officer and Chairman of our Board of Directors and Dr. Ned Swanson as Chief Operating Officer of the Company. Until their respective appointments, both doctors were associated with Johns Hopkins University, Baltimore, Maryland, as full-time residents. On December 1, 2016, Dr. Lough assigned the patent application as well as all related intellectual property to a newly-formed Nevada corporation, Polarityte, Inc. (“Polarity NV”), and the Company entered into an Agreement and Plan of Reorganization (the “Agreement”) with Polarity NV and Dr. Lough. As a result, at closing, the patent application would be owned by the Company without the need for further assignments or recordation with the Patent Trademark Office.

On April 7, 2017, the Company issued 7,050 shares of its newly authorized Series E Preferred Stock (the “Series E Preferred Shares”) convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017) to Dr. Lough for the purchase of the Polarity NV’s assets. Since the assets purchased were in-process research and development assets, the total purchase price was immediately expensed as research and development - intellectual property acquired since they have no alternative future use.

Drs. Lough and Swanson lead the Company’s current efforts focused on scientific research and development and in this regard on December 1, 2016, the Company leased laboratory space and purchased laboratory equipment in Salt Lake City, Utah. Subsequent expenditures include the purchase of medical equipment, including microscopes for high end real-time imaging of cells and tissues required for tissue engineering and regenerative medicine research. The Company has added additional facilities, and established university and scientific relationships and collaborations in order to pursue its business. None of these activities were performed by Dr. Lough or Dr. Swanson prior to December 1, 2016 in connection with their university positions or privately.

Dr. Lough is the named inventor under a pending patent application for a novel regenerative medicine and tissue engineering platform filed in the United States and elsewhere. The Company believes that its future success depends significantly on its ability to protect its inventions and technology. Prior to December 1, 2016, no employees, consultants or partners engaged in any business activity related to the patent application and no licenses or contracts were granted related to the patent application, other than professional services related to preparation and filing of the patent.

There was never any intent to acquire an ongoing business and no ongoing business was acquired. The asset is preserved in a stand-alone entity merely as a vehicle to provide the Company a seamless means to acquire the asset (a patent application) without undue cost, expense and time. Polarity NV has never had employees and, therefore, no employees were acquired in the transaction.

The Company adopted ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, during the first quarter of fiscal 2017. In accordance with ASU 2017-01 we analyzed the above transaction as follows:

Step 1 - Is substantially all the fair value of the gross assets acquired concentrated in a single or (group of similar) identifiable asset(s)? - The Company has a proposal to acquire a single intellectual property asset and no employees on the acquisition date.

Step 2 - Evaluate whether an input and a substantive process exists? Does the set have outputs? - The set does not yet have outputs, as Polarity NV’s intellectual property does not generate any revenue. Without outputs, the set requires employees that form an organized workforce with skills, knowledge, or experience to perform an acquired process that is critical to the ability to create outputs to qualify as a business. Polarity NV never had any employees or workforce. On December 1, 2016, prior to any Polarity NV acquisition, the Company hired Denver Lough as its Chief Executive and Chief Scientific Officer and Edward Swanson as Chief Operating Officer. Both of these executives were employed full-time by Johns Hopkins University and were not employed by Polarity NV. In December 2016, the Company established a clinical advisory board and added three members in December 2016 and three more in January 2017. Establishing the clinical advisory board and hiring a COO are critical to establishing at the Company for the first time a workforce that has the knowledge and experience to obtain regulatory approval of the Company’s intellectual property. Therefore, the acquisition of an intellectual property asset and no employees from Polarity NV on April 7, 2017 did not represent the acquisition of an organized workforce with the necessary skills and experience to create outputs.

5 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Discontinued Operations. On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco Sub”) to Zift Interactive LLC, a Nevada limited liability company pursuant to a purchase agreement. Pursuant to the terms of the agreement, the Company sold 100% of the issued and outstanding shares of common stock of Majesco to Zift, including all of the right, title and interest in and to Majesco Sub’s business of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the agreement, the Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues valued at $0. As of July 31, 2017, the Company received $10,000 in cash consideration.

As a result of transactions contemplated above, the Company disposed entirely of its gaming business assets and intends to devote its resources and attention to its regenerative medicine efforts going forward.

General. The accompanying condensed consolidated financial statements present the financial results of PolarityTE, Inc. and its wholly owned subsidiaries; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended October 31, 2016 and Majesco Sub was sold on June 23, 2017.

Segments. With the sale of Majesco Sub on June 23, 2017, the Company now solely operates in its Regenerative Medicine segment.

Regenerative Medicine

Through its regenerative medicine efforts, the Company is developing the proprietary tissue engineering platform invented by Dr. Denver Lough to translate regenerative products into clinical application. Preliminarily, the technological platform has demonstrated the potential capacity to grow fully functional tissue across the entire spectrum of the musculoskeletal and integumentary systems, including skin, muscle, bone, cartilage, peripheral nerve, fat, and fascia. Preliminary results indicate it has applications across solid organ and specialty tissue regeneration as well, including bowel, liver, kidney, and urethra. The product furthest in the development pipeline is an autologous (tissue from the patient themselves) skin regeneration construct, SkinTE ^TM, to regenerate fully functional skin with all of its layers, including epidermis, dermis, hypodermis, and all appendages including hair and glands. The Company is preparing SkinTE ^TM for clinical testing and market entry. The platform provides a pipeline of products to follow in parallel, with plans for serial clinical and market entry, and each addressing separate and similarly sized potential markets. The Company’s approach seeks to benefit from fewer regulatory and capital barriers to market entry, avoiding the long timelines associated with three phase trials and their associated costs seen with other competing technologies and therapeutics. The regenerative medicine business model being pursued takes advantage of the smaller regulatory hurdles, with streamlined product development from cell/tissue in vitro and ex vivo testing, to small and large animal preclinical models, manufacturing technology transfer, and ultimately clinical application and market entry occurring in a mapped out stepwise fashion for each product.

NASDAQ listing. On January 6, 2017, PolarityTE, Inc., was notified by The NASDAQ Stock Market, LLC of failure to comply with Nasdaq Listing Rule 5605(b)(1) which requires that a majority of the directors comprising the Company’s Board of Directors be considered “independent”, as defined under the Rule. The notice had no immediate effect on the listing or trading of the Company’s common stock on The NASDAQ Capital Market and the common stock continued to trade on The NASDAQ Capital Market under the symbol “COOL”.

On February 22, 2017, the Company regained compliance with Listing Rule 5605(b)(1), the independent director requirement for continued listing on The NASDAQ Stock Market, with the appointment of Mr. Steve Gorlin and Dr. Jon Mogford, and the matter is now closed. PolarityTE’s common stock will continue to be listed on The NASDAQ Capital Market.

The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim period. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. The Company’s financial results are impacted by the seasonality of the retail selling season and the timing of the release of new titles. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at October 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended October 31, 2016 filed with the Securities and Exchange Commission on Form 10-K on December 30, 2016.

6 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended October 31, 2016 and Majesco Sub was sold on June 23, 2017. Significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.

Accounts Payable and Accrued Expenses. The carrying amounts of accounts payable and accrued expenses approximate fair value as these accounts are largely current and short term in nature.

Property and Equipment. Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets, generally five years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.

Income Taxes. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely than not.

Stock Based Compensation. The Company measures all stock-based compensation to employees using a fair value method and records such expense in general and administrative and research and development expenses. Compensation expense for stock options with cliff vesting is recognized on a straight-line basis over the vesting period of the award, based on the fair value of the option on the date of grant. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.

The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on the Company’s historical stock prices.

The value of restricted stock grants 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.

Loss Per Share. Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect would be anti-dilutive due to our net loss.

Commitments and Contingencies. We are subject to claims and litigation in the ordinary course of our business. We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.

Accounting for Warrants. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet as a current liability.

7 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Change in Fair Value of Warrant Liability. The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that certain instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in fair value of warrant liability” in the condensed consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 7).

Reverse stock-split. On July 27, 2016, Majesco Entertainment Company (the “Company”) filed a certificate of amendment (the “Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).

The Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016. The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer LLC, acted as exchange agent for the Reverse Stock Split.

As a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest.

All common share and per share amounts have been restated to show the effect of the Reverse Stock Split.

Reclassifications. Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. One reclassification relates to discontinued operations. Another represents a reclassification of approximately $1.8 million from general and administrative expenses to research and development expenses for the six months ended April 30, 2017.

Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements are the recoverability of advance payments for capitalized software development costs and intellectual property licenses, the valuation of warrant liability, stock based compensation and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”) that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The Company adopted ASU No. 2014-15 on November 1, 2016 and its adoption did not have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance effective November 1, 2016.

Recent Accounting Pronouncements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material impact on our financial statements.

8 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company is currently assessing the impact that ASU No. 2016-09 will have on its condensed consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

3. GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced net losses and negative cash flows from operations since its inception. The Company has sustained cumulative losses of approximately $249.4 million as of July 31, 2017, has negative working capital and has not generated positive cash flows from operations. The continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, potential collaborations, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot make any assurances that additional financings will be available to it and, if available, completed on a timely basis, on acceptable terms or at all. If the Company is unable to complete a debt or equity offering, execute a collaboration arrangement or otherwise obtain sufficient financing when and if needed, it would negatively impact its business and operations and could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to cease operations. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

9 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

	July 31, 2017		October 31, 2016
Legal retainer	$	60	$	-
Prepaid insurance		86		22
Tax receivable		-		18
Trade show deposit		160		-
Other prepaids		71		-
Deposits		32		-
Other assets		2		7
Total prepaid expenses and other current assets	$	411	$	47

5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consist of the following (in thousands):

	July 31, 2017			October 31, 2016
Medical equipment	$	2,193		$	-
Computers and software		198			61
Furniture and equipment		109			78
Total property and equipment, gross		2,500			139
Accumulated depreciation		(427	)		(121	)
Total property and equipment, net	$	2,073		$	18

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in thousands):

	July 31, 2017		October 31, 2016
Accounts payable	$	56	$	-
Due to Zift		66		-
Medical equipment purchase		108		-
Salaries and other compensation		662		463
Legal and accounting		454		-
Other accruals		93		11
Total accounts payable and accrued expenses	$	1,439	$	474

Salaries and other compensation include accrued payroll expense and employer 401K plan contributions.

10 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

7. STOCKHOLDERS’ EQUITY

Convertible preferred stock as of July 31, 2017 consisted of the following (in thousands, except share amounts):

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		3,146,671	$	769	$	2,140		713,245
Series B		54,250		47,689		4,020		-		794,806
Series C		26,000		17,965		1,401		-		417,791
Series D		170,000		26,667		312		-		44,445
Series E		7,050		7,050		104,693		-		7,050,000
Other authorized, unissued		912,700		-		-		-		-
Total		10,000,000		3,246,042	$	111,195	$	2,140		9,020,287

Convertible preferred stock as of October 31, 2016 consisted of the following (in thousands, except share amounts):

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		7,138,158	$	1,745	$	4,854		1,189,693
Series B		54,250		54,201		4,569		-		903,362
Series C		26,000		25,763		2,010		-		429,392
Series D		170,000		156,332		1,829		-		260,553
Other authorized, unissued		919,750		-		-		-		-
Total		10,000,000		7,374,454	$	10,153	$	4,854		2,783,000

Series A Preferred Shares

The Series A Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion price is $4.08 (current conversion price is $3.00) per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of its common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of PolarityTE, Inc., the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined in the December Subscription Agreements) as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.

The holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however, that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common stock outstanding at such time.

The Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.

11 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company entered into separate Registration Rights Agreements with each Series A Preferred Shares Investor, (as amended on January 30, 2015 and March 31, 2015, the “December Registration Rights Agreement”). The Company agreed to use its best efforts to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or conversion of the Series A Preferred Shares and to maintain its effectiveness until all such securities have been sold or may be sold without restriction under Rule 144 of the Securities Act. In the event the Company fails to satisfy its obligations under the December Registration Rights Agreements, the Company is required to pay to the Investors on a monthly basis an amount equal to 1% of the investors’ investment, up to a maximum of 12%. On March 31, 2015, the Company and the required holders of Series A Preferred Shares amended the registration rights agreement to extend the filing deadline for the registration statement to June 30, 2015.

Series B Preferred Shares

The Series B Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series B Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $140.00 and the initial conversion price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholders of the Company on an as converted basis, based on a conversion price of $8.40 per shares. The Series B Preferred Shares rank junior to the Series A Preferred Shares and bear no dividends. All of the convertible preferred shares do not represent an unconditional obligation to be settled in a variable number of shares, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholders’ equity.

Series C Preferred Shares

The Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series C Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series C Preferred Share is $120.00 per share, and the initial conversion price is $7.20 (current conversion price is $5.16) per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions and provided that the conversion price may not be reduced to less than $5.16, unless and until such time as the Company obtains shareholder approval to allow for a lower conversion price. The Company is prohibited from effecting a conversion of the Series C Preferred Shares to the extent that, as a result of such conversion, such May Investor would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to the beneficial ownership limitations discussed previously, each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.80 per share. The Series C Preferred Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s Series B Preferred Shares.

In connection with the sale of the Series C Preferred Shares, the Company also entered into separate registration rights agreements (the “May Registration Rights Agreement”) with each Investor. The Company agreed to use its best efforts to file a registration statement to register the Shares and the common stock issuable upon the conversion of the Series C Preferred Shares, within thirty days following the Closing Date, to cause such registration statement to be declared effective within ninety days of the filing day and to maintain the effectiveness of the registration statement until all of such shares of common stock have been sold or are otherwise able to be sold pursuant to Rule 144 without restriction. In the event the Company fails to satisfy its obligations under the Registration Rights Agreement, the Company is obligated to pay to the Investors on a monthly basis, an amount equal to 1% of the Investor’s investment, up to a maximum of 12%. Effective as of the original filing deadline of the registration statement, the Company obtained the requisite approval from the Investors for the waiver of its obligations under the May Registration Rights Agreement.

The Company evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity to determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered equity hosts and recorded in stockholders’ equity.

12 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Series D Preferred Shares

The Preferred D Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred D Shares, plus all accrued and unpaid dividends, if any, on such Preferred D Share, as of such date of determination, divided by the conversion price. The stated value Preferred D Shares is $1,000 per share and the initial conversion price is $600 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Preferred D Shares. Upon 61 days written notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no dividends and shall rank senior to the Company’s other classes of capital stock.

Series E Preferred Shares

The Preferred E Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred E Shares, plus all accrued and unpaid dividends, if any as of such date of determination, divided by the conversion price. The stated value of each Preferred E Share is $1,000 and the initial conversion price is $1.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Preferred E Shares, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior to the Company’s common stock and all other securities of the Company that do not expressly provide that such securities rank on parity with or senior to the Preferred E Shares. Until converted, each Preferred E Share is entitled to two votes for every share of common stock into which it is convertible on any matter submitted for a vote of stockholders. The Preferred E Shares participate on an “as converted” basis with all dividends declared on the Company’s common stock.

April 2016 Registered Common Stock and Warrant Offering

On April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the Company of 250,000 shares of the Company’s common stock, par value $0.001 per share at an offering price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common shares and the Warrant Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing of the offering occurred on April 19, 2016.

Each Warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. The Warrants were classified as liabilities and measured at fair value, with changes in fair value recognized in the Condensed Consolidated Statements of Operations in other expenses (income) until they were exchanged for shares of common stock on January 18, 2017. The initial recognition of the Warrants resulted in an allocation of the net proceeds from the offering to a warrant liability of approximately $318,000, with the remainder being attributable to the common stock sold in the offering.

Preferred Share Conversion Activity

During the nine months ended July 31, 2017, 3,991,487 shares of Convertible Preferred Stock Series A, 6,512 shares of Convertible Preferred Stock Series B, 7,798 shares of Convertible Preferred Stock Series C and 129,665 shares of Convertible Preferred Stock Series D were converted into 1,232,793 shares of common stock.

During the nine months ended July 31, 2016, 1,638,810 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible Preferred Stock Series D were converted into 293,137 shares of common stock.

13 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Common Stock

On January 4, 2016, the Company declared a special cash dividend of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis. Approximately $6.0 million of the special cash dividend relates to preferred stock shares.

On January 6, 2016, certain employees exercised their options at $4.08 in exchange for the Company’s common stock for an aggregated amount of 31,656 shares.

On December 16, 2016, the Company sold an aggregate of 759,333 shares of its common stock to certain accredited investors pursuant to separate subscription agreements at a price of $3.00 per share for gross proceeds of $2.3 million.

On January 18, 2017, the Company entered into separate exchange agreements (each an “Exchange Agreement”) with certain accredited investors (the “Investors”) who purchased warrants to purchase shares of the Company’s common stock (the “Warrants”) pursuant to the prospectus dated April 13, 2016. In 2016, the Company issued 250,000 shares of the Company’s common stock and Warrants to purchase 187,500 shares of common stock (taking into account the reverse split of the Company’s common stock on a 1 for 6 basis effective with The NASDAQ Stock Market LLC on August 1, 2016). The common stock and Warrants were offered by the Company pursuant to an effective shelf registration statement. Under the terms of the Exchange Agreement, each Investor exchanged each Warrant it purchased in the Offering for 0.3 shares of common stock. Accordingly, the Company issued an aggregate of 56,250 shares of common stock in exchange for the return and cancellation of 187,500 Warrants.

During the nine months ended July 31, 2017, certain employees exercised their options at a weighted-average exercise price of $4.85 in exchange for the Company’s common stock for an aggregated amount of 231,404 shares. The Company received approximately $1.1 million from the exercise of stock options.

8. FAIR VALUE MEASUREMENTS

In accordance with ASC 820, Fair Value Measurements, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

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

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

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

In connection with the April 19, 2016 common stock offering, the Company issued warrants to purchase an aggregate of 187,500 shares of common stock. These warrants were exercisable at $6.90 per share and expire on April 19, 2018. These warrants were analyzed and it was determined that they require liability treatment. Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet as a current liability.

The fair value of these warrants at January 18, 2017 and October 31, 2016 was determined to be approximately $78,000 and $70,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $3.62 and $3.58, respectively; (2) a risk-free rate of 0.97% and 0.75%, respectively; and (3) an expected volatility of 68% and 61%, respectively.

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At July 31, 2017, there was no warrant liability balance.

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability (in thousands):

	Warrant Liability
Fair value - October 31, 2016	$	70
Change in fair value		8
Exchanged - January 18, 2017 (see Note 7)		(78	)
Fair value - July 31, 2017	$	-

14 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

9. STOCK BASED COMPENSATION ARRANGEMENTS

Stock-based compensation expense during the three months ended July 31, 2017 and 2016 amounted to approximately $3.7 million and $1.6 million, respectively. Stock-based compensation expense (including stock based compensation recorded in discontinued operations) during the nine months ended July 31, 2017 and 2016 amounted to approximately $11.8 million and $2.8 million, respectively. Stock-based compensation expense is recorded in general and administrative and research and development expenses in the accompanying consolidated statements of operations.

On February 8, 2017, the Board appointed Steve Gorlin as a Class II director with a term expiring in 2019 and Dr. Jon Mogford as a Class III director with a term expiring in 2017 to fill vacancies created upon the resignations of Messrs. Brauser and Honig. In addition, Mr. Gorlin was appointed as a member of each of the Board’s Audit, Compensation and Nominating and Corporate Governance Committees. Each of Mr. Gorlin and Dr. Mogford are deemed an “independent” director as such term is defined by the rules of The NASDAQ Stock Market LLC. There are no family relationships between either of Mr. Gorlin and Dr. Mogford and any of our other officers and directors. Mr. Gorlin and Dr. Mogford were each granted (i) an option to purchase up to 50,000 shares of the Company’s common stock at an exercise price equal to $4.72 per share (the “Options”) which Options will vest in 24 equal monthly installments commencing on the one month anniversary of the grant date and (ii) a restricted stock award of 50,000 shares of common stock that will vest in 24 equal monthly installments commencing on the one month anniversary of the grant date (the “RSUs”). The Options and the RSUs were granted pursuant to the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan, the vesting and the exercise of the Options and the vesting of the RSUs are subject to stockholder approval (which was considered perfunctory given management’s high level of ownership interest).

A summary of the Company’s employee stock option activity in the nine months ended July 31, 2017 is presented below:

	Number of shares			Weighted-Average Exercise Price
Outstanding - October 31, 2016		383,210		$	5.74
Granted		2,715,000		$	3.49
Exercised		(231,404	)	$	4.85
Outstanding - July 31, 2017		2,866,806		$	3.68
Options exercisable - July 31, 2017		997,008		$	3.88
Weighted-average fair value of options granted during the period				$	2.37

A summary of the Company’s non-employee stock option activity in the nine months ended July 31, 2017 is presented below:

	Number of shares		Weighted-Average Exercise Price
Outstanding - October 31, 2016		-	$	-
Granted		52,000	$	4.71
Outstanding - July 31, 2017		52,000	$	4.71
Options exercisable - July 31, 2017		10,833	$	4.71

The value of employee and non-employee stock option grants is amortized over the vesting period of, generally, one to three years. As of July 31, 2017, there was approximately $2.8 million of unrecognized compensation cost related to non-vested employee and non-employee stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.7 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the nine months ended July 31, 2017:

Risk free annual interest rate		1.78-2.28	%
Expected volatility		71.65-86.34	%
Expected life		5.04-6.00
Assumed dividends	None

15 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

A summary of the Company’s restricted stock activity in the nine months ended July 31, 2017 is presented below:

	Number of shares			Weighted-Average Grant-Date Fair Value
Unvested - October 31, 2016		274,829		$	6.00
Granted		1,031,000		$	4.56
Vested		(1,011,466	)	$	4.22
Unvested - July 31, 2017		294,363		$	7.07

During the nine months ended July 31, 2017, the Company granted 1,031,000 restricted shares to employees and non-employees.

The weighted-average fair value of restricted shares granted during the nine months ended July 31, 2017 was $4.56. The total fair value of restricted stock granted during the nine months ended July 31, 2017 was approximately $4.7 million.

The value of restricted stock grants is measured based on its fair value on the date of grant and amortized over the vesting period of, generally, six months to three years. As of July 31, 2017, there was approximately $2.0 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 0.6 years.

10. INCOME TAXES

Due to the Company’s history of losses and uncertainty of future taxable income, a valuation allowance sufficient to fully offset net operating losses and other deferred tax assets has been established. The valuation allowance will be maintained until sufficient positive evidence exists to support a conclusion that a valuation allowance is not necessary. The Company’s effective tax rate for the nine months ended July 31, 2017 and 2016 differed from the expected U.S. federal statutory rate primarily due to the change in the valuation allowance. The issuance of Preferred Stock in connection with the Polarity acquisition will likely result in limitations on the utilization of the Company’s net operating loss carryforwards under IRS section 382.

11. LOSS PER SHARE

Shares of common stock issuable under convertible preferred stock, warrants and options and shares subject to restricted stock grants were not included in the calculation of diluted earnings per common share for the three months and nine months ended July 31, 2017 and 2016, as the effect of their inclusion would be anti-dilutive.

The table below provides total potential shares outstanding, including those that are anti-dilutive, on July 31, 2017 and 2016:

	July 31,
	2017		2016
Shares issuable upon exercise of warrants		-		187,500
Shares issuable upon conversion of preferred stock		9,020,287		2,783,000
Shares issuable upon exercise of stock options		2,918,806		394,278
Non-vested shares under restricted stock grants		294,363		303,477

12. COMMITMENTS AND CONTINGENCIES

Contingencies

On February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, the Company and a number of other game publisher defendants. The complaint alleges that the Company’s Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. The Company, in conjunction with Microsoft, is defending itself against the claim and has certain third-party indemnity rights from developers for costs incurred in the litigation. In August 2015, the defendants jointly moved to transfer the case to the Western District of Washington. On May 17, 2016, the Washington Court issued a scheduling order that provides that defendants leave to jointly file an early motion for summary judgement in June 2016. On June 17, 2016, the defendants jointly filed a motion for summary judgment that stated that none of the defendants, including the Company, infringed upon the asserted patent. On July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016, the defendants jointly filed a reply. The briefing on the motion is now closed. The Court has not yet issued a decision or indicated if or when there will be oral argument on the motion.

16 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Intelligent Verification Systems, LLC (“IVS”), filed a patent infringement complaint on September 20, 2012, in the United States District Court for the Eastern District against the Company and Microsoft Corporation. In March 2015, the court issued an order excluding the evidence proffered by IVS in support of its alleged damages, including the opinion of its damages expert. IVS appealed that decision. On January 19, 2016, the Federal Circuit denied IVS’ appeal and affirmed the district court’s orders that excluded the plaintiff’s damages expert and dismissed the case.

In addition to the item above, the Company at times may be a party to claims and suits in the ordinary course of business. We record a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Commitments

The Company leases office space in Hazlet, New Jersey at a cost of approximately $1,100 per month under a lease agreement that expires on March 31, 2018.

The Company also leases space in Salt Lake City, Utah at a cost of approximately $24,044 per month under a lease agreement that expires on March 31 2018.

The Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.

13. RELATED PARTIES

In January 2015, the Company entered into an agreement with Equity Stock Transfer for transfer agent services. A former Board member of the Company is a co-founder and chief executive officer of Equity Stock Transfer. Fees under the agreement were approximately $2,000 and $0, in the nine months ended July 31, 2017 and 2016, respectively.

14. DISCONTINUED OPERATIONS

On July 31, 2015, the Company transferred to Zift Interactive LLC (“Zift”), a newly-formed subsidiary, certain rights under certain of its publishing licenses related to developing, publishing and distributing video game products through retail distribution for a term of one year. The Company transferred Zift to its former chief executive officer, Jesse Sutton. In exchange, the Company received Mr. Sutton’s resignation from the position of chief executive officer of the Company, including waiver of any severance payments and the execution of a separation agreement, together with his agreement to serve as a consultant to the Company. In addition, Zift will pay the Company a specified percent of its net revenue from retail sales on a quarterly basis.

In addition, the Company entered into a conveyance agreement with Zift under which it assigned to Zift certain assets used in the retail business and Zift agreed to assume and indemnify the Company for liabilities and claims related to the retail business, including customer claims for price protection and promotional allowances. The assets transferred to Zift included cash in an amount of $800,000, of which $400,000 was transferred immediately and the remaining $400,000 was payable by the Company in twelve equal consecutive monthly installments of $33,000 commencing August 1, 2015, and certain accounts receivable and inventory with an aggregate carrying value of approximately $87,000.

On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco”) to Zift (the “Purchaser”) pursuant to a purchase agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, the Company sold to the Purchaser 100% of the issued and outstanding shares of common stock of Majesco, including all of the right, title and interest in and to Majesco’s business of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the Purchase Agreement, the Company will receive total cash consideration of $100,000 ($5,000 upon signing the Purchase Agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues valued at $0. The Company received $10,000 in cash consideration as of July 31, 2017. Subsequent to July 31, 2017, the Company received another $5,000.

17 

POLARITYTE, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

The Company recorded a gain of $100,000 on the sale of Majesco Entertainment Company, calculated as the difference between the $100,000 in non-contingent consideration and the net carrying amount of Majesco Entertainment Company, which was $0. The gain on the sale of Majesco Entertainment Company may be adjusted in future periods by the contingent consideration, based upon the achievement of pre-determined revenue milestones of more than $50,000 per month.

The sale of Majesco Entertainment Company, classified in the Company’s video games segment, qualifies as a discontinued operation as the sale represents a strategic shift that has (or will have) a major effect on operations and financial results.

The results of operations from the discontinued business for the three and nine months ended July 31, 2017 and 2016 are as follows (in thousands):

	For the Three Months Ended						For the Nine Months Ended
	July 31,						July 31,
	2017			2016			2017			2016
Revenues	$	143		$	315		$	558		$	1,318
Expenses		176			1,085			1,007			2,169
Loss from discontinued operations	$	(33	)	$	(770	)	$	(449	)	$	(851	)
Gain on sale of discontinued operations	$	100		$	-		$	100		$	-

The assets and liabilities related to the discontinued operations as of July 31, 2017 and October 31, 2016 are as follows (in thousands):

	July 31, 2017		October 31, 2016
	(Unaudited)
Current assets related to discontinued operations
Accounts receivable	$	-	$	113
Capitalized software development costs and license fees		-		50
	$	-	$	163
Current liabilities related to discontinued operations
Accounts payable and accrued expenses	$	-	$	810
	$	-	$	810

The cash flows from the discontinued business for the nine months ended July 31, 2017 and 2016 are as follows (in thousands):

	For the nine months ended July 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from discontinued operations		(349	)		(851	)
Adjustments to reconcile net loss from discontinued operations to net cash used in discontinued operating activities:
Depreciation and amortization		11			21
Stock based compensation expense		1,118			994
Amortization of capitalized software development costs and license fees		50			150
Gain on sale of Majesco Sub		(100	)		-
Changes in operating assets and liabilities:
Accounts receivable		113			107
Capitalized software development costs and license fees		-			(21	)
Accounts payable and accrued expenses		(810	)		(218	)
Payable to Zift		-			(19	)
Net cash provided by discontinued operating activities		33			163
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from sale of Majesco Sub		10			-
Net cash provided by discontinued investing activities		10			-

15. SUBSEQUENT EVENTS

On September 14, 2017, the Company announced that it has entered into securities purchase agreements with investors for the sale of $15.2 million of Series F Convertible Preferred Stock. The Investor will also receive 276,364 Warrants exercisable at $30.00 per share of common stock. The Series F Convertible Preferred stock converts at $27.50 per share into a total of 552,727 shares of common stock, upon conversion.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Statements in this quarterly report on Form 10-Q that are not historical facts constitute forward-looking statements that are made pursuant to the safe harbor provisions of Section 21E of the Securities Exchange Act of 1934, as amended, or the “Exchange Act”. Examples of forward-looking statements include statements relating to industry prospects, our future economic performance including anticipated revenues and expenditures, results of operations or financial position, and other financial items, our business plans and objectives, including our intended product releases, and may include certain assumptions that underlie forward-looking statements. Risks and uncertainties that may affect our future results, levels of activity, performance or achievements expressed or implied by these forward-looking statements include, among other things, those listed under “Risk Factors” and elsewhere in our annual report on Form 10-K for the fiscal year ended October 31, 2016. In some cases, you can identify forward-looking statements by terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential” or “continue” or the negative of these terms or other comparable terminology. These statements are subject to business and economic risk and reflect management’s current expectations, and involve subjects that are inherently uncertain and difficult to predict. Actual events or results may differ materially. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of these statements. We are under no duty to update any of the forward-looking statements after the date of this report to conform these statements to actual results. References herein to “we,” “us,” and “the Company” are to PolarityTE, Inc.

Overview

PolarityTE, Inc. is aiming to be the first company to deliver regenerative medicine into clinical practice through tissue engineering. Subsequent to the acquisition, the Company’s platform technology will allow it to regenerate a patient’s tissues using their own cells.

Research and Development Expenses. Research and development expenses primarily represent employee related costs, including stock compensation, for research and development executives and staff, lab and office expenses and other overhead charges.

Research and Development - Intellectual Property Acquired. On April 7, 2017, as payment for the Polarity NV asset acquisition, the Company issued 7,050 shares of Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s common stock and with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017). Since the assets purchased were in-process research and development assets, the total purchase price was immediately expensed as research and development - intellectual property acquired since they have no alternative future use.

General and Administrative Expenses. General and administrative expenses primarily represent employee related costs, including stock compensation, for corporate executive and support staff, general office expenses, professional fees and various other overhead charges. Professional fees, including legal and accounting expenses, typically represent one of the largest components of our general and administrative expenses. These fees are partially attributable to our required activities as a publicly traded company, such as SEC filings, and corporate- and business-development initiatives.

Discontinued Operations. On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco”) to Zift Interactive LLC, a Nevada limited liability company (the “Purchaser”) pursuant to a purchase agreement (the “Agreement”). Pursuant to the terms of the Agreement, the Company sold to the Purchaser 100% of the issued and outstanding shares of common stock of Majesco, including all of the right, title and interest in and to Majesco’s business of developing, publishing and distributing video game products through both retail distribution and mobile and online digital downloading. Pursuant to the terms of the Agreement, the Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the Agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues.

Income Taxes. Income taxes consist of our provisions for income taxes, as affected by our net operating loss carryforwards. Future utilization of our net operating loss, or NOL, 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 NOL carryforwards before utilization. Due to our history of losses, a valuation allowance sufficient to fully offset our NOL and other deferred tax assets has been established under current accounting pronouncements, and this valuation allowance will be maintained unless sufficient positive evidence develops to support its reversal.

Critical Accounting Estimates

Our discussion and analysis of the financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or GAAP.

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The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ materially from these estimates under different assumptions or conditions.

We have identified the policies below as critical to our business operations and to the understanding of our financial results. The impact and any associated risks related to these policies on our business operations is discussed throughout management’s discussion and analysis of financial condition and results of operations when such policies affect our reported and expected financial results.

Accounting for Stock-Based Compensation. Stock-based compensation expense is measured at the grant date based on the fair value of the award and is recognized as expense over the vesting period. Determining the fair value of stock-based awards at the grant date requires judgment, including, in the case of stock option awards, estimating expected stock volatility. In addition, judgment is also required in estimating the amount of stock-based awards that are expected to be forfeited. If actual results differ significantly from these estimates, stock-based compensation expense and our results of operations could be materially impacted.

Accounting for Common and Preferred Stock and Warrant transactions. We issued units consisting of preferred shares and warrants and common stock and warrants and subsequently remeasured certain of those warrants. Determining the fair value of the securities in these transactions requires significant judgment, including adjustments to quoted share prices and expected stock volatility. Such estimates may significantly impact our results of operations and losses applicable to common stockholders.

Commitments and Contingencies. We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.

Results of Operations

Three months ended July 31, 2017 versus three months ended July 31, 2016

Research and Development Expenses. For the three-month period ended July 31, 2017, research and development expenses were approximately $1.6 million. Research and development costs mostly consist of salaries of approximately $488,000, stock-based compensation of approximately of $452,000, travel relates expenses of approximately $264,000 and medical equipment depreciation of approximately $122,000.

General and Administrative Expenses. For the three-month period ended July 31, 2017, general and administrative expenses increased 93% to approximately $3.6 million compared to $1.9 million for the three months ended July 31, 2016. The increase is primarily due to increased stock-based compensation.

Net loss from continuing operations. Operating loss for the three months ended July 31, 2017 was approximately $5.3 million, compared to an operating loss of approximately $1.7 million in the comparable period in 2016, primarily reflecting higher stock-based compensation expenses.

Nine months ended July 31, 2017 versus nine months ended July 31, 2016

Research and Development Expenses. For the nine-month period ended July 31, 2017, research and development expenses were approximately $3.4 million. Research and development costs mostly consist of salaries of approximately $1.3 million, stock-based compensation of approximately of $639,000, travel relates expenses of approximately $543,000 and medical equipment depreciation of approximately $295,000.

Research and Development - Intellectual Property Acquired. For the nine months ended July 31, 2017, research and development - intellectual property acquired relates to the Polarity NV asset acquisition and the issuance of 7,050 shares of Series E Preferred Stock convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017). Since the assets purchased were in-process research and development assets, the total purchase price was immediately expensed as research and development - intellectual property acquired since there is no alternative future use.

General and Administrative Expenses. For the nine-month period ended July 31, 2017, general and administrative expenses increased 261% to approximately $12.8 million compared to $3.5 million for the nine months ended July 31, 2016. The increase is primarily due to increased stock-based compensation and increased headcount related to the Company’s new medical activities.

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Net loss from continuing operations. Operating loss for the nine months ended July 31, 2017 was approximately $120.9 million, compared to an operating loss of approximately $3.4 million in the comparable period in 2016, primarily reflecting higher research and development - intellectual property acquired expenses and stock-based compensation expenses.

Liquidity and Capital Resources

As of July 31, 2017, our cash and cash equivalents balance was $3.0 million and our working capital was approximately $2.1 million, compared to cash and equivalents of $6.5 million and working capital of $5.4 million at October 31, 2016.

As reflected in the condensed consolidated financial statements, we had an accumulated deficit of approximately $249.4 million at July 31, 2017, a net loss of approximately $120.9 million from continuing operations and approximately $4.7 million net cash used in continuing operating activities for the nine months ended July 31, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern.

We will continue to pursue fundraising opportunities that meet our long-term objectives, however, our cash position is not sufficient to support our operations for the foreseeable future. The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Dividends

On January 4, 2016, we declared a special cash dividend of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Preferred Shares; (iii) Series B Preferred Shares; (iv) Series C Preferred Shares and (v) Series D Preferred Shares. The holders of record of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis.

April 2016 Registered Common Stock and Warrant Offering

On April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the Company of 250,000 shares of the Company’s common stock, par value $0.001 per share at an offering price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common shares and the Warrant Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing of the offering occurred on April 19, 2016.

Each Warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction.

Preferred Share Conversion Activity

During the nine months ended July 31, 2017, 3,991,487 shares of Convertible Preferred Stock Series A, 6,512 shares of Convertible Preferred Stock Series B, 7,798 shares of Convertible Preferred Stock Series C and 129,665 shares of Convertible Preferred Stock Series D were converted into 1,232,793 shares of common stock.

During the nine months ended July 31, 2016, 1,638,810 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible Preferred Stock Series D were converted into 293,137 shares of common stock.

Common Stock

On January 6, 2016, certain investors exercised their options at $4.08 in exchange for the Company’s common stock for an aggregated amount of 31,656 shares.

On December 16, 2016, the Company sold an aggregate of 759,333 shares of its common stock to certain accredited investors pursuant to separate subscription agreements at a price of $3.00 per share for gross proceeds of $2.3 million.

21 

On January 18, 2017, the Company entered into separate exchange agreements (each an “Exchange Agreement”) with certain accredited investors (the “Investors”) who purchased warrants to purchase shares of the Company’s common stock (the “Warrants”) pursuant to the prospectus dated April 13, 2016. Pursuant to the Offering, the Company issued 250,000 shares of the Company’s common stock and Warrants to purchase 187,500 shares of common stock (taking into account the reverse split of the Company’s common stock on a 1 for 6 basis effective with The NASDAQ Stock Market LLC on August 1, 2016). The common stock and Warrants were offered by the Company pursuant to an effective shelf registration statement.

Under the terms of the Exchange Agreement, each Investor exchanged each Warrant it purchased in the Offering for 0.3 shares of common stock. Accordingly, the Company issued an aggregate of 56,250 shares of common stock in exchange for the return and cancellation of 187,500 Warrants.

During the nine months ended July 31, 2017, certain employees exercised their options at a weighted-average exercise price of $4.85 in exchange for the Company’s common stock for an aggregated amount of 231,404 shares.

Off-Balance Sheet Arrangements

As of July 31, 2017, we had no off-balance sheet arrangements.

Inflation

Our management currently believes that inflation has not had, and does not currently have, a material impact on continuing operations.

Cash Flows

Cash and cash equivalents and working capital were approximately $3.0 million and $2.1 million, respectively, as of July 31, 2017 compared to approximately $6.5 million and $5.4 million at October 31, 2016, respectively.

Operating Cash Flows. Cash used in continuing operating activities in the nine months ended July 31, 2017 amounted to approximately $4.7 million compared to approximately $1.7 million for the 2016 period. The increase in net cash used in continuing operating activities mostly relates to the increase in net loss, partially offset by the research and development - intellectual property acquired paid for in preferred shares and by the increase in share-based compensation.

Cash used in discontinued operating activities in the nine months ended July 31, 2017 amounted to approximately $33,000 compared to approximately $163,000 for the 2016 period.

Investing Cash Flows. Cash used in continuing investing activities in the nine months ended July 31, 2017 amounted to approximately $2.3 million. The $2.3 million relates to the purchase of property and equipment (mostly medical equipment). There were no investing activities in the 2016 period.

Financing Cash Flows. Net cash provided by financing activities for the nine months ended July 31, 2017 amounted to approximately $3.4 million compared to approximately $8.8 million used in 2016 period. For the nine months ended July 31, 2017, the $3.4 million related to capital raising activities and proceeds from option exercises. For the nine months ended July 31, 2016, the $8.8 million mostly related to a payment of a $10.0 million special cash dividend, partially offset by an equity capital raise of approximately $1.4 million.

Recent Accounting Pronouncements

Refer to our discussion of recent accounting pronouncements in Note 2 - Summary of Significant Accounting Policies to the accompanying condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Not applicable.

Item 4. Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures, as defined in the Securities Exchange Act of 1934 Rule 13a-15(e) and 15d-15(e), as of the end of the period covered by this report.

In designing and evaluating our disclosure controls and procedures, management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives.

22 

While we believe our disclosure controls and procedures and our internal control over financial reporting are adequate, no system of controls can prevent errors and fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. 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 the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur. Controls can also be circumvented by individual acts of some people, by collusion of two or more people, or by management override of the controls. The design of any system of controls is 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 deterioration in the degree of compliance with its policies or procedures. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

Subject to the limitations above, management believes that the condensed consolidated financial statements and other financial information contained in this report, fairly present in all material respects our financial condition, results of operations, and cash flows for the periods presented.

Based on the evaluation of the effectiveness of our disclosure controls and procedures, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

During the three months ended July 31, 2017, there were no changes in our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

On February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, the Company and a number of other game publisher defendants. The complaint alleges that the Company’s Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. The Company, in conjunction with Microsoft, is defending itself against the claim and has certain third-party indemnity rights from developers for costs incurred in the litigation. In August 2015, the defendants jointly moved to transfer the case to the Western District of Washington. On May 17, 2016, the Washington Court issued a scheduling order that provides that defendants leave to jointly file an early motion for summary judgement in June 2016. On June 17, 2016, the defendants jointly filed a motion for summary judgment that stated that none of the defendants, including the Company, infringed upon the asserted patent. On July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016, the defendants jointly filed a reply. The briefing on the motion is now closed. The Court has not yet issued a decision or indicated if or when there will be oral argument on the motion.

In addition to the item above, the Company at times may be a party to claims and suits in the ordinary course of business. We record a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Item 1A. Risk Factors

None.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

23 

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits

10.1	Purchase Agreement dated June 23, 2017
31.1*	Certification of Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2*	Certification of Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32*	Certification of Principal Executive Officer and Principal Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101.INS*	XBRL Instance Document.
101.SCH*	XBRL Schema Document.
101.CAL*	XBRL Calculation Linkbase Document.
101.DEF*	XBRL Definition Linkbase Document.
101.LAB*	XBRL Label Linkbase Document.
101.PRE*	XBRL Presentation Linkbase Document.

* Filed herewith.

24 

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

POLARITYTE, INC.

	/s/ Denver Lough
	Denver Lough
	Chief Executive Officer
	(Principal Executive Officer)
Date:	September 14, 2017
	/s/ John Stetson
	John Stetson
Title:	Chief Financial Officer
	(Principal Financial and Accounting Officer)
Date:	September 14, 2017

25 

EX-10.1

Exhibit 10.1

Execution Copy

PURCHASE AGREEMENT

PURCHASE AGREEMENT (this “Agreement”) dated as of June 23, 2017, by and among POLARITYTE, INC., a Delaware corporation (“Seller”), Majesco Entertainment Company, a Nevada corporation and a wholly-owned subsidiary of Seller (“Company”) and Zift Interactive LLC, a Nevada limited liability company wholly-owned by Jesse Sutton (“Purchaser”).

WHEREAS, the Seller (then called Majesco Entertainment Company) was engaged in the business of developing, publishing and distributing video game products through both retail distribution (the “Retail Business”) and mobile and online digital downloading (the “Business”); and

WHEREAS, Seller has previously transferred, conveyed an assigned to Purchaser all of the assets, and Purchaser has heretofore assumed all of the liabilities, of Seller relating to the operation of the Retail Business, on the terms and conditions set forth in that certain Agreement of Conveyance, Transfer and Assignment of Assets and Assumption of Obligations between Seller and Purchaser dated as of July 31, 2015.

WHEREAS, Seller subsequently assigned to the Company, as assignee, the remaining assets and liabilities of the Seller which constitute the Business, and the Company has since been engaged in the Business; and

WHEREAS, the Purchaser wishes to acquire from the Seller, and the Seller wishes to sell to the Purchaser, 100% of the issued and outstanding shares of Company, including all of the right, title and interest in and to the Business as heretofore conducted by Seller and/or Company, as-is, where-is, without any representations or warranties related to the Business, other than representations and warranties as provided herein related to Seller’s ownership of the Company.

NOW, THEREFORE, in consideration of the premises and the representations, warranties and agreements herein contained, the parties hereto agree as follows:

ARTICLE 1. – DEFINITIONS

1.1 Definitions. As used herein, the following terms have the following meanings:

“Agreement” has the meaning specified in the introductory paragraph above.

“Liabilities” has the meaning specified in Section 2.3 hereof.

“Business” has the meaning specified in the recitals above.

“Closing” has the meaning specified in Section 2.1 below.

“Closing Date” means the date on which the Closing takes place.

“Damages” means all claims, liabilities, damages, payments, obligations, losses, diminutions, costs and expenses (including reasonable attorneys’ fees, court costs, expert witness fees, transcript costs and other expenses of litigation), and judgments (at law or in equity) of any nature, but shall not include incidental, special, indirect, consequential, exemplary or punitive damages unless such damages are part of any judgment or award against an Indemnitee in actions by third parties to the extent that any such judgment or award is subject to indemnification pursuant to Article 5.

1

“Encumbrance” means any mortgage, lien, pledge, charge, security interest, conditional sale agreement, financing statement or encumbrance of any kind, or any other type of preferential arrangement that has the practical effect of creating a security interest.

“Excluded Liabilities” has the meaning specified in Section 2.1 hereof.

“Governmental Entity” means any government or governmental, regulatory or administrative authority or agency, domestic or foreign.

“Indemnitee” has the meaning specified in Section 5.4(a) hereof.

“Indemnitor” has the meaning specified in Section 5.4(a) hereof.

“Laws” means all applicable common law and any statute, law, code, ordinance, regulation, rule, resolution, order, determination, writ, injunction, award (including, without limitation, any award of any arbitrator), judgments and decrees applicable to the specified persons or entities and to the businesses and assets thereof.

“Liens” means a lien, charge, pledge, security interest, encumbrance, right of first refusal, preemptive right or other restriction.

“Person” means a natural person, corporation, partnership, Limited Liability Company, trust, Governmental Entity, or any other entity.

“Proceeding” means an action, claim, suit, investigation or proceeding (including, without limitation, an informal investigation or partial proceeding, such as a deposition), whether commenced or threatened.

“Purchase Price” has the meaning specified in Section 2.2 hereof.

“Purchaser” has the meaning specified in the introductory paragraph hereof.

“Seller” has the meaning specified in the introductory paragraph above.

“Shares” has the meaning specified in Section 2.1 hereof.

“Tax” and “Taxes” means all federal, state and local property, sales and use, payroll, withholding, franchise and income tax and all assessments, rates, levies, fees and other governmental charges.

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ARTICLE 2. - SALE AND PURCHASE OF ASSETS

2.1 Purchase and Sale of Shares/Assumption of Liabilities. Subject to the terms and conditions of this Agreement and in reliance upon the representations and warranties contained herein, at the Closing the Seller will sell, convey, assign, transfer and deliver, and Purchaser will acquire, all of the issued and outstanding shares of the Company as set forth on Schedule A (the “Shares”) annexed hereto. As a consequence of such purchase the Purchaser hereby assumes, or becomes obligated, and agrees, to pay, perform and discharge all of those liabilities and claims with respect to the Business (whether existing on the Closing Date or arising following the Closing Date, and whether incurred by Seller or Company, including, without limitation, any and all claims, costs, liabilities and other charges asserted by or related to Zev Ausch or any associated persons and related to facts asserted in that certain complaint filed against Jesse Sutton, Gili Lisani or Yair Goldfinger or any agreement, arrangement or understanding in respect thereto (“Assumed Liabilities”), other than the Excluded Liabilities, and the Purchaser shall indemnify and hold harmless Seller in respect of all such Assumed Liabilities. The Assumed Liabilities specifically include all liabilities associated with the Business including, but not limited to: (i) any and all outstanding indebtedness of the Seller or Company or their affiliates, (ii) any liability to vendors, consultants, licensors, partners, joint venturers and similar liabilities and under contracts, agreements or understandings, whether written or oral, (iii) any liability for federal, state or local, income, sales, property or other tax liability which accrued prior to or at Closing or pertains to any period of time prior to Closing even if such liability becomes due after Closing or any tax liability of Company arising out of the transaction relating to the Business, (iv) wages, bonus, compensation, consulting, insurance, retirement, welfare, social security, benefits, severance and vacation pay and similar liabilities and obligations or any kind whatsoever for any employees or independent contractor engaged by Seller, Company and or Purchaser prior to the Closing who following the Closing is hired or engaged by Company or Purchaser and all litigation, indemnification, guaranties, bonds or similar obligations and all taxes, fines, penalties, or other similar assessment imposed by any Governmental Entity which arise or result from any violation of law or regulations by Seller, Company or Purchaser relating to the Business. Notwithstanding the foregoing, neither the Company nor the Purchaser will assume, and will not be obligated to pay or indemnify Seller for, any of the liabilities set forth on Exhibit A annexed hereto and made a part hereof (the “Excluded Liabilities”). Nothing herein will limit any claim for indemnification which Jesse Sutton may have or have had as an officer or director of Seller or its affiliates.

2.2 Purchase Price. The aggregate purchase price (“Purchase Price”) for the Shares shall be paid to Seller as follows:

(i)	Cash payment by Purchaser to Seller in the amount of $100,000, payable $5,000 on the date of execution of this Agreement and $5,000 on each of the 15th day of each of the following nineteen (19) months by wire transfer of immediately available funds;
(ii)	Commencing on, and for the one (1) year period following, the Closing Date, in addition to the Cash portion of the Purchase Price, the Seller shall be paid by the Company ten (10%) percent of net revenues actually received by Company in excess of $50,000 per month (“Royalty Payment”), payable within thirty (30) days of the end of each calendar quarter by wire transfer of immediately available funds; as used herein “net revenues” means all gross revenues, less costs of goods sold, credits and returns and all other deductions or credits, all as determined pursuant to Company’s customary accounting methods used in the preparation of its income tax returns; and
(iii)	Payment and assumption by Company of all Assumed Liabilities, other than the Excluded Liabilities.

2.3 Closing. The Closing shall take place on the date of execution hereof, at a time mutually acceptable to the parties hereto, by electronic transmission of documents, wire transfer of funds and delivery of stock certificates and stock powers.

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ARTICLE 3. - REPRESENTATIONS AND WARRANTIES OF THE SELLER

3.1 Organization, Good Standing. (a) The Company is a corporation duly incorporated or otherwise organized, validly existing and in good standing under the laws of the State of Nevada, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Company is not in violation or default of any of the provisions of its articles of incorporation, bylaws or other organizational or charter documents. The Company is duly qualified to conduct business and is in good standing as a foreign corporation in each jurisdiction in which the nature of the business conducted or property owned by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in a material adverse effect on its properties or assets, taken as a whole, and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

(b) The Seller is a corporation duly incorporated or otherwise organized, validly existing and in good standing under the laws of the State of Delaware, with the requisite power and authority to own and use its properties and assets and to carry on its business as currently conducted. The Seller is not in violation or default of any of the provisions of its articles of incorporation, bylaws or other organizational or charter documents.

3.2 Authorization; Enforcement. Seller has the requisite corporate power and authority to enter into and to consummate the transactions contemplated by this Agreement and otherwise to carry out its obligations hereunder and thereunder. The execution and delivery of this by the Seller and the consummation by it of the transactions contemplated hereby and thereby have been duly authorized by all necessary action on the part of the Seller and no further action is required by the Seller, its Board of Directors or the Company. This Agreement has been (or upon delivery will have been) duly executed by the Seller and, when delivered in accordance with the terms hereof and thereof, will constitute the valid and binding obligation of the Seller enforceable against the Seller in accordance with its terms, except (i) as limited by general equitable principles and applicable bankruptcy, insolvency, reorganization, moratorium and other laws of general application affecting enforcement of creditors’ rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief or other equitable remedies and (iii) insofar as indemnification and contribution provisions may be limited by applicable law.

3.3 No Conflicts. The execution, delivery and performance by the Seller, the issuance and sale of the Shares and the consummation by it of the transactions contemplated hereby and thereby do not and will not (i) conflict with or violate any provision of the Seller’s or any Subsidiary’s certificate or articles of incorporation, bylaws or other organizational or charter documents, or (ii) conflict with, or constitute a default (or an event that with notice or lapse of time or both would become a default) under, result in the creation of any Lien upon any of the properties or assets of the Seller or the Company, or give to others any rights of termination, amendment, acceleration or cancellation (with or without notice, lapse of time or both) of, any agreement, credit facility, debt or other instrument (evidencing a Seller debt or otherwise) or other understanding to which the Seller is a party or by which any property or asset of the Seller is bound or affected, or (iii) conflict with or result in a violation of any law, rule, regulation, order, judgment, injunction, decree or other restriction of any court or governmental authority to which the Seller is subject (including federal and state securities laws and regulations), or by which any property or asset of the Seller is bound or affected.

3.4 Title; Sale of the Shares. Seller is the holder of record and beneficial owner of, and has good and valid title to, the Shares, free and clear of all Liens, restrictions on transfer or Taxes. The Shares are duly authorized are and when delivered to Purchaser will be, duly and validly issued, fully paid and nonassessable.

3.5 Broker. Seller has not incurred and will incur any liability for any brokerage fees, commissions, finders’ fees or similar fees in connection with this Agreement or the transactions contemplated hereby for which Purchaser may become liable.

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3.6 Litigation. There are no civil, criminal or administrative actions, suits, claims, hearings, investigations, arbitrations, or proceedings pending or threatened against the Seller (or any of its affiliates) preventing, or which, if determined adversely to the Seller (or any such affiliate) would prevent the Seller (or any such affiliate) from consummating the transactions contemplated by this Agreement.

ARTICLE 4. - REPRESENTATIONS AND WARRANTIES OF THE PURCHASER

The Purchaser hereby represents and warrants to the Seller and Company as follows:

4.1 Organization and Good Standing. The Purchaser is a limited liability company duly organized, validly existing and in good standing under the laws of the State of Nevada and has all requisite corporate power and authority to own or hold under lease its properties and assets and to carry on its business as now being conducted or as presently proposed to be conducted, and is duly qualified and in good standing as a foreign corporation in each jurisdiction where the nature of the property owned or leased or the business transacted by it makes such qualification necessary, except where the failure to be so qualified or in good standing, as the case may be, could not have or reasonably be expected to result in a material adverse effect on its properties or assets, taken as a whole, and no Proceeding has been instituted in any such jurisdiction revoking, limiting or curtailing or seeking to revoke, limit or curtail such power and authority or qualification.

4.2 Authority Relative to this Agreement. The Purchaser has the requisite corporate power and authority to enter into this Agreement, and to carry out its obligations hereunder. The execution and delivery of this Agreement, and the consummation of the transactions contemplated hereby and thereby, have been duly authorized by the Board of Directors of the Purchaser, and do not violate any provision of the Certificate of Incorporation or Bylaws of the Purchaser, and no other corporate proceedings on the part of the Purchaser are necessary to authorize this Agreement and the transactions contemplated hereby and thereby.

4.3 Broker. The Purchaser has not incurred and will incur any liability for any brokerage fees, commissions, finders’ fees or similar fees in connection with this Agreement or the transactions contemplated hereby for which the Sellers may become liable.

4.4 Litigation. There are no civil, criminal or administrative actions, suits, claims, hearings, investigations, arbitrations, or proceedings pending or threatened against the Purchaser (or any of its affiliates) preventing, or which, if determined adversely to the Purchaser (or any such affiliate) would prevent the Purchaser (or any such affiliate) from consummating the transactions contemplated by this Agreement.

4.5 Name Transfer. Seller has duly transferred to Seller or surrendered all rights to the name “Majesco” in connection with the Retail Business and the Business, and has not granted any such rights to any other Person.

ARTICLE 5. SURVIVAL OF REPRESENTATIONS AND WARRANTIES; INDEMNIFICATION

5.1 Survival of Representations and Warranties of the Parties. Except as provided in the next sentence, all representations and warranties made by any party hereto contained in this Agreement and the indemnification obligations of each party hereto, shall survive the Closing Date until the second (2nd) anniversary of the Closing Date. Notwithstanding the foregoing, if a party has made a claim for indemnification in accordance with the procedures set forth in this Article 5 on or prior to the expiration of the applicable survival period referred to in the previous sentence, then the indemnity obligations relating to such claim shall survive until the final resolution of such claim, as further provided in this Article 5.

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5.2 Indemnification by the Purchaser. The Purchaser hereby agrees to indemnify and hold the Seller and its affiliates, subsidiaries, parent companies, directors, officers, agents and employees harmless (subject to the terms of this Article 5) from and against any and all Damages resulting from, arising out of or in connection with (i) any misrepresentation or breach of any warranty, representation or covenant on the part of the Purchaser made herein, and (ii) the Assumed Liabilities.

5.3 Indemnification by the Seller. The Seller hereby agrees to indemnify and hold the Company, the Purchaser and their respective affiliates, subsidiaries, parent companies, directors, officers, agents and employees harmless (subject to the terms of this Article 5) from and against any and all Damages resulting from, arising out of or in connection with (i) any misrepresentation or breach of any warranty, representation or covenant on the part of the Seller made herein, and (ii) the Excluded Liabilities, provided that, except in the case of fraud, the maximum liability of Seller pursuant to this Section 5.3 shall not exceed $100,000.

5.4 Procedure.

(a) Upon receipt by one party of notice of any claim by a third party which might give rise to indemnification hereunder, or upon such party’s discovery of facts which might give rise to indemnification hereunder including with respect to any breach of any of Purchaser’s representation or warranties, covenants or agreements in this Agreement, the party claiming indemnification hereunder (the “Indemnitee”) shall give prompt written notice to the other (the “Indemnitor”), which notice shall describe in reasonable detail the Damages anticipated to be suffered (if ascertainable) and the specific circumstances thereof, and specifying the provisions of this Agreement to which such claim for Damages relates (the “Damage Claim Notice”). The Indemnitee may amend the Damage Claim Notice, without prejudice to its rights hereunder, if it becomes aware of facts indicating that the Damages anticipated to be suffered have increased or decreased from those estimated in the previous Damage Claim Notice. A failure to provide or amend the Damage Claim Notice shall not relieve the Indemnitor from any obligations or liabilities that the Indemnitor may have to the Indemnitee hereunder, except to the extent that the Indemnitor has been adversely prejudiced as a result of such failure. The Indemnitor shall be entitled to participate in the defense of any such claim or action which is a third party claim or action at the Indemnitor’s own cost and, upon the prior written consent of the Indemnitee (which consent shall not be unreasonably withheld or delayed), to assume the defense thereof, with counsel of Indemnitor’s own choosing, the cost of which shall be paid for by the Indemnitor. Upon notice from Indemnitor to Indemnitee of Indemnitor’s election to assume the defense, the Indemnitor will not be liable to the Indemnitee for any legal or other expenses subsequently incurred by the Indemnitee in connection with the defense thereof. The Indemnitee may not compromise or settle any claim for which it has asserted or may assert its right to indemnification without the prior written consent of the Indemnitor, which consent shall not be unreasonably withheld or delayed. The Indemnitor may not compromise or settle any claim for which Indemnitor has elected to assume the defense without Indemnitee’s prior written consent, unless (i) Indemnitor has acknowledged its obligation to pay all Damages relating to such claim and has provided to Indemnitee evidence reasonably satisfactory to Indemnitee that Indemnitor has the financial wherewithal to pay such Damages, (ii) such settlement will not contain any terms that would interfere in the normal operations of the Indemnitee, and (iii) such settlement contains an unconditional release of all claims against the Indemnitee.

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(b) Upon receipt by Indemnitor of a Damage Claim Notice which does not relate to a third party claim, the Indemnitor and Indemnitee shall make all reasonable efforts to promptly resolve such claim on an amicable basis within the thirty (30) day period following such receipt. If not resolved, then the issues will be exclusively resolved by binding arbitration by the American Arbitration Association in New York, New York, upon a party’s submission of the dispute to arbitration. The demand for arbitration shall be made within a reasonable time after the claim, dispute or other matter in question has arisen, and in no event shall it be made after two years from when the aggrieved party knew or should have known of the controversy, claim, dispute or breach. The complaining party shall notify the other party in writing thereof.

(c) The arbitration shall be conducted by one (1) arbitrator. If the parties are not able to agree upon the selection of an arbitrator, within 20 days of commencement of an arbitration proceeding by service of a demand for arbitration, the arbitrator shall be selected by the American Arbitration Association. The arbitrator so elected shall have at least five (5) years’ experience in resolving commercial disputes involving indemnification claims similar to those under this Agreement. The arbitrator shall permit reasonable document discovery and deposition of witnesses. The decision of the arbitrator shall be rendered as promptly as is feasible, and shall be final and binding on the parties. The costs and expenses of the arbitration, including the arbitrator’s fees, shall be shared equally by the parties.

5.5 Payment of Indemnification Obligations. Damages shall be due and owing when finally judicially determined to be covered by the indemnities set forth in Article 5 hereof or otherwise as mutually agreed among the parties hereto. The Indemnitor shall, within ten (10) business days following receipt of written demand by the Indemnitee, pay the Indemnitee or at the Indemnitee’s direction in immediately available funds any and all Damages then due and owing.

5.6 Agreements Regarding Representations. It is understood that the Seller is not making any representations or warranties except as expressly set forth in Article 3 hereof and the Purchaser is not making any representations or warranties except as expressly set forth in Article 4 hereof. The representations and warranties of any party (a “Representing Party”) shall not be affected or deemed waived by reason of any investigation made (or not made) by or on behalf of the other party, or by reason of the fact that the other party knew or should have known that any such representation or warranty is or might be inaccurate or untrue. Each Representing Party hereby acknowledges that, regardless of any investigation made (or not made) by or on behalf of the other party, and regardless of the results of any such investigation, the other party has entered into this transaction in express reliance upon the representations and warranties of the Representing Party made herein. The Representing Party further acknowledges that, in connection with this transaction, the other party has furnished to the Representing Party good and sufficient consideration in exchange for the Representing Party’s representations and warranties made herein.

ARTICLE 6. -THE CLOSING

6.1 Conditions to Each Party’s Obligations to Complete the Closing. The respective obligation of each party to close the transactions described in Article 2 hereof shall be subject to the satisfaction prior to Closing of the following conditions:

(a) No temporary restraining order, injunction or other order preventing the transactions contemplated by this Agreement shall have been issued by any court or other governmental entity and remain in effect, and no litigation seeking the issuance of such an order or injunction, or seeking relief against the Purchaser or the Sellers if the sale is consummated, shall be pending. In the event any such order or injunction shall have been issued, each party agrees to use commercially reasonable efforts to have any such injunction lifted.

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(b) All authorizations, consents, orders or approvals of, or declarations or filings with, or expiration of waiting periods imposed by, any Governmental Entity necessary for the consummation of the transactions contemplated by this Agreement shall have been filed, occurred or been obtained, unless failure to make such filing or obtain such approval would not be materially adverse to the Purchaser, as reasonably determined by the Purchaser.

6.2 Conditions of Obligations of the Seller and Purchaser to Complete the Closing. The obligations of the Seller and the Purchaser to complete the Closing are subject to the satisfaction of the following conditions, unless waived by the Seller or Purchaser, as the case may be:

(a) Seller’s Condition. At the Closing, the Purchaser shall deliver to the Seller an aggregate of $5,000.

(b) Purchaser’s Condition. At the Closing, Seller shall deliver to Purchaser a certificate or certificates for the Shares, duly issued in the name of Purchaser or assigned in blank or with blank stock powers attached.

ARTICLE 7. - GENERAL PROVISIONS

7.1 Expenses. Each party shall pay its own expenses (including legal and accounting costs and expenses) in connection with the negotiation, preparation and consummation of this Agreement, and the transactions contemplated hereby.

7.2 Governing Law; Exclusive Jurisdiction. All questions concerning the construction, validity, enforcement and interpretation of this Agreement and the relation of the parties hereunder shall be governed by and construed and enforced in accordance with the internal laws of the State of New York, without regard to the principles of conflicts of law thereof. Each party agrees that all Proceedings concerning the interpretations, enforcement and defense of the transactions contemplated by this Agreement (whether brought against a party hereto or its respective affiliates, directors, officers, shareholders, partners, members, employees or agents) shall be commenced exclusively in the state and federal courts sitting in the City of New York, Borough of Manhattan. 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 herewith or with any transaction contemplated hereby or discussed herein, and hereby irrevocably waives, and agrees not to assert in any action or Proceeding, any claim that it is not personally subject to the jurisdiction of any such court, that such action or Proceeding is improper or is an inconvenient venue for such Proceeding. Each party hereby irrevocably waives personal service of process and consents to process being served in any such action or Proceeding by mailing a copy thereof via registered or certified mail or overnight delivery (with evidence of delivery) 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 other manner permitted by law. If any party shall commence a Proceeding to enforce any provisions of this Agreement, then the prevailing party in such action or Proceeding shall be reimbursed by the non-prevailing party for its reasonable attorneys’ fees and other costs and expenses incurred with the investigation, preparation and prosecution of such Action or Proceeding.

7.3 Headings. Article and Section headings used in this Agreement are for convenience only and shall not affect the meaning or construction of this Agreement.

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7.4 Notices. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally or mailed by certified mail (return receipt requested) or by courier (with proof of delivery and charges prepaid), to the parties at the following address (or at such other address for a party as shall be specified by like notice);

If to Purchaser:

Zift Interactive LLC

1989 East 2^nd Street

Brooklyn, New York 11233

Attn: Jesse Sutton

Telephone: (732) 476-1969

With a copy (which shall not be notice) to:

Meltzer, Lippe, Goldstein & Breitstone, LLP

190 Willis Avenue

Mineola, New York 11501

Attn: David I. Schaffer, Esq.

Telephone: (516) 747-0300 x 138

If to Company:

PolarityTE, Inc.

404I-T Hadley Road

S. Plainfield, New Jersey 07080

Attn:

Telephone:

With a copy (which shall not be notice) to:

Sichenzia Ross Ference Kesner LLP

61 Broadway, 32^nd Floor

New York, New York 10006

Attn: Harvey Kesner, Esq.

Telephone: (212) 930-9700

7.5 Parties in Interest. Neither this Agreement nor any rights hereunder may be assigned or otherwise transferred by either party without the consent of the other party. All the terms and provisions of this Agreement shall be binding upon and inure to the benefit of and be enforceable by the permitted successors and assigns of the parties hereto.

7.6 Entire Agreement. This Agreement constitutes the entire agreement between the parties hereto and supersede all prior agreements and understandings, both written and oral, with respect to the subject matter hereof.

7.7 Counterparts. This Agreement may be executed in counterparts, each of which shall be deemed to be an original, and all of which shall constitute one and the same agreement. This Agreement may be delivered by the exchange of signed signature pages by facsimile transmission or by e-mail with a pdf copy or other replicating image attached, and any printed or copied version of any signature page so delivered shall have the same force and effect as an originally signed version of such signature page.

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7.8 Amendment. The terms of this Agreement may be amended, modified or waived only by an instrument in writing signed by or on behalf of each of the parties against whom enforcement of such amendment, modification or waiver is sought.

7.9 Public Announcements. The Seller shall not make or allow any public announcements concerning the transactions contemplated hereby without the Purchaser’s prior written consent.

7.10 Further Assurances. After Closing, each of the parties agree that, at the reasonable request of the other party, it shall take actions and furnish such additional documents and instruments as may be necessary to better effectuate the transactions contemplated by this Agreement.

7.11 Access to Information. The Purchaser shall provide Seller, its counsel, financial advisors, auditors and other authorized representatives full access to such information as the Seller may from time to time reasonably request with respect to the Business which reasonably relates to the representations and warranties hereunder. In addition, if a third party has brought a claim against Seller or Purchaser, for the Assumed Liabilities or Excluded Liabilities, as the case may be, the other party will provide information to the party against whom the claim is made and otherwise cooperate with such party as reasonably necessary to defend such claim. Following Closing, Purchaser shall provide Seller monthly statements in reasonable detail to verify the amount of all Royalty Payments and include a calculation report in reasonable detail with each such payment, and Seller shall have the full right of inspection to review the books and accounts of Purchaser at any reasonable time or times on not less than 20 days prior written notice, provided such right of inspection shall not exceed 2 times per year. In the event of any shortfall of Royalty Payments that exceeds 25%, Purchaser shall pay interest at a rate of 5% per annum on any deficiency and pay the costs and expenses of Seller in connection with such review and payment.

[Signatures on Following Page]

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IN WITNESS WHEREOF, the parties have duly executed this Purchase Agreement as of the date first written above.

PURCHASER:
ZIFT INTERACTIVE LLC
By:
	Jesse Sutton
	Sole Member

COMPANY:

MAJESCO ENTERTAINMENT COMPANY

By:

Name:

Title:

SELLER:

POLARITYTE, INC.

By:

Name:

Title:

[Signature Page to Purchase Agreement]

SCHEDULE A

Description of Shares

EXHIBIT A

Excluded Liabilities

● All liabilities for Taxes arising from the activities of Seller or its affiliates (other than the Company) or from the inclusion of the Company in a consolidated group or consolidated tax returns of the Seller, or arising from any other matter or thing other than the operations, profits or losses of the Business.

● All liabilities for royalties due or to become due from the Company for all periods prior to the Closing Date and which have not been paid prior to such date.

● All liabilities of the Company due or to become due from the Company related to that certain claim and demand for arbitration pursuant to that certain License Agreement No. 27067 between Twentieth Century Fox Licensing and Merchandising and Majesco Entertainment Company dated as of March 31, 2009 in connection with “Alvin and the Chipmunks: The Squeakuel” and “Alvin and the Chipmunks: Chipwrecked” for all periods prior to the Closing Date.

● All liabilities for wages, benefits, bonuses, compensation, consulting, insurance, retirement, welfare, social security, benefits, severance and vacation pay and similar liabilities and obligations or any kind whatsoever, including any 401(k) plan or other employee benefit plan liabilities for any employees or independent contractors who were employed or engaged by Seller, any of its affiliates or the Company prior to the Closing Date and who are not engaged by the Company or Purchaser immediately following the Closing.

EX-31.1

EXHIBIT 31.1

CERTIFICATION

I, Denver Lough, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of PolarityTE, Inc.;
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 officer(s) 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 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 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 officer(s) 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: September 14, 2017

/s/ Denver Lough

Denver Lough

Title: Chief Executive Officer

(Principal Executive Officer)

EX-31.2

EXHIBIT 31.2

CERTIFICATION

I, John Stetson, certify that:

1.	I have reviewed this Quarterly Report on Form 10-Q of PolarityTE, Inc.:
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 officer(s) 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 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 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 officer(s) 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: September 14, 2017

/s/ John Stetson

John Stetson

Title: Chief Financial Officer

(Principal Financial Officer)

EX-32

EXHIBIT 32

Certification

Pursuant To Section 906 of the Sarbanes-Oxley Act Of 2002

(Subsections (A) And (B) Of Section 1350, Chapter 63 of Title 18, United States Code)

Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of 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 Quarterly Report on Form 10-Q for the period ending July 31, 2017 (the “Form 10-Q”) 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-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: September 14, 2017

/s/ Denver Lough

Denver Lough

Title: Chief Executive Officer

(Principal Executive Officer)

/s/ John Stetson

John Stetson

Title: Chief Financial Officer

(Principal Financial and Accounting Officer)

XML

Document and Entity Information - shares	9 Months Ended
	Jul. 31, 2017	Sep. 12, 2017
Document And Entity Information
Entity Registrant Name	POLARITYTE, INC.
Entity Central Index Key	0001076682
Document Type	10-Q
Document Period End Date	Jul. 31, 2017
Amendment Flag	false
Current Fiscal Year End Date	--10-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		6,333,985
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2017

XML

Condensed Consolidated Balance Sheets - USD ($) $ in Thousands	Jul. 31, 2017	Oct. 31, 2016
Current assets:
Cash and cash equivalents	$ 3,027	$ 6,523
Prepaid expenses and other current assets	411	47
Receivable from Zift	60
Current assets related to discontinued operations		163
Total current assets	3,498	6,733
Non-current assets:
Property and equipment, net	2,073	18
Receivable from Zift, non-current	30
Total non-current assets	2,103	18
TOTAL ASSETS	5,601	6,751
Current liabilities:
Accounts payable and accrued expenses	1,439	474
Warrant liability		70
Current liabilities related to discontinued operations		810
Total current liabilities	1,439	1,354
Total liabilities	1,439	1,354
Commitments and Contingencies
STOCKHOLDERS' EQUITY:
Convertible preferred stock - 10,000,000 shares authorized, 3,246,042 and 7,374,454 shares issued and outstanding at July 31, 2017 and October 31, 2016, aggregate liquidation preference $2,140 and $4,854, respectively	111,195	10,153
Common stock - $.001 par value; 250,000,000 shares authorized; 6,093,743 and 2,782,963 shares issued and outstanding at July 31, 2017 and October 31, 2016, respectively	6	3
Additional paid-in capital	142,358	123,417
Accumulated deficit	(249,397)	(128,176)
Total stockholders' equity	4,162	5,397
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY	$ 5,601	$ 6,751

XML

Condensed Consolidated Balance Sheets (Parenthetical) - USD ($) $ in Thousands	Jul. 31, 2017	Oct. 31, 2016
Statement of Financial Position [Abstract]
Convertible preferred stock, shares authorized	10,000,000	10,000,000
Convertible preferred stock, shares issued	3,246,042	7,374,454
Convertible preferred stock, shares outstanding	3,246,042	7,374,454
Convertible preferred stock, liquidation preference	$ 2,140	$ 4,854
Common stock, par value	$ 0.001	$ .001
Common stock, shares authorized	250,000,000	250,000,000
Common stock, shares issued	6,093,743	2,782,963
Common stock, shares outstanding	6,093,743	2,782,963

XML

Condensed Consolidated Statements of Operations (Unaudited) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jul. 31, 2017	Jul. 31, 2016	Jul. 31, 2017	Jul. 31, 2016
Operating costs and expenses
Research and development	$ 1,641		$ 3,424
Research and development - intellectual property acquired			104,693
General and administrative	3,629	1,880	12,757	3,531
Operating costs and expenses total	5,270	1,880	120,874	3,531
Operating loss	(5,270)	(1,880)	(120,874)	(3,531)
Other expenses (income)
Interest income	(3)	(5)	(10)	(15)
Change in fair value of warrant liability		(159)	8	(133)
Net loss from continuing operations	(5,267)	(1,716)	(120,872)	(3,383)
Loss from discontinued operations	(33)	(770)	(449)	(851)
Gain on sale of discontinued operations	100		100
Gain (loss) from discontinued operations, net	67	(770)	(349)	(851)
Net loss	(5,200)	(2,486)	(121,221)	(4,234)
Special cash dividend attributable to preferred stockholders				(6,002)
Net loss attributable to common stockholders	$ (5,200)	$ (2,486)	$ (121,221)	$ (10,236)
Net loss per share, basic and diluted:
Loss from continuing operations	$ (0.94)	$ (0.65)	$ (26.65)	$ (1.73)
Gain (loss) from discontinued operations	0.01	(0.29)	(0.08)	(0.43)
Special cash dividend attributable to preferred stockholders				(3.06)
Net loss attributable to common stockholders	$ (0.93)	$ (0.94)	$ (26.73)	$ (5.22)
Weighted average shares outstanding, basic and diluted:	5,568,072	2,631,640	4,534,967	1,960,643

XML

Condensed Consolidated Statement of Changes in Stockholders' Equity (Unaudited) - 9 months ended Jul. 31, 2017 - USD ($) $ in Thousands	Preferred Stock [Member]	Common Stock [Member]	Additional Paid-in Capital [Member]	Accumulated Deficit [Member]	Total
Balance at Oct. 31, 2016	$ 10,153	$ 3	$ 123,417	$ (128,176)	$ 5,397
Balance, shares at Oct. 31, 2016	7,374,454	2,782,963
Conversion of Series A preferred stock to common stock	$ (976)	$ 1	975
Conversion of Series A preferred stock to common stock, shares	(3,991,487)	761,798
Conversion of Series B preferred stock to common stock	$ (549)		549
Conversion of Series B preferred stock to common stock, shares	(6,512)	108,543
Conversion of Series C preferred stock to common stock	$ (609)		609
Conversion of Series C preferred stock to common stock, shares	(7,798)	146,346
Conversion of Series D preferred stock to common stock	$ (1,517)		1,517
Conversion of Series D preferred stock to common stock, shares	(129,665)	216,106
Issuance of Series E preferred stock for research and development intellectual property	$ 104,693				104,693
Issuance of Series E preferred stock for research and development intellectual property, shares	7,050
Proceeds from option exercises			1,123		1,123
Proceeds from option exercises, shares		231,404
Warrant exchange to common stock			78		78
Warrant exchange to common stock, shares		56,250
Stock-based compensation expense		$ 1	11,813		11,814
Stock-based compensation expense, shares		1,031,000
Shares issued for cash		$ 1	2,277		2,278
Shares issued for cash, shares		759,333
Net loss				(121,221)	(121,221)
Balance at Jul. 31, 2017	$ 111,195	$ 6	$ 142,358	$ (249,397)	$ 4,162
Balance, shares at Jul. 31, 2017	3,246,042	6,093,743

XML

Condensed Consolidated Statements of Cash Flows (Unaudited) - USD ($) $ in Thousands	9 Months Ended
	Jul. 31, 2017	Jul. 31, 2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss	$ (121,221)	$ (4,234)
Loss from discontinued operations	349	851
Loss from continuing operations	(120,872)	(3,383)
Adjustments to reconcile net loss from continuing operations to net cash used in continuing operating activities:
Depreciation and amortization	295
Stock based compensation expense	10,696	1,845
Research and development - intellectual property acquired	104,693
Change in fair value of warrant liability	8	(133)
Offering costs expensed		21
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(364)	(20)
Accounts payable and accrued expenses	857	(46)
Net cash used in continuing operating activities	(4,687)	(1,716)
Net cash provided by discontinued operating activities	33	163
Net cash used in operating activities	(4,654)	(1,553)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment	(2,253)
Net cash used in continuing investing activities	(2,253)
Net cash provided by discontinued investing activities	10
Net cash used in investing activities	(2,243)
CASH FLOWS FROM FINANCING ACTIVITIES
Special cash dividend		(10,000)
Proceeds from stock options exercised	1,123	129
Net proceeds from the sale of common stock and warrants		1,406
Proceeds from the sale of common stock	2,278
Payments to Zift		(299)
Net cash provided by (used in) financing activities	3,401	(8,764)
Net decrease in cash and cash equivalents	(3,496)	(10,317)
Cash and cash equivalents - beginning of period	6,523	17,053
Cash and cash equivalents - end of period	3,027	6,736
Supplemental schedule of non-cash investing and financing activities:
Conversion of Series A preferred stock to common stock	976	401
Conversion of Series B preferred stock to common stock	549
Conversion of Series C preferred stock to common stock	609
Conversion of Series D preferred stock to common stock	1,517	140
Unpaid liability for acquisition of property and equipment	108
Warrant exchange for common stock shares	78
Common stock shares and warrants issued for offering costs		$ 75

XML

Principal Business Activity and Basis of Presentation

9 Months Ended

Jul. 31, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Principal Business Activity and Basis of Presentation

1. PRINCIPAL BUSINESS ACTIVITY AND BASIS OF PRESENTATION

Asset Acquisition and Name Change. On December 1, 2016, Majesco Entertainment Company (n/k/a PolarityTE, Inc.), a Delaware corporation (the “Company”) entered into an agreement to acquire the assets of Polarity NV (as defined below), a regenerative medicine company. The asset acquisition was subject to shareholder approval, which was received on March 10, 2017 and the transaction closed on April 7, 2017, as more fully described below. In January, 2017, the Company changed its name to “PolarityTE, Inc.”

On December 1, 2016, the Company appointed Dr. Denver Lough as Chief Executive Officer, Chief Scientific Officer and Chairman of our Board of Directors and Dr. Ned Swanson as Chief Operating Officer of the Company. Until their respective appointments, both doctors were associated with Johns Hopkins University, Baltimore, Maryland, as full-time residents. On December 1, 2016, Dr. Lough assigned the patent application as well as all related intellectual property to a newly-formed Nevada corporation, Polarityte, Inc. (“Polarity NV”), and the Company entered into an Agreement and Plan of Reorganization (the “Agreement”) with Polarity NV and Dr. Lough. As a result, at closing, the patent application would be owned by the Company without the need for further assignments or recordation with the Patent Trademark Office.

On April 7, 2017, the Company issued 7,050 shares of its newly authorized Series E Preferred Stock (the “Series E Preferred Shares”) convertible into an aggregate of 7,050,000 shares of the Company’s common stock with a fair value of approximately $104.7 million which is equal to 7,050,000 common shares times $14.85 (the closing price of the Company’s common stock as of April 7, 2017) to Dr. Lough for the purchase of the Polarity NV’s assets. Since the assets purchased were in-process research and development assets, the total purchase price was immediately expensed as research and development - intellectual property acquired since they have no alternative future use.

Drs. Lough and Swanson lead the Company’s current efforts focused on scientific research and development and in this regard on December 1, 2016, the Company leased laboratory space and purchased laboratory equipment in Salt Lake City, Utah. Subsequent expenditures include the purchase of medical equipment, including microscopes for high end real-time imaging of cells and tissues required for tissue engineering and regenerative medicine research. The Company has added additional facilities, and established university and scientific relationships and collaborations in order to pursue its business. None of these activities were performed by Dr. Lough or Dr. Swanson prior to December 1, 2016 in connection with their university positions or privately.

Dr. Lough is the named inventor under a pending patent application for a novel regenerative medicine and tissue engineering platform filed in the United States and elsewhere. The Company believes that its future success depends significantly on its ability to protect its inventions and technology. Prior to December 1, 2016, no employees, consultants or partners engaged in any business activity related to the patent application and no licenses or contracts were granted related to the patent application, other than professional services related to preparation and filing of the patent.

There was never any intent to acquire an ongoing business and no ongoing business was acquired. The asset is preserved in a stand-alone entity merely as a vehicle to provide the Company a seamless means to acquire the asset (a patent application) without undue cost, expense and time. Polarity NV has never had employees and, therefore, no employees were acquired in the transaction.

The Company adopted ASU 2017-01, Business Combinations (Topic 805), Clarifying the Definition of a Business, during the first quarter of fiscal 2017. In accordance with ASU 2017-01 we analyzed the above transaction as follows:

Step 1 - Is substantially all the fair value of the gross assets acquired concentrated in a single or (group of similar) identifiable asset(s)? - The Company has a proposal to acquire a single intellectual property asset and no employees on the acquisition date.

Step 2 - Evaluate whether an input and a substantive process exists? Does the set have outputs? - The set does not yet have outputs, as Polarity NV’s intellectual property does not generate any revenue. Without outputs, the set requires employees that form an organized workforce with skills, knowledge, or experience to perform an acquired process that is critical to the ability to create outputs to qualify as a business. Polarity NV never had any employees or workforce. On December 1, 2016, prior to any Polarity NV acquisition, the Company hired Denver Lough as its Chief Executive and Chief Scientific Officer and Edward Swanson as Chief Operating Officer. Both of these executives were employed full-time by Johns Hopkins University and were not employed by Polarity NV. In December 2016, the Company established a clinical advisory board and added three members in December 2016 and three more in January 2017. Establishing the clinical advisory board and hiring a COO are critical to establishing at the Company for the first time a workforce that has the knowledge and experience to obtain regulatory approval of the Company’s intellectual property. Therefore, the acquisition of an intellectual property asset and no employees from Polarity NV on April 7, 2017 did not represent the acquisition of an organized workforce with the necessary skills and experience to create outputs.

Discontinued Operations. On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco Sub”) to Zift Interactive LLC, a Nevada limited liability company pursuant to a purchase agreement. Pursuant to the terms of the agreement, the Company sold 100% of the issued and outstanding shares of common stock of Majesco to Zift, including all of the right, title and interest in and to Majesco Sub’s business of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the agreement, the Company will receive total cash consideration of approximately $100,000 ($5,000 upon signing the agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues valued at $0. As of July 31, 2017, the Company received $10,000 in cash consideration.

As a result of transactions contemplated above, the Company disposed entirely of its gaming business assets and intends to devote its resources and attention to its regenerative medicine efforts going forward.

General. The accompanying condensed consolidated financial statements present the financial results of PolarityTE, Inc. and its wholly owned subsidiaries; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended October 31, 2016 and Majesco Sub was sold on June 23, 2017.

Segments. With the sale of Majesco Sub on June 23, 2017, the Company now solely operates in its Regenerative Medicine segment.

Regenerative Medicine

Through its regenerative medicine efforts, the Company is developing the proprietary tissue engineering platform invented by Dr. Denver Lough to translate regenerative products into clinical application. Preliminarily, the technological platform has demonstrated the potential capacity to grow fully functional tissue across the entire spectrum of the musculoskeletal and integumentary systems, including skin, muscle, bone, cartilage, peripheral nerve, fat, and fascia. Preliminary results indicate it has applications across solid organ and specialty tissue regeneration as well, including bowel, liver, kidney, and urethra. The product furthest in the development pipeline is an autologous (tissue from the patient themselves) skin regeneration construct, SkinTE ^TM, to regenerate fully functional skin with all of its layers, including epidermis, dermis, hypodermis, and all appendages including hair and glands. The Company is preparing SkinTE ^TM for clinical testing and market entry. The platform provides a pipeline of products to follow in parallel, with plans for serial clinical and market entry, and each addressing separate and similarly sized potential markets. The Company’s approach seeks to benefit from fewer regulatory and capital barriers to market entry, avoiding the long timelines associated with three phase trials and their associated costs seen with other competing technologies and therapeutics. The regenerative medicine business model being pursued takes advantage of the smaller regulatory hurdles, with streamlined product development from cell/tissue in vitro and ex vivo testing, to small and large animal preclinical models, manufacturing technology transfer, and ultimately clinical application and market entry occurring in a mapped out stepwise fashion for each product.

NASDAQ listing. On January 6, 2017, PolarityTE, Inc., was notified by The NASDAQ Stock Market, LLC of failure to comply with Nasdaq Listing Rule 5605(b)(1) which requires that a majority of the directors comprising the Company’s Board of Directors be considered “independent”, as defined under the Rule. The notice had no immediate effect on the listing or trading of the Company’s common stock on The NASDAQ Capital Market and the common stock continued to trade on The NASDAQ Capital Market under the symbol “COOL”.

On February 22, 2017, the Company regained compliance with Listing Rule 5605(b)(1), the independent director requirement for continued listing on The NASDAQ Stock Market, with the appointment of Mr. Steve Gorlin and Dr. Jon Mogford, and the matter is now closed. PolarityTE’s common stock will continue to be listed on The NASDAQ Capital Market.

The accompanying interim condensed consolidated financial statements of the Company are unaudited, but in the opinion of management, reflect all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the results for the interim period. Accordingly, they do not include all information and notes required by generally accepted accounting principles for complete financial statements. The Company’s financial results are impacted by the seasonality of the retail selling season and the timing of the release of new titles. The results of operations for interim periods are not necessarily indicative of results to be expected for the entire fiscal year. The balance sheet at October 31, 2016 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete financial statements. These interim condensed consolidated financial statements should be read in conjunction with the Company’s consolidated financial statements and notes thereto for the year ended October 31, 2016 filed with the Securities and Exchange Commission on Form 10-K on December 30, 2016.

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Summary of Significant Accounting Policies

9 Months Ended

Jul. 31, 2017

Accounting Policies [Abstract]

Summary of Significant Accounting Policies

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended October 31, 2016 and Majesco Sub was sold on June 23, 2017. Significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.

Accounts Payable and Accrued Expenses. The carrying amounts of accounts payable and accrued expenses approximate fair value as these accounts are largely current and short term in nature.

Property and Equipment. Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets, generally five years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.

Income Taxes. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely than not.

Stock Based Compensation. The Company measures all stock-based compensation to employees using a fair value method and records such expense in general and administrative and research and development expenses. Compensation expense for stock options with cliff vesting is recognized on a straight-line basis over the vesting period of the award, based on the fair value of the option on the date of grant. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.

The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on the Company’s historical stock prices.

The value of restricted stock grants 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.

Loss Per Share. Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect would be anti-dilutive due to our net loss.

Commitments and Contingencies. We are subject to claims and litigation in the ordinary course of our business. We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.

Accounting for Warrants. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet as a current liability.

Change in Fair Value of Warrant Liability. The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that certain instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in fair value of warrant liability” in the condensed consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 7).

Reverse stock-split. On July 27, 2016, Majesco Entertainment Company (the “Company”) filed a certificate of amendment (the “Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).

The Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016. The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer LLC, acted as exchange agent for the Reverse Stock Split.

As a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest.

All common share and per share amounts have been restated to show the effect of the Reverse Stock Split.

Reclassifications. Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. One reclassification relates to discontinued operations. Another represents a reclassification of approximately $1.8 million from general and administrative expenses to research and development expenses for the six months ended April 30, 2017.

Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements are the recoverability of advance payments for capitalized software development costs and intellectual property licenses, the valuation of warrant liability, stock based compensation and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”) that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The Company adopted ASU No. 2014-15 on November 1, 2016 and its adoption did not have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance effective November 1, 2016.

Recent Accounting Pronouncements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material impact on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company is currently assessing the impact that ASU No. 2016-09 will have on its condensed consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

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Going Concern

9 Months Ended

Jul. 31, 2017

Organization, Consolidation and Presentation of Financial Statements [Abstract]

Going Concern

3. GOING CONCERN

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced net losses and negative cash flows from operations since its inception. The Company has sustained cumulative losses of approximately $249.4 million as of July 31, 2017, has negative working capital and has not generated positive cash flows from operations. The continuation of the Company as a going concern is dependent upon continued financial support from its shareholders, potential collaborations, the ability of the Company to obtain necessary equity and/or debt financing to continue operations, and the attainment of profitable operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. The Company cannot make any assurances that additional financings will be available to it and, if available, completed on a timely basis, on acceptable terms or at all. If the Company is unable to complete a debt or equity offering, execute a collaboration arrangement or otherwise obtain sufficient financing when and if needed, it would negatively impact its business and operations and could also lead to the reduction or suspension of the Company’s operations and ultimately force the Company to cease operations. These financial statements do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

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Prepaid Expenses and Other Current Assets

9 Months Ended

Jul. 31, 2017

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Prepaid Expenses and Other Current Assets

4. PREPAID EXPENSES AND OTHER CURRENT ASSETS

Prepaid expenses and other current assets consist of the following (in thousands):

	July 31, 2017		October 31, 2016
Legal retainer	$	60	$	-
Prepaid insurance		86		22
Tax receivable		-		18
Trade show deposit		160		-
Other prepaids		71		-
Deposits		32		-
Other assets		2		7
Total prepaid expenses and other current assets	$	411	$	47

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Property and Equipment, Net

9 Months Ended

Jul. 31, 2017

Property, Plant and Equipment [Abstract]

Property and Equipment, Net

5. PROPERTY AND EQUIPMENT, NET

Property and equipment, net, consist of the following (in thousands):

	July 31, 2017			October 31, 2016
Medical equipment	$	2,193		$	-
Computers and software		198			61
Furniture and equipment		109			78
Total property and equipment, gross		2,500			139
Accumulated depreciation		(427	)		(121	)
Total property and equipment, net	$	2,073		$	18

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Accounts Payable and Accrued Expenses

9 Months Ended

Jul. 31, 2017

Payables and Accruals [Abstract]

Accounts Payable and Accrued Expenses

6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES

Accounts payable and accrued expenses consist of the following (in thousands):

	July 31, 2017		October 31, 2016
Accounts payable	$	56	$	-
Due to Zift		66		-
Medical equipment purchase		108		-
Salaries and other compensation		662		463
Legal and accounting		454		-
Other accruals		93		11
Total accounts payable and accrued expenses	$	1,439	$	474

Salaries and other compensation include accrued payroll expense and employer 401K plan contributions.

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Stockholders' Equity

9 Months Ended

Jul. 31, 2017

Equity [Abstract]

Stockholders' Equity

7. STOCKHOLDERS’ EQUITY

Convertible preferred stock as of July 31, 2017 consisted of the following (in thousands, except share amounts):

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		3,146,671	$	769	$	2,140		713,245
Series B		54,250		47,689		4,020		-		794,806
Series C		26,000		17,965		1,401		-		417,791
Series D		170,000		26,667		312		-		44,445
Series E		7,050		7,050		104,693		-		7,050,000
Other authorized, unissued		912,700		-		-		-		-
Total		10,000,000		3,246,042	$	111,195	$	2,140		9,020,287

Convertible preferred stock as of October 31, 2016 consisted of the following (in thousands, except share amounts):

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		7,138,158	$	1,745	$	4,854		1,189,693
Series B		54,250		54,201		4,569		-		903,362
Series C		26,000		25,763		2,010		-		429,392
Series D		170,000		156,332		1,829		-		260,553
Other authorized, unissued		919,750		-		-		-		-
Total		10,000,000		7,374,454	$	10,153	$	4,854		2,783,000

Series A Preferred Shares

The Series A Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series A Preferred Share, plus all accrued and unpaid dividends, if any, on such Series A Preferred Share, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $0.68 and the initial conversion price is $4.08 (current conversion price is $3.00) per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of its common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series A Convertible Preferred Stock of PolarityTE, Inc., the Company is prohibited from incurring debt or liens, or entering into new financing transactions without the consent of the lead investor (as defined in the December Subscription Agreements) as long as any of the Series A Preferred Shares are outstanding. The Series A Preferred Shares bear no dividends.

The holders of Series A Preferred Shares shall vote together with the holders of common stock on all matters on an as if converted basis, subject to certain conversion and ownership limitations, and shall not vote as a separate class. Notwithstanding the foregoing, the conversion price for purposes of calculating voting power shall in no event be lower than $3.54 per share. At no time may all or a portion of the Series A Preferred Shares be converted if the number of shares of common stock to be issued pursuant to such conversion would exceed, when aggregated with all other shares of common stock owned by the holder at such time, the number of shares of common stock which would result in such Holder beneficially owning (as determined in accordance with Section 13(d) of the 1934 Act and the rules thereunder) more than 4.99% of all of the common stock outstanding at such time; provided, however, that the holder may waive the 4.99% limitation at which time he may not own beneficially own more than 9.99% of all the common stock outstanding at such time.

The Series A Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series A Preferred Shares are considered equity hosts and recorded in stockholders’ equity.

The Company entered into separate Registration Rights Agreements with each Series A Preferred Shares Investor, (as amended on January 30, 2015 and March 31, 2015, the “December Registration Rights Agreement”). The Company agreed to use its best efforts to file by March 31, 2015 a registration statement covering the resale of the shares of common stock issuable upon exercise or conversion of the Series A Preferred Shares and to maintain its effectiveness until all such securities have been sold or may be sold without restriction under Rule 144 of the Securities Act. In the event the Company fails to satisfy its obligations under the December Registration Rights Agreements, the Company is required to pay to the Investors on a monthly basis an amount equal to 1% of the investors’ investment, up to a maximum of 12%. On March 31, 2015, the Company and the required holders of Series A Preferred Shares amended the registration rights agreement to extend the filing deadline for the registration statement to June 30, 2015.

Series B Preferred Shares

The Series B Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series B Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series B Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Preferred Share is $140.00 and the initial conversion price is $8.40 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Series B Preferred Shares to the extent that, as a result of such conversion, such holder would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series B Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to such beneficial ownership limitations, each holder is entitled to vote on all matters submitted to stockholders of the Company on an as converted basis, based on a conversion price of $8.40 per shares. The Series B Preferred Shares rank junior to the Series A Preferred Shares and bear no dividends. All of the convertible preferred shares do not represent an unconditional obligation to be settled in a variable number of shares, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the convertible preferred shares are considered equity hosts and recorded in stockholders’ equity.

Series C Preferred Shares

The Series C Preferred Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Series C Preferred Shares, plus all accrued and unpaid dividends, if any, on such Series C Preferred Shares, as of such date of determination, divided by the conversion price. The stated value of each Series C Preferred Share is $120.00 per share, and the initial conversion price is $7.20 (current conversion price is $5.16) per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. In addition, in the event the Company issues or sells, or is deemed to issue or sell, shares of common stock at a per share price that is less than the conversion price then in effect, the conversion price shall be reduced to such lower price, subject to certain exceptions and provided that the conversion price may not be reduced to less than $5.16, unless and until such time as the Company obtains shareholder approval to allow for a lower conversion price. The Company is prohibited from effecting a conversion of the Series C Preferred Shares to the extent that, as a result of such conversion, such May Investor would beneficially own more than 4.99% of the number of shares of common stock outstanding immediately after giving effect to the issuance of shares of common stock upon conversion of the Series C Preferred Shares, which beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Subject to the beneficial ownership limitations discussed previously, each holder is entitled to vote on all matters submitted to stockholders of the Company, and shall have the number of votes equal to the number of shares of common stock issuable upon conversion of such holder’s Series C Preferred Shares, based on a conversion price of $7.80 per share. The Series C Preferred Shares bear no dividends and shall rank junior to the Company’s Series A Preferred Shares but senior to the Company’s Series B Preferred Shares.

In connection with the sale of the Series C Preferred Shares, the Company also entered into separate registration rights agreements (the “May Registration Rights Agreement”) with each Investor. The Company agreed to use its best efforts to file a registration statement to register the Shares and the common stock issuable upon the conversion of the Series C Preferred Shares, within thirty days following the Closing Date, to cause such registration statement to be declared effective within ninety days of the filing day and to maintain the effectiveness of the registration statement until all of such shares of common stock have been sold or are otherwise able to be sold pursuant to Rule 144 without restriction. In the event the Company fails to satisfy its obligations under the Registration Rights Agreement, the Company is obligated to pay to the Investors on a monthly basis, an amount equal to 1% of the Investor’s investment, up to a maximum of 12%. Effective as of the original filing deadline of the registration statement, the Company obtained the requisite approval from the Investors for the waiver of its obligations under the May Registration Rights Agreement.

The Company evaluated the guidance ASC 480-10 Distinguishing Liabilities from Equity and ASC 815-40 Contracts in an Entity’s Own Equity to determine the appropriate classification of the instruments. The Series C Preferred Shares do not represent an unconditional obligation to be settled in a variable number of shares of common stock, are not redeemable and do not contain fixed or indexed conversion provisions similar to debt instruments. Accordingly, the Series C Preferred Shares are considered equity hosts and recorded in stockholders’ equity.

Series D Preferred Shares

The Preferred D Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred D Shares, plus all accrued and unpaid dividends, if any, on such Preferred D Share, as of such date of determination, divided by the conversion price. The stated value Preferred D Shares is $1,000 per share and the initial conversion price is $600 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Company is prohibited from effecting a conversion of the Preferred D Shares to the extent that, as a result of such conversion, such investor would beneficially own more than 4.99% of the number of shares of Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock upon conversion of the Preferred D Shares. Upon 61 days written notice, the beneficial ownership limitation may be increased by the holder up to, but not exceeding, 9.99%. Except as otherwise required by law, holders of Series D Preferred Shares shall not have any voting rights. Pursuant to the Certificate of Designations, Preferences and Rights of the 0% Series D Convertible Preferred Stock, the Preferred D Shares bear no dividends and shall rank senior to the Company’s other classes of capital stock.

Series E Preferred Shares

The Preferred E Shares are convertible into shares of common stock based on a conversion calculation equal to the stated value of such Preferred E Shares, plus all accrued and unpaid dividends, if any as of such date of determination, divided by the conversion price. The stated value of each Preferred E Share is $1,000 and the initial conversion price is $1.00 per share, each subject to adjustment for stock splits, stock dividends, recapitalizations, combinations, subdivisions or other similar events. The Preferred E Shares, with respect to dividend rights and rights on liquidation, winding-up and dissolution, in each case will rank senior to the Company’s common stock and all other securities of the Company that do not expressly provide that such securities rank on parity with or senior to the Preferred E Shares. Until converted, each Preferred E Share is entitled to two votes for every share of common stock into which it is convertible on any matter submitted for a vote of stockholders. The Preferred E Shares participate on an “as converted” basis with all dividends declared on the Company’s common stock.

April 2016 Registered Common Stock and Warrant Offering

On April 13, 2016, the Company entered into a Securities Purchase Agreement with certain institutional investors providing for the issuance and sale by the Company of 250,000 shares of the Company’s common stock, par value $0.001 per share at an offering price of $6.00 per share, for net proceeds of $1.4 million after deducting placement agent fees and expenses. In addition, the Company sold to purchasers of common stock in this offering, warrants to purchase 187,500 shares of its common stock. The common shares and the Warrant Shares were offered by the Company pursuant to an effective shelf registration statement on Form S-3, which was initially filed with the Securities and Exchange Commission on October 22, 2015 and declared effective on December 7, 2015. The closing of the offering occurred on April 19, 2016.

Each Warrant is immediately exercisable for two years, but not thereafter, at an exercise price of $6.90 per share. Subject to limited exceptions, a holder of warrants will not have the right to exercise any portion of its warrants if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the number of shares of our common stock outstanding immediately after giving effect to such exercise. The exercise price and number of warrants are subject to adjustment in the event of any stock dividends and splits, reverse stock split, stock dividend, recapitalization, reorganization or similar transaction. The Warrants were classified as liabilities and measured at fair value, with changes in fair value recognized in the Condensed Consolidated Statements of Operations in other expenses (income) until they were exchanged for shares of common stock on January 18, 2017. The initial recognition of the Warrants resulted in an allocation of the net proceeds from the offering to a warrant liability of approximately $318,000, with the remainder being attributable to the common stock sold in the offering.

Preferred Share Conversion Activity

During the nine months ended July 31, 2017, 3,991,487 shares of Convertible Preferred Stock Series A, 6,512 shares of Convertible Preferred Stock Series B, 7,798 shares of Convertible Preferred Stock Series C and 129,665 shares of Convertible Preferred Stock Series D were converted into 1,232,793 shares of common stock.

During the nine months ended July 31, 2016, 1,638,810 shares of Convertible Preferred Stock Series A and 12,001 shares of Convertible Preferred Stock Series D were converted into 293,137 shares of common stock.

Common Stock

On January 4, 2016, the Company declared a special cash dividend of an aggregate of $10.0 million to holders of record on January 14, 2016 of its outstanding shares of: (i) common stock (ii) Series A Convertible Preferred Stock; (iii) Series B Convertible Preferred Stock; (iv) Series C Convertible Preferred Stock and (v) Series D Convertible Preferred Stock. The holders of record of the Company’s outstanding preferred stock participated in the dividend on an “as converted” basis. Approximately $6.0 million of the special cash dividend relates to preferred stock shares.

On January 6, 2016, certain employees exercised their options at $4.08 in exchange for the Company’s common stock for an aggregated amount of 31,656 shares.

On December 16, 2016, the Company sold an aggregate of 759,333 shares of its common stock to certain accredited investors pursuant to separate subscription agreements at a price of $3.00 per share for gross proceeds of $2.3 million.

On January 18, 2017, the Company entered into separate exchange agreements (each an “Exchange Agreement”) with certain accredited investors (the “Investors”) who purchased warrants to purchase shares of the Company’s common stock (the “Warrants”) pursuant to the prospectus dated April 13, 2016. In 2016, the Company issued 250,000 shares of the Company’s common stock and Warrants to purchase 187,500 shares of common stock (taking into account the reverse split of the Company’s common stock on a 1 for 6 basis effective with The NASDAQ Stock Market LLC on August 1, 2016). The common stock and Warrants were offered by the Company pursuant to an effective shelf registration statement. Under the terms of the Exchange Agreement, each Investor exchanged each Warrant it purchased in the Offering for 0.3 shares of common stock. Accordingly, the Company issued an aggregate of 56,250 shares of common stock in exchange for the return and cancellation of 187,500 Warrants.

During the nine months ended July 31, 2017, certain employees exercised their options at a weighted-average exercise price of $4.85 in exchange for the Company’s common stock for an aggregated amount of 231,404 shares. The Company received approximately $1.1 million from the exercise of stock options.

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Fair Value Measurements

9 Months Ended

Jul. 31, 2017

Fair Value Disclosures [Abstract]

Fair Value Measurements

8. FAIR VALUE MEASUREMENTS

In accordance with ASC 820, Fair Value Measurements, financial instruments were measured at fair value using a three-level hierarchy which maximizes use of observable inputs and minimizes use of unobservable inputs:

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

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

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

In connection with the April 19, 2016 common stock offering, the Company issued warrants to purchase an aggregate of 187,500 shares of common stock. These warrants were exercisable at $6.90 per share and expire on April 19, 2018. These warrants were analyzed and it was determined that they require liability treatment. Under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet as a current liability.

The fair value of these warrants at January 18, 2017 and October 31, 2016 was determined to be approximately $78,000 and $70,000, respectively, as calculated using Black-Scholes with the following assumptions: (1) stock price of $3.62 and $3.58, respectively; (2) a risk-free rate of 0.97% and 0.75%, respectively; and (3) an expected volatility of 68% and 61%, respectively.

Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. At July 31, 2017, there was no warrant liability balance.

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability (in thousands):

	Warrant Liability
Fair value - October 31, 2016	$	70
Change in fair value		8
Exchanged - January 18, 2017 (see Note 7)		(78	)
Fair value - July 31, 2017	$	-

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Stock Based Compensation Arrangements

9 Months Ended

Jul. 31, 2017

Disclosure of Compensation Related Costs, Share-based Payments [Abstract]

Stock Based Compensation Arrangements

9. STOCK BASED COMPENSATION ARRANGEMENTS

Stock-based compensation expense during the three months ended July 31, 2017 and 2016 amounted to approximately $3.7 million and $1.6 million, respectively. Stock-based compensation expense (including stock based compensation recorded in discontinued operations) during the nine months ended July 31, 2017 and 2016 amounted to approximately $11.8 million and $2.8 million, respectively. Stock-based compensation expense is recorded in general and administrative and research and development expenses in the accompanying consolidated statements of operations.

On February 8, 2017, the Board appointed Steve Gorlin as a Class II director with a term expiring in 2019 and Dr. Jon Mogford as a Class III director with a term expiring in 2017 to fill vacancies created upon the resignations of Messrs. Brauser and Honig. In addition, Mr. Gorlin was appointed as a member of each of the Board’s Audit, Compensation and Nominating and Corporate Governance Committees. Each of Mr. Gorlin and Dr. Mogford are deemed an “independent” director as such term is defined by the rules of The NASDAQ Stock Market LLC. There are no family relationships between either of Mr. Gorlin and Dr. Mogford and any of our other officers and directors. Mr. Gorlin and Dr. Mogford were each granted (i) an option to purchase up to 50,000 shares of the Company’s common stock at an exercise price equal to $4.72 per share (the “Options”) which Options will vest in 24 equal monthly installments commencing on the one month anniversary of the grant date and (ii) a restricted stock award of 50,000 shares of common stock that will vest in 24 equal monthly installments commencing on the one month anniversary of the grant date (the “RSUs”). The Options and the RSUs were granted pursuant to the Company’s 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan, the vesting and the exercise of the Options and the vesting of the RSUs are subject to stockholder approval (which was considered perfunctory given management’s high level of ownership interest).

A summary of the Company’s employee stock option activity in the nine months ended July 31, 2017 is presented below:

	Number of shares			Weighted-Average Exercise Price
Outstanding - October 31, 2016		383,210		$	5.74
Granted		2,715,000		$	3.49
Exercised		(231,404	)	$	4.85
Outstanding - July 31, 2017		2,866,806		$	3.68
Options exercisable - July 31, 2017		997,008		$	3.88
Weighted-average fair value of options granted during the period				$	2.37

A summary of the Company’s non-employee stock option activity in the nine months ended July 31, 2017 is presented below:

	Number of shares		Weighted-Average Exercise Price
Outstanding - October 31, 2016		-	$	-
Granted		52,000	$	4.71
Outstanding - July 31, 2017		52,000	$	4.71
Options exercisable - July 31, 2017		10,833	$	4.71

The value of employee and non-employee stock option grants is amortized over the vesting period of, generally, one to three years. As of July 31, 2017, there was approximately $2.8 million of unrecognized compensation cost related to non-vested employee and non-employee stock option awards, which is expected to be recognized over a remaining weighted-average vesting period of 0.7 years.

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the nine months ended July 31, 2017:

Risk free annual interest rate		1.78-2.28	%
Expected volatility		71.65-86.34	%
Expected life		5.04-6.00
Assumed dividends	None

A summary of the Company’s restricted stock activity in the nine months ended July 31, 2017 is presented below:

	Number of shares			Weighted-Average Grant-Date Fair Value
Unvested - October 31, 2016		274,829		$	6.00
Granted		1,031,000		$	4.56
Vested		(1,011,466	)	$	4.22
Unvested - July 31, 2017		294,363		$	7.07

During the nine months ended July 31, 2017, the Company granted 1,031,000 restricted shares to employees and non-employees.

The weighted-average fair value of restricted shares granted during the nine months ended July 31, 2017 was $4.56. The total fair value of restricted stock granted during the nine months ended July 31, 2017 was approximately $4.7 million.

The value of restricted stock grants is measured based on its fair value on the date of grant and amortized over the vesting period of, generally, six months to three years. As of July 31, 2017, there was approximately $2.0 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 0.6 years.

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Income Taxes

9 Months Ended

Jul. 31, 2017

Income Tax Disclosure [Abstract]

Income Taxes

10. INCOME TAXES

Due to the Company’s history of losses and uncertainty of future taxable income, a valuation allowance sufficient to fully offset net operating losses and other deferred tax assets has been established. The valuation allowance will be maintained until sufficient positive evidence exists to support a conclusion that a valuation allowance is not necessary. The Company’s effective tax rate for the nine months ended July 31, 2017 and 2016 differed from the expected U.S. federal statutory rate primarily due to the change in the valuation allowance. The issuance of Preferred Stock in connection with the Polarity acquisition will likely result in limitations on the utilization of the Company’s net operating loss carryforwards under IRS section 382.

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Loss Per Share

9 Months Ended

Jul. 31, 2017

Earnings Per Share [Abstract]

Loss Per Share

11. LOSS PER SHARE

Shares of common stock issuable under convertible preferred stock, warrants and options and shares subject to restricted stock grants were not included in the calculation of diluted earnings per common share for the three months and nine months ended July 31, 2017 and 2016, as the effect of their inclusion would be anti-dilutive.

The table below provides total potential shares outstanding, including those that are anti-dilutive, on July 31, 2017 and 2016:

	July 31,
	2017		2016
Shares issuable upon exercise of warrants		-		187,500
Shares issuable upon conversion of preferred stock		9,020,287		2,783,000
Shares issuable upon exercise of stock options		2,918,806		394,278
Non-vested shares under restricted stock grants		294,363		303,477

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Commitments and Contingencies

9 Months Ended

Jul. 31, 2017

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies

12. COMMITMENTS AND CONTINGENCIES

Contingencies

On February 26, 2015, a complaint for patent infringement was filed in the United States District Court for the Eastern District of Texas by Richard Baker, an individual residing in Australia, against Microsoft, Nintendo, the Company and a number of other game publisher defendants. The complaint alleges that the Company’s Zumba Fitness Kinect game infringed plaintiff’s patents in motion tracking technology. The plaintiff is representing himself pro se in the litigation and is seeking monetary damages in the amount of $1.3 million. The Company, in conjunction with Microsoft, is defending itself against the claim and has certain third-party indemnity rights from developers for costs incurred in the litigation. In August 2015, the defendants jointly moved to transfer the case to the Western District of Washington. On May 17, 2016, the Washington Court issued a scheduling order that provides that defendants leave to jointly file an early motion for summary judgement in June 2016. On June 17, 2016, the defendants jointly filed a motion for summary judgment that stated that none of the defendants, including the Company, infringed upon the asserted patent. On July 9, 2016, Mr. Baker opposed the motion. On July 15, 2016, the defendants jointly filed a reply. The briefing on the motion is now closed. The Court has not yet issued a decision or indicated if or when there will be oral argument on the motion.

Intelligent Verification Systems, LLC (“IVS”), filed a patent infringement complaint on September 20, 2012, in the United States District Court for the Eastern District against the Company and Microsoft Corporation. In March 2015, the court issued an order excluding the evidence proffered by IVS in support of its alleged damages, including the opinion of its damages expert. IVS appealed that decision. On January 19, 2016, the Federal Circuit denied IVS’ appeal and affirmed the district court’s orders that excluded the plaintiff’s damages expert and dismissed the case.

In addition to the item above, the Company at times may be a party to claims and suits in the ordinary course of business. We record a liability when it is both probable that a liability has been incurred and the amount of the loss or range of loss can be reasonably estimated. The Company has not recorded a liability with respect to the matter above. While the Company believes that it has valid defenses with respect to the legal matter pending and intends to vigorously defend the matter above, given the uncertainty surrounding litigation and our inability to assess the likelihood of a favorable or unfavorable outcome, it is possible that the resolution of the matter could have a material adverse effect on our consolidated financial position, cash flows or results of operations.

Commitments

The Company leases office space in Hazlet, New Jersey at a cost of approximately $1,100 per month under a lease agreement that expires on March 31, 2018.

The Company also leases space in Salt Lake City, Utah at a cost of approximately $24,044 per month under a lease agreement that expires on March 31 2018.

The Company has entered into employment agreements with key executives that contain severance terms and change of control provisions.

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Related Parties

9 Months Ended

Jul. 31, 2017

Related Party Transactions [Abstract]

Related Parties

13. RELATED PARTIES

In January 2015, the Company entered into an agreement with Equity Stock Transfer for transfer agent services. A former Board member of the Company is a co-founder and chief executive officer of Equity Stock Transfer. Fees under the agreement were approximately $2,000 and $0, in the nine months ended July 31, 2017 and 2016, respectively.

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Discontinued Operations

9 Months Ended

Jul. 31, 2017

Discontinued Operations and Disposal Groups [Abstract]

Discontinued Operations

14. DISCONTINUED OPERATIONS

On July 31, 2015, the Company transferred to Zift Interactive LLC (“Zift”), a newly-formed subsidiary, certain rights under certain of its publishing licenses related to developing, publishing and distributing video game products through retail distribution for a term of one year. The Company transferred Zift to its former chief executive officer, Jesse Sutton. In exchange, the Company received Mr. Sutton’s resignation from the position of chief executive officer of the Company, including waiver of any severance payments and the execution of a separation agreement, together with his agreement to serve as a consultant to the Company. In addition, Zift will pay the Company a specified percent of its net revenue from retail sales on a quarterly basis.

In addition, the Company entered into a conveyance agreement with Zift under which it assigned to Zift certain assets used in the retail business and Zift agreed to assume and indemnify the Company for liabilities and claims related to the retail business, including customer claims for price protection and promotional allowances. The assets transferred to Zift included cash in an amount of $800,000, of which $400,000 was transferred immediately and the remaining $400,000 was payable by the Company in twelve equal consecutive monthly installments of $33,000 commencing August 1, 2015, and certain accounts receivable and inventory with an aggregate carrying value of approximately $87,000.

On June 23, 2017, the Company sold Majesco Entertainment Company, a Nevada corporation and wholly-owned subsidiary of the Company (“Majesco”) to Zift (the “Purchaser”) pursuant to a purchase agreement (the “Purchase Agreement”). Pursuant to the terms of the Purchase Agreement, the Company sold to the Purchaser 100% of the issued and outstanding shares of common stock of Majesco, including all of the right, title and interest in and to Majesco’s business of developing, publishing and distributing video game products through mobile and online digital downloading. Pursuant to the terms of the Purchase Agreement, the Company will receive total cash consideration of $100,000 ($5,000 upon signing the Purchase Agreement and 19 additional monthly payments of $5,000) plus contingent consideration based on net revenues valued at $0. The Company received $10,000 in cash consideration as of July 31, 2017. Subsequent to July 31, 2017, the Company received another $5,000.

The Company recorded a gain of $100,000 on the sale of Majesco Entertainment Company, calculated as the difference between the $100,000 in non-contingent consideration and the net carrying amount of Majesco Entertainment Company, which was $0. The gain on the sale of Majesco Entertainment Company may be adjusted in future periods by the contingent consideration, based upon the achievement of pre-determined revenue milestones of more than $50,000 per month.

The sale of Majesco Entertainment Company, classified in the Company’s video games segment, qualifies as a discontinued operation as the sale represents a strategic shift that has (or will have) a major effect on operations and financial results.

The results of operations from the discontinued business for the three and nine months ended July 31, 2017 and 2016 are as follows (in thousands):

	For the Three Months Ended						For the Nine Months Ended
	July 31,						July 31,
	2017			2016			2017			2016
Revenues	$	143		$	315		$	558		$	1,318
Expenses		176			1,085			1,007			2,169
Loss from discontinued operations	$	(33	)	$	(770	)	$	(449	)	$	(851	)
Gain on sale of discontinued operations	$	100		$	-		$	100		$	-

The assets and liabilities related to the discontinued operations as of July 31, 2017 and October 31, 2016 are as follows (in thousands):

	July 31, 2017		October 31, 2016
	(Unaudited)
Current assets related to discontinued operations
Accounts receivable	$	-	$	113
Capitalized software development costs and license fees		-		50
	$	-	$	163
Current liabilities related to discontinued operations
Accounts payable and accrued expenses	$	-	$	810
	$	-	$	810

The cash flows from the discontinued business for the nine months ended July 31, 2017 and 2016 are as follows (in thousands):

	For the nine months ended July 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from discontinued operations		(349	)		(851	)
Adjustments to reconcile net loss from discontinued operations to net cash used in discontinued operating activities:
Depreciation and amortization		11			21
Stock based compensation expense		1,118			994
Amortization of capitalized software development costs and license fees		50			150
Gain on sale of Majesco Sub		(100	)		-
Changes in operating assets and liabilities:
Accounts receivable		113			107
Capitalized software development costs and license fees		-			(21	)
Accounts payable and accrued expenses		(810	)		(218	)
Payable to Zift		-			(19	)
Net cash provided by discontinued operating activities		33			163
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from sale of Majesco Sub		10			-
Net cash provided by discontinued investing activities		10			-

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Subsequent Events

9 Months Ended

Jul. 31, 2017

Subsequent Events [Abstract]

Subsequent Events

15. SUBSEQUENT EVENTS

On September 14, 2017, the Company announced that it has entered into securities purchase agreements with investors for the sale of $15.2 million of Series F Convertible Preferred Stock. The Investor will also receive 276,364 Warrants exercisable at $30.00 per share of common stock. The Series F Convertible Preferred stock converts at $27.50 per share into a total of 552,727 shares of common stock, upon conversion.

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Summary of Significant Accounting Policies (Policies)

9 Months Ended

Jul. 31, 2017

Accounting Policies [Abstract]

Principles of Consolidation

Principles of Consolidation. The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries; Polarity NV, Majesco Sub and Majesco Europe Limited. Majesco Europe Limited was dissolved during the year ended October 31, 2016 and Majesco Sub was sold on June 23, 2017. Significant intercompany accounts and transactions have been eliminated in consolidation.

Cash and Cash Equivalents

Cash and cash equivalents. Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. At various times, the Company has deposits in excess of the Federal Deposit Insurance Corporation limit. The Company has not experienced any losses on these accounts.

Accounts Payable and Accrued Expenses

Accounts Payable and Accrued Expenses. The carrying amounts of accounts payable and accrued expenses approximate fair value as these accounts are largely current and short term in nature.

Property and Equipment

Property and Equipment. Property and equipment is stated at cost. Depreciation and amortization is being provided for by the straight-line method over the estimated useful lives of the assets, generally five years. Amortization of leasehold improvements is provided for over the shorter of the term of the lease or the life of the asset.

Income Taxes

Income Taxes. The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The Company evaluates the potential for realization of deferred tax assets at each quarterly balance sheet date and records a valuation allowance for assets for which realization is not more likely than not.

Stock Based Compensation

Stock Based Compensation. The Company measures all stock-based compensation to employees using a fair value method and records such expense in general and administrative and research and development expenses. Compensation expense for stock options with cliff vesting is recognized on a straight-line basis over the vesting period of the award, based on the fair value of the option on the date of grant. For stock options with graded vesting, the Company recognizes compensation expense over the service period for each separately vesting tranche of the award as though the award were in substance, multiple awards.

The fair value for options issued is estimated at the date of grant using a Black-Scholes option-pricing model. The risk-free rate is derived from the U.S. Treasury yield curve in effect at the time of the grant. The volatility factor is determined based on the Company’s historical stock prices.

The value of restricted stock grants 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.

Loss Per Share

Loss Per Share. Basic loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options, unvested shares of restricted stock and outstanding common stock purchase warrants because their effect would be anti-dilutive due to our net loss.

Commitments and Contingencies

Commitments and Contingencies. We are subject to claims and litigation in the ordinary course of our business. We record a liability for contingencies when the amount is both probable and reasonably estimable. We record associated legal fees as incurred.

Accounting for Warrants

Accounting for Warrants. The Company accounts for the issuance of common stock purchase warrants issued in connection with the equity offerings in accordance with the provisions of ASC 815, Derivatives and Hedging (“ASC 815”). The Company classifies as equity any contracts that (i) require physical settlement or net-share settlement or (ii) gives the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). The Company classifies as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement). In addition, under ASC 815, registered common stock warrants that require the issuance of registered shares upon exercise and do not expressly preclude an implied right to cash settlement are accounted for as derivative liabilities. The Company classifies these derivative warrant liabilities on the condensed consolidated balance sheet as a current liability.

Change in Fair Value of Warrant Liability

Change in Fair Value of Warrant Liability. The Company assessed the classification of common stock purchase warrants as of the date of each offering and determined that certain instruments met the criteria for liability classification. Accordingly, the Company classified the warrants as a liability at their fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until the warrants are exercised or expired, and any change in fair value is recognized as “change in fair value of warrant liability” in the condensed consolidated statements of operations. The fair value of the warrants has been estimated using a Black-Scholes valuation model (see Note 7).

Reverse Stock-split

Reverse stock-split. On July 27, 2016, Majesco Entertainment Company (the “Company”) filed a certificate of amendment (the “Amendment”) to its Restated Certificate of Incorporation with the Secretary of State of the State of Delaware in order to effectuate a reverse stock split of the Company’s issued and outstanding common stock, par value $0.001 per share on a one (1) for six (6) basis, effective on July 29, 2016 (the “Reverse Stock Split”).

The Reverse Stock Split was effective with The NASDAQ Capital Market (“NASDAQ”) at the open of business on August 1, 2016. The par value and other terms of Company’s common stock were not affected by the Reverse Stock Split. The Company’s post-Reverse Stock Split common stock has a new CUSIP number, 560690 406. The Company’s transfer agent, Equity Stock Transfer LLC, acted as exchange agent for the Reverse Stock Split.

As a result of the Reverse Stock Split, every six shares of the Company’s pre-Reverse Stock Split common stock was combined and reclassified into one share of the Company’s common stock. No fractional shares of common stock were issued as a result of the Reverse Stock Split. Stockholders who otherwise would be entitled to a fractional share shall receive a cash payment in an amount equal to the product obtained by multiplying (i) the closing sale price of our common stock on the business day immediately preceding the effective date of the Reverse Stock Split as reported on NASDAQ by (ii) the number of shares of our common stock held by the stockholder that would otherwise have been exchanged for the fractional share interest.

All common share and per share amounts have been restated to show the effect of the Reverse Stock Split.

Reclassifications

Reclassifications. Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. One reclassification relates to discontinued operations. Another represents a reclassification of approximately $1.8 million from general and administrative expenses to research and development expenses for the six months ended April 30, 2017.

Estimates

Estimates. The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities or the disclosure of gain or loss contingencies at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Among the more significant estimates included in these financial statements are the recoverability of advance payments for capitalized software development costs and intellectual property licenses, the valuation of warrant liability, stock based compensation and the valuation allowances for deferred tax benefits. Actual results could differ from those estimates.

Recently Adopted Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In August 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2014-15, Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (“ASU No. 2014-15”) that requires management to evaluate whether there are conditions and events that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the financial statements are issued on both an interim and annual basis. Management is required to provide certain footnote disclosures if it concludes that substantial doubt exists or when its plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The Company adopted ASU No. 2014-15 on November 1, 2016 and its adoption did not have a material impact on the Company’s financial statements.

In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Company adopted this guidance effective November 1, 2016.

Recent Accounting Pronouncements

Recent Accounting Pronouncements.

In February 2016, FASB issued ASU No. 2016-02, Leases (Topic 842), which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. When adopted, the Company does not expect this guidance to have a material impact on our financial statements.

In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718), Improvements to Employee Share-Based Payment Accounting. Under ASU No. 2016-09, companies will no longer record excess tax benefits and certain tax deficiencies in additional paid-in capital (“APIC”). Instead, they will record all excess tax benefits and tax deficiencies as income tax expense or benefit in the income statement and the APIC pools will be eliminated. In addition, ASU No. 2016-09 eliminates the requirement that excess tax benefits be realized before companies can recognize them. ASU No. 2016-09 also requires companies to present excess tax benefits as an operating activity on the statement of cash flows rather than as a financing activity. Furthermore, ASU No. 2016-09 will increase the amount an employer can withhold to cover income taxes on awards and still qualify for the exception to liability classification for shares used to satisfy the employer’s statutory income tax withholding obligation. An employer with a statutory income tax withholding obligation will now be allowed to withhold shares with a fair value up to the amount of taxes owed using the maximum statutory tax rate in the employee’s applicable jurisdiction(s). ASU No. 2016-09 requires a company to classify the cash paid to a tax authority when shares are withheld to satisfy its statutory income tax withholding obligation as a financing activity on the statement of cash flows. Under current U.S. GAAP, it was not specified how these cash flows should be classified. In addition, companies will now have to elect whether to account for forfeitures on share-based payments by (1) recognizing forfeitures of awards as they occur or (2) estimating the number of awards expected to be forfeited and adjusting the estimate when it is likely to change, as is currently required. The amendments of this ASU are effective for reporting periods beginning after December 15, 2016, with early adoption permitted but all of the guidance must be adopted in the same period. The Company is currently assessing the impact that ASU No. 2016-09 will have on its condensed consolidated financial statements.

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480) and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception, (ASU 2017-11). Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion option. Part II of this update addresses the difficulty of navigating Topic 480, Distinguishing Liabilities from Equity, because of the existence of extensive pending content in the FASB Accounting Standards Codification. This pending content is the result of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related disclosures.

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Prepaid Expenses and Other Current Assets (Tables)

9 Months Ended

Jul. 31, 2017

Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]

Schedule of Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following (in thousands):

	July 31, 2017		October 31, 2016
Legal retainer	$	60	$	-
Prepaid insurance		86		22
Tax receivable		-		18
Trade show deposit		160		-
Other prepaids		71		-
Deposits		32		-
Other assets		2		7
Total prepaid expenses and other current assets	$	411	$	47

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Property and Equipment, Net (Tables)

9 Months Ended

Jul. 31, 2017

Property, Plant and Equipment [Abstract]

Schedule of Property and Equipment

Property and equipment, net, consist of the following (in thousands):

	July 31, 2017			October 31, 2016
Medical equipment	$	2,193		$	-
Computers and software		198			61
Furniture and equipment		109			78
Total property and equipment, gross		2,500			139
Accumulated depreciation		(427	)		(121	)
Total property and equipment, net	$	2,073		$	18

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Accounts Payable and Accrued Expenses (Tables)

9 Months Ended

Jul. 31, 2017

Payables and Accruals [Abstract]

Schedule of Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following (in thousands):

	July 31, 2017		October 31, 2016
Accounts payable	$	56	$	-
Due to Zift		66		-
Medical equipment purchase		108		-
Salaries and other compensation		662		463
Legal and accounting		454		-
Other accruals		93		11
Total accounts payable and accrued expenses	$	1,439	$	474

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Stockholders' Equity (Tables)

9 Months Ended

Jul. 31, 2017

Equity [Abstract]

Schedule of Convertible Preferred Stock

Convertible preferred stock as of July 31, 2017 consisted of the following (in thousands, except share amounts):

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		3,146,671	$	769	$	2,140		713,245
Series B		54,250		47,689		4,020		-		794,806
Series C		26,000		17,965		1,401		-		417,791
Series D		170,000		26,667		312		-		44,445
Series E		7,050		7,050		104,693		-		7,050,000
Other authorized, unissued		912,700		-		-		-		-
Total		10,000,000		3,246,042	$	111,195	$	2,140		9,020,287

Convertible preferred stock as of October 31, 2016 consisted of the following (in thousands, except share amounts):

	Shares Authorized		Shares Issued and Outstanding		Net Carrying Value		Aggregate Liquidation Preference		Common Shares Issuable Upon Conversion
Series A		8,830,000		7,138,158	$	1,745	$	4,854		1,189,693
Series B		54,250		54,201		4,569		-		903,362
Series C		26,000		25,763		2,010		-		429,392
Series D		170,000		156,332		1,829		-		260,553
Other authorized, unissued		919,750		-		-		-		-
Total		10,000,000		7,374,454	$	10,153	$	4,854		2,783,000

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Fair Value Measurements (Tables)

9 Months Ended

Jul. 31, 2017

Fair Value Disclosures [Abstract]

Changes in Estimated Fair Value for Level 3 Classified Derivative Warrant Liability

The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative warrant liability (in thousands):

	Warrant Liability
Fair value - October 31, 2016	$	70
Change in fair value		8
Exchanged - January 18, 2017 (see Note 7)		(78	)
Fair value - July 31, 2017	$	-

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Stock Based Compensation Arrangements (Tables)

9 Months Ended

Jul. 31, 2017

Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions for the nine months ended July 31, 2017:

Risk free annual interest rate		1.78-2.28	%
Expected volatility		71.65-86.34	%
Expected life		5.04-6.00
Assumed dividends	None

Schedule of Share-based Compensation, Restricted Stock Activity

A summary of the Company’s restricted stock activity in the nine months ended July 31, 2017 is presented below:

	Number of shares			Weighted-Average Grant-Date Fair Value
Unvested - October 31, 2016		274,829		$	6.00
Granted		1,031,000		$	4.56
Vested		(1,011,466	)	$	4.22
Unvested - July 31, 2017		294,363		$	7.07

Employee Stock Option [Member]

Schedule of Share-based Compensation, Stock Options, Activity

A summary of the Company’s employee stock option activity in the nine months ended July 31, 2017 is presented below:

	Number of shares			Weighted-Average Exercise Price
Outstanding - October 31, 2016		383,210		$	5.74
Granted		2,715,000		$	3.49
Exercised		(231,404	)	$	4.85
Outstanding - July 31, 2017		2,866,806		$	3.68
Options exercisable - July 31, 2017		997,008		$	3.88
Weighted-average fair value of options granted during the period				$	2.37

Non-Employee Stock Option [Member]

Schedule of Share-based Compensation, Stock Options, Activity

A summary of the Company’s non-employee stock option activity in the nine months ended July 31, 2017 is presented below:

	Number of shares		Weighted-Average Exercise Price
Outstanding - October 31, 2016		-	$	-
Granted		52,000	$	4.71
Outstanding - July 31, 2017		52,000	$	4.71
Options exercisable - July 31, 2017		10,833	$	4.71

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Loss Per Share (Tables)

9 Months Ended

Jul. 31, 2017

Earnings Per Share [Abstract]

Schedule of Anti-dilutive Potential Shares Outstanding Activity

The table below provides total potential shares outstanding, including those that are anti-dilutive, on July 31, 2017 and 2016:

	July 31,
	2017		2016
Shares issuable upon exercise of warrants		-		187,500
Shares issuable upon conversion of preferred stock		9,020,287		2,783,000
Shares issuable upon exercise of stock options		2,918,806		394,278
Non-vested shares under restricted stock grants		294,363		303,477

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Discontinued Operations (Tables)

9 Months Ended

Jul. 31, 2017

Discontinued Operations and Disposal Groups [Abstract]

Schedule of Assets and Liabilities of Discontinued Operations

The results of operations from the discontinued business for the three and nine months ended July 31, 2017 and 2016 are as follows (in thousands):

	For the Three Months Ended						For the Nine Months Ended
	July 31,						July 31,
	2017			2016			2017			2016
Revenues	$	143		$	315		$	558		$	1,318
Expenses		176			1,085			1,007			2,169
Loss from discontinued operations	$	(33	)	$	(770	)	$	(449	)	$	(851	)
Gain on sale of discontinued operations	$	100		$	-		$	100		$	-

The assets and liabilities related to the discontinued operations as of July 31, 2017 and October 31, 2016 are as follows (in thousands):

	July 31, 2017		October 31, 2016
	(Unaudited)
Current assets related to discontinued operations
Accounts receivable	$	-	$	113
Capitalized software development costs and license fees		-		50
	$	-	$	163
Current liabilities related to discontinued operations
Accounts payable and accrued expenses	$	-	$	810
	$	-	$	810

The cash flows from the discontinued business for the nine months ended July 31, 2017 and 2016 are as follows (in thousands):

	For the nine months ended July 31,
	2017			2016
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from discontinued operations		(349	)		(851	)
Adjustments to reconcile net loss from discontinued operations to net cash used in discontinued operating activities:
Depreciation and amortization		11			21
Stock based compensation expense		1,118			994
Amortization of capitalized software development costs and license fees		50			150
Gain on sale of Majesco Sub		(100	)		-
Changes in operating assets and liabilities:
Accounts receivable		113			107
Capitalized software development costs and license fees		-			(21	)
Accounts payable and accrued expenses		(810	)		(218	)
Payable to Zift		-			(19	)
Net cash provided by discontinued operating activities		33			163
CASH FLOWS FROM INVESTING ACTIVITIES
Cash received from sale of Majesco Sub		10			-
Net cash provided by discontinued investing activities		10			-

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Principal Business Activity and Basis of Presentation (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands			9 Months Ended
	Jul. 23, 2017	Apr. 07, 2017	Jul. 31, 2017	Oct. 31, 2016
Convertible preferred stock, shares authorized			10,000,000	10,000,000
Cash consideration received			$ 10
Majesco to Zift [Member]
Common stock issued, outstanding percentage	100.00%
Cash consideration	$ 100
Additional monthly payments	5
Net revenue	$ 0
Series E Preferred Stock [Member]
Convertible preferred stock, shares authorized		7,050
Number of convertible into an aggregate shares of common stock		7,050,000
Number of convertible into an aggregate value of common stock		$ 104,700
Number of preferred stock convertible into common stock		7,050,000
Common stock closing price per share		$ 14.85

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Summary of Significant Accounting Policies (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		6 Months Ended	9 Months Ended
	Jul. 31, 2017	Jul. 31, 2016	Apr. 30, 2017	Jul. 31, 2017	Jul. 31, 2016	Oct. 31, 2016
Property and equipment, estimated useful lives				5 years
Common stock, par value	$ 0.001			$ 0.001		$ .001
Reverse stock split, description				one (1) for six (6) basis, effective on July 29, 2016
Research and development expenses	$ 1,641		$ 1,800	$ 3,424
Minimum [Member]
Share-based compensation arrangement by share-based payment award, award vesting period				1 year
Maximum [Member]
Share-based compensation arrangement by share-based payment award, award vesting period				3 years
Restricted Stock [Member] | Minimum [Member]
Share-based compensation arrangement by share-based payment award, award vesting period				6 months
Restricted Stock [Member] | Maximum [Member]
Share-based compensation arrangement by share-based payment award, award vesting period				3 years

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Going Concern (Details Narrative) - USD ($) $ in Thousands	Jul. 31, 2017	Oct. 31, 2016
Organization, Consolidation and Presentation of Financial Statements [Abstract]
Cumulative losses	$ (249,397)	$ (128,176)

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Prepaid Expenses and Other Current Assets - Schedule of Prepaid Expenses and Other Current Assets (Details) - USD ($) $ in Thousands	Jul. 31, 2017	Oct. 31, 2016
Deferred Costs, Capitalized, Prepaid, and Other Assets Disclosure [Abstract]
Legal retainer	$ 60
Prepaid insurance	86	22
Tax receivable		18
Trade show deposit	160
Other prepaids	71
Deposits	32
Other assets	2	7
Total prepaid expenses and other current assets	$ 411	$ 47

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Property and Equipment, Net - Schedule of Property and Equipment (Details) - USD ($) $ in Thousands	Jul. 31, 2017	Oct. 31, 2016
Property, Plant and Equipment [Abstract]
Medical equipment	$ 2,193
Computers and software	198	61
Furniture and equipment	109	78
Total property and equipment, gross	2,500	139
Accumulated depreciation	(427)	(121)
Total property and equipment, net	$ 2,073	$ 18

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Accounts Payable and Accrued Expenses - Schedule of Accounts Payable and Accrued Expenses (Details) - USD ($) $ in Thousands	Jul. 31, 2017	Oct. 31, 2016
Payables and Accruals [Abstract]
Accounts payable	$ 56
Due to Zift	66
Medical equipment purchase	108
Salaries and other compensation	662	463
Legal and accounting	454
Other accruals	93	11
Total accounts payable and accrued expenses	$ 1,439	$ 474

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Stockholders' Equity (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands				9 Months Ended		12 Months Ended
	Dec. 16, 2016	Apr. 13, 2016	Jan. 06, 2016	Jul. 31, 2017	Jul. 31, 2016	Oct. 31, 2016	Apr. 19, 2016	Jan. 14, 2016
Common stock, par value				$ 0.001		$ .001
Warrant exercise price per share							$ 6.90
Number of common stock value issued				$ 2,278
Reverse stock split, description				one (1) for six (6) basis, effective on July 29, 2016
Employees [Member]
Number of common stock option exercise price per share			$ 4.08
Number of common stock shares issued			31,656
Accredited Investors [Member]
Sale of common stock issued, shares	759,333
Sale of stock price, per share	$ 3.00
Warrants to purchase shares of common stock				187,500		187,500
Number of common stock shares issued				56,250		250,000
Proceeds from sale of common stock	$ 2,300
Reverse stock split, description						1 for 6 basis
Number of warrant offering, shares						0.3
Warrant [Member]
Beneficially not ownership percentage				4.99%
Proceeds from offering to a warrant liability				$ 318
Warrant exercisable term				2 years
Warrant exercise price per share				$ 6.90
Common Stock [Member]
Number of convertible into an aggregate shares issued				(761,798)
Cash dividend								$ 6,000
Number of common stock shares issued				759,333
Number of common stock value issued				$ 1
Securities Purchase Agreement [Member]
Sale of common stock issued, shares		250,000
Common stock, par value		$ 0.001
Common stock offering price per share		$ 6.00
Proceeds from offering to a warrant liability		$ 1,400
Warrants to purchase shares of common stock				187,500
Series A Preferred Shares [Member]
Preferred stock, stated value per share				$ 0.68
Preferred stock initial conversion price, per share				4.08
Preferred stock current conversion price per share				$ 3.00
Series A Preferred Shares [Member] | Minimum [Member]
Beneficially ownership percentage				4.99%
Beneficially not ownership percentage				9.99%
Investors monthly payment percentage				1.00%
Series A Preferred Shares [Member] | Maximum [Member]
Preferred stock conversion price, per share				$ 3.54
Investors monthly payment percentage				12.00%
Series A Convertible Preferred Stock [Member]
Preferred stock conversion price, percentage				0.00%
Number of convertible into an aggregate shares issued				3,991,487	1,638,810
Series B Preferred Shares [Member]
Preferred stock, stated value per share				$ 140.00
Preferred stock initial conversion price, per share				8.40
Preferred stock conversion price, per share				$ 8.40
Series B Preferred Shares [Member] | Minimum [Member]
Beneficially ownership percentage				4.99%
Series B Preferred Shares [Member] | Maximum [Member]
Beneficially ownership percentage				9.99%
Series C Preferred Shares [Member]
Preferred stock, stated value per share				$ 120.00
Preferred stock initial conversion price, per share				7.20
Preferred stock current conversion price per share				5.16
Preferred stock conversion price, per share				$ 7.80
Series C Preferred Shares [Member] | Minimum [Member]
Beneficially ownership percentage				4.99%
Investors monthly payment percentage				1.00%
Series C Preferred Shares [Member] | Maximum [Member]
Beneficially ownership percentage				9.99%
Investors monthly payment percentage				12.00%
Preferred stock reduction conversion price, per share				$ 5.16
Series D Preferred Shares [Member]
Preferred stock, stated value per share				1,000
Preferred stock initial conversion price, per share				$ 600
Preferred stock conversion price, percentage				0.00%
Series D Preferred Shares [Member] | Minimum [Member]
Beneficially ownership percentage				4.99%
Series D Preferred Shares [Member] | Maximum [Member]
Beneficially ownership percentage				9.99%
Series E Preferred Shares [Member]
Preferred stock, stated value per share				$ 1,000
Preferred stock initial conversion price, per share				$ 1.00
Series B Convertible Preferred Stock [Member]
Number of convertible into an aggregate shares issued				6,512
Series C Convertible Preferred Stock [Member]
Number of convertible into an aggregate shares issued				7,798
Series D Convertible Preferred Stock [Member]
Number of convertible into an aggregate shares issued				129,665	12,001
Common Stock [Member]
Number of convertible into an aggregate shares issued				1,232,793	293,137
Cash dividend								$ 10,000
Number of common stock option exercise price per share				$ 4.85
Number of common stock shares issued				231,404
Number of common stock value issued				$ 1,100

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Stockholders' Equity - Schedule of Convertible Preferred Stock (Details) - USD ($) $ in Thousands	Jul. 31, 2017	Oct. 31, 2016
Preferred stock, shares authorized	10,000,000	10,000,000
Preferred stock, shares issued and outstanding	3,246,042	7,374,454
Preferred stock, net carrying value	$ 111,195	$ 10,153
Preferred stock, aggregate liquidation preference	$ 2,140	$ 4,854
Preferred stock, common shares issuable upon conversion	9,020,287	2,783,000
Series A Convertible Preferred Stock [Member]
Preferred stock, shares authorized	8,830,000	8,830,000
Preferred stock, shares issued and outstanding	3,146,671	7,138,158
Preferred stock, net carrying value	$ 769	$ 1,745
Preferred stock, aggregate liquidation preference	$ 2,140	$ 4,854
Preferred stock, common shares issuable upon conversion	713,245	1,189,693
Series B Convertible Preferred Stock [Member]
Preferred stock, shares authorized	54,250	54,250
Preferred stock, shares issued and outstanding	47,689	54,201
Preferred stock, net carrying value	$ 4,020	$ 4,569
Preferred stock, aggregate liquidation preference
Preferred stock, common shares issuable upon conversion	794,806	903,362
Series C Convertible Preferred Stock [Member]
Preferred stock, shares authorized	26,000	26,000
Preferred stock, shares issued and outstanding	17,965	25,763
Preferred stock, net carrying value	$ 1,401	$ 2,010
Preferred stock, aggregate liquidation preference
Preferred stock, common shares issuable upon conversion	417,791	429,392
Series D Convertible Preferred Stock [Member]
Preferred stock, shares authorized	170,000	170,000
Preferred stock, shares issued and outstanding	26,667	156,332
Preferred stock, net carrying value	$ 312	$ 1,829
Preferred stock, aggregate liquidation preference
Preferred stock, common shares issuable upon conversion	44,445	260,553
Series E Convertible Preferred Stock [Member]
Preferred stock, shares authorized	7,050
Preferred stock, shares issued and outstanding	7,050
Preferred stock, net carrying value	$ 104,693
Preferred stock, aggregate liquidation preference
Preferred stock, common shares issuable upon conversion	7,050,000
Other Authorized, Unissued [Member]
Preferred stock, shares authorized	912,700	919,750
Preferred stock, shares issued and outstanding
Preferred stock, net carrying value
Preferred stock, aggregate liquidation preference
Preferred stock, common shares issuable upon conversion

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Fair Value Measurements (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands			3 Months Ended		9 Months Ended		12 Months Ended
	Jan. 18, 2017	Apr. 19, 2016	Jul. 31, 2017	Jul. 31, 2016	Jul. 31, 2017	Jul. 31, 2016	Oct. 31, 2016
Fair Value Disclosures [Abstract]
Number of warrant to purchase shares of common stock		187,500
Warrant exercisable price per share		$ 6.90
Warrant expiry date		Apr. 19, 2018
Fair value of warrants	$ 78			$ (159)	$ 8	$ (133)	$ 70
Stock price	$ 3.62						$ 3.58
Risk-free rate	0.97%						0.75%
Expected volatility	68.00%						61.00%

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Fair Value Measurements - Changes in Estimated Fair Value for Level 3 Classified Derivative Warrant Liability (Details) $ in Thousands	9 Months Ended
	Jul. 31, 2017 USD ($)
Fair Value Disclosures [Abstract]
Fair value at the beginning of period	$ 70
Change in fair value	8
Exchanged - January 18, 2017 (see Note 7)	(78)
Fair value at the end of period

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Stock Based Compensation Arrangements (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Jul. 31, 2017	Jul. 31, 2016	Jul. 31, 2017	Jul. 31, 2016
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense	$ 3,700	$ 1,600	$ 10,696	$ 1,845
Unrecognized compensation cost	2,800		$ 2,800
Unrecognized compensation cost, period for recognition			8 months 12 days
Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period			1 year
Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period			3 years
Restricted Stock [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation cost	$ 2,000		$ 2,000
Unrecognized compensation cost, period for recognition			7 months 6 days
Weighted-average grant-date fair value granted			$ 4.56
Fair value of restricted stock vested			$ 4,700
Restricted Stock [Member] | Employees [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted shares of common stock			1,031,000
Restricted Stock [Member] | Non-employees [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of restricted shares of common stock			1,031,000
Restricted Stock [Member] | Minimum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period			6 months
Restricted Stock [Member] | Maximum [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period			3 years
2017 Equity Incentive Plan [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of options to purchase shares of common stock			50,000
Options exercise price per share			$ 4.72
Vesting period			24 months
2017 Equity Incentive Plan [Member] | Restricted Stock Units (RSUs) [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Vesting period			24 months
Number of restricted shares of common stock			50,000
General and Administrative Expense [Member]
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock-based compensation expense			$ 11,800	$ 2,800

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Stock Based Compensation Arrangements - Schedule of Share-based Compensation, Stock Options, Activity (Details)	9 Months Ended
	Jul. 31, 2017 $ / shares shares
Employees [Member]
Number of Shares, Outstanding at beginning of period | shares	383,210
Number of Shares, Granted | shares	2,715,000
Number of Shares, Exercised | shares	(231,404)
Number of Shares, Outstanding at end of period | shares	2,866,806
Number of Shares, Options exercisable | shares	997,008
Weighted Average Exercise Price, Outstanding at beginning of year	$ 5.74
Weighted Average Exercise Price, Granted	3.49
Weighted Average Exercise Price, Exercised	4.85
Weighted Average Exercise Price, Outstanding at end of year	3.68
Weighted Average Exercise Price, Options exercisable	$ 3.88
Weighted Average Exercise Price, Weighted-average fair value of options granted during the period	2 years 4 months 13 days
Non-employees [Member]
Number of Shares, Granted | shares	52,000
Number of Shares, Exercised | shares
Number of Shares, Outstanding at end of period | shares	52,000
Number of Shares, Options exercisable | shares	10,833
Weighted Average Exercise Price, Outstanding at beginning of year
Weighted Average Exercise Price, Granted	4.71
Weighted Average Exercise Price, Exercised
Weighted Average Exercise Price, Outstanding at end of year	4.71
Weighted Average Exercise Price, Options exercisable	$ 4.71

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Stock Based Compensation Arrangements - Schedule of Share-based Payment Award, Stock Options, Valuation Assumptions (Details)	9 Months Ended
	Jul. 31, 2017
Risk free annual interest rate, minimum	1.78%
Risk free annual interest rate, maximum	2.28%
Expected volatility, minimum	71.65%
Expected volatility, Maximum	86.34%
Assumed dividends	0.00%
Minimum [Member]
Expected life	5 years 15 days
Maximum [Member]
Expected life	6 years

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Stock Based Compensation Arrangements - Schedule of Share-based Compensation, Restricted Stock Activity (Details) - Restricted Stock [Member]	9 Months Ended
	Jul. 31, 2017 $ / shares shares
Number of Shares, Unvested at beginning of period | shares	274,829
Number of Shares, Granted | shares	1,031,000
Number of Shares, Vested | shares	(1,011,466)
Number of Shares, Unvested at end of period | shares	294,363
Weighted-Average Grant-Date Fair Value Unvested at beginning of period | $ / shares	$ 6.00
Weighted-Average Grant-Date Fair Value, Granted | $ / shares	4.56
Weighted-Average Grant-Date Fair Value, Vested | $ / shares	4.22
Weighted-Average Grant-Date Fair Value, Unvested at end of period | $ / shares	$ 7.07

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Loss Per Share - Schedule of Anti-dilutive Potential Shares Outstanding Activity (Details) - shares	9 Months Ended
	Jul. 31, 2017	Jul. 31, 2016
Shares Issuable Upon Exercise of Warrants [Member]
Antidilutive shares		187,500
Shares Issuable Upon Conversion of Preferred Stock [Member]
Antidilutive shares	9,020,287	2,783,000
Shares Issuable Upon Exercise of Stock Options [Member]
Antidilutive shares	2,918,806	394,278
Non-vested Shares Under Restricted Stock Grants [Member]
Antidilutive shares	294,363	303,477

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Commitments and Contingencies (Details Narrative)	9 Months Ended
	Jul. 31, 2017 USD ($)
Litigation damages sought	$ 1,300,000
Hazlet, New Jersey [Member]
Operating leases, rent expense	$ 1,100
Operating lease expiration date	Mar. 31, 2018
Salt Lake City, Utah [Member]
Operating leases, rent expense	$ 24,044
Operating lease expiration date	Mar. 31, 2018

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Related Parties (Details Narrative) - USD ($) $ in Thousands	9 Months Ended
	Jul. 31, 2017	Jul. 31, 2016
Transfer Agent [Member]
Related Party Transaction [Line Items]
Related party transaction strategic consulting services fee from transaction with related party monthly	$ 2	$ 0

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Discontinued Operations (Details Narrative) - USD ($) $ in Thousands		9 Months Ended
	Jun. 23, 2017	Jul. 31, 2017
Cash consideration received		$ 10
Gain on sale of business		100
Non-contingent consideration and net carrying amount		0
Predetermined revenue milestone, amount		50
Subsequent to July 31, 2017 [Member]
Cash consideration received		5
Conveyance Agreement [Member]
Cash included in assets		400
Cash payable		400
Accounts receivable and inventory carrying value		87
Conveyance Agreement [Member] | Twelve Monthly Installments [Member]
Cash payable		33
Conveyance Agreement [Member] | Zift Interactive LLC [Member]
Cash included in assets		$ 800
Purchase Agreement [Member]
Issued and outstanding shares, percentage	100.00%
Cash consideration received	$ 100
Purchase Agreement [Member] | Upon Signing Agreement [Member]
Cash consideration received	5
Purchase Agreement [Member] | 19 Additional Monthly Payments [Member]
Cash consideration received	5
Contingent consideration based on net revenue	$ 0

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Discontinued Operations - Schedule of Assets and Liabilities of Discontinued Operations (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Jul. 31, 2017	Jul. 31, 2016	Jul. 31, 2017	Jul. 31, 2016	Oct. 31, 2016
Loss from discontinued operations	$ (33)	$ (770)	$ (449)	$ (851)
Net loss from discontinued operations	67	(770)	(349)	(851)
Net cash provided by discontinued operating activities			33	163
Net cash provided by discontinued investing activities			10
Majesco Entertainment Company [Member]
Revenues	143	315	558	1,318
Expenses	176	1,085	1,007	2,169
Loss from discontinued operations	(33)	(770)	(449)	(851)
Gain on sale of discontinued operations	100		100
Accounts receivable					$ 113
Capitalized software development costs and license fees					50
Accounts payable and accrued expenses					$ 163
Net loss from discontinued operations		$ (770)	(349)	(851)
Depreciation and amortization			11	21
Stock based compensation expense			1,118	994
Amortization of capitalized software development costs and license fees			50	150
Gain on sale of Majesco Sub			(100)
Accounts receivable			113	107
Capitalized software development costs and license fees				(21)
Accounts payable and accrued expenses			(810)	(218)
Payable to Zift				(19)
Net cash provided by discontinued operating activities			33	163
Cash received from sale of Majesco Sub			10
Net cash provided by discontinued investing activities			$ 10

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Subsequent Events (Details Narrative) - USD ($) $ / shares in Units, $ in Thousands	Sep. 14, 2017	Apr. 19, 2016
Number of warrants exercisable during the period		187,500
Warrants exercisable price per share		$ 6.90
Subsequent Event [Member] | Investors [Member]
Number of warrants exercisable during the period	276,364
Warrants exercisable price per share	$ 30.00
Subsequent Event [Member] | Series F Convertible Preferred Stock [Member]
Convertible preferred stock conversion price per share	$ 27.50
Convertible preferred stock into common stock shares	552,727
Subsequent Event [Member] | Securities Purchase Agreement [Member] | Series F Convertible Preferred Stock [Member] | Investors [Member]
Proceeds from sale of convertible preferred stock	$ 15,200