PolarityTE Reports Second Quarter Financial Results

August 12, 2021

PolarityTE, Inc. (Nasdaq: PTE), a biotechnology company developing regenerative tissue products and biomaterials, today provided a business update and reported financial results for the second quarter ended June 30, 2021.

Recent Business Updates

• Submitted an Investigational New Drug application (IND) for SkinTE® on July 23, 2021, for the proposed indication of treatment of chronic cutaneous ulcers
• Reported SkinTE met primary and secondary endpoints in final analysis from Diabetic Foot Ulcer (DFU) trial
• Received notice of allowance for additional patent, bringing the Company’s total number of allowed and granted utility patents worldwide to 12 – 10 abroad and 2 in the United States

In response to the IND submission the Company recently received requests from the FDA’s Clinical and CMC reviewers for additional information and the Company provided initial responses to those requests. The Company appreciates the FDA’s feedback and believes it is generally in line with what the Company anticipated following its pre-IND interactions with the FDA.

Financial Updates for the Quarter Ended June 30, 2021

• Total revenues were $2.54 million in Q2:21 compared to $4.71 million in Q1:21
• SkinTE revenues were $1.20 million in Q2:21 (April 1, 2021 through cessation of SkinTE sales on May 31, 2021) compared to $1.73 million in Q1:21
• Contract services revenues were $1.34 million in Q2:21 compared to $2.98 million in Q1:21
• Cash used in operations for Q2:21 was $4.1 million, or an average of $1.4 million per month, representing a 38% reduction from Q1:21

Transition to a Clinical Stage Biotech Company

As part of the transition to a clinically focused biotech company and consistent with the conclusion of FDA’s enforcement discretion for certain human cells, tissues, and cellular and tissue-based products under Section 361 of the Public Health Service Act (361 HCT/Ps), the Company ceased commercial sales of SkinTE on May 31, 2021, and has made substantial reductions in costs associated with its commercial operations. The Company previously provided guidance for an IND submission in the second half of 2021 and on July 23, 2021 the Company submitted to the FDA an IND for SkinTE for the treatment of chronic cutaneous ulcers.

David Seaburg, Chief Executive Officer, commented, “We have made great strides to position the Company for the future, most recently with the submission of an IND, and I could not be more impressed by the organization’s commitment to this achievement. We are also incredibly encouraged by the recent outreach and support from physicians and patients after ceasing sales of SkinTE, and we will work expeditiously in the pursuit of a Biologic License Application (BLA).” Mr. Seaburg continued, “The second quarter includes the final two months of SkinTE sales prior to the end of FDA’s enforcement discretion and further solidifies our view that there is sizable market opportunity for SkinTE.”

Financial Results for the Quarter Ended June 30, 2021

There have been significant changes in items affecting the Company’s results of operations for the six-month period ended June 30, 2021, compared to the six-month period ended June 30, 2020, due to:

• The decision in April 2020 to file an IND with the FDA for SkinTE and, as a result, transition from a commercial stage company to a clinical stage company;
• The COVID-19 testing business that began in the last week of May 2020 that generated significant services revenues through March 2021, but has since substantially diminished; and
• The COVID-19 pandemic, which had a negative impact on revenues from the sale of SkinTE and IBEX services in the six-month period ended June 30, 2020, but not in the six-month period ended June 30, 2021.

As a result of the foregoing developments, the Company made a number of changes to its operations that impacted results of operations. These included reductions in the Company’s work force in March and May 2020 and on June 1, 2021, and reducing the services and infrastructure needed to support a larger work force and commercial sales effort.

Net revenues increased $4.0 million, or 127%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $0.3 million, or 12%, for the three months ended June 30, 2021, compared to the same period in 2020. The Company effectuated a substantial reduction in force for commercial operations in May 2020, which together with the effect of COVID-19 on selling product to healthcare institutions caused the Company to adopt a sales strategy in May 2020 that focused on regions and facilities where there were repeat users of SkinTE. As a result of this strategy, product net revenues increased by 27% for the three-months ended June 30, 2021, compared to the same period in 2020, even though the Company ceased product sales at the end of May 2021. Net revenues from services remained essentially unchanged for the three months ended June 30, 2021, compared to the same period in 2020, but the mix of business activity generating those revenues changed from a majority of service revenues generated by COVID-19 testing in the second quarter of 2020 to a majority of service revenues generated by pre-clinical research services in 2021.

Cost of sales increased $1.7 million, or 121%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $0.04 million, or 5%, for the three months ended June 30, 2021, compared to the same period in 2020. Cost of sales for products revenues decreased 27% period over period for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and decreased 25% period over period for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, even though revenues were higher in 2021 for both the six and three-month periods, which is attributable to the economies of scale the Company achieved by selling product for larger wound sizes in 2021 compared to 2020. Cost of sales for services revenues increased 237% period over period for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and increased 18% period over period for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, which is primarily attributable to the cost of sales pertaining to the COVID-19 testing service that only began in the last week of May 2020, including a write-off of inventory for the COVID-19 testing business in the first quarter of 2021 due to the substantial decrease in that business during the quarter.

Operating costs and expenses decreased $9.6 million, or 31%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $2.2 million, or 18%, for the three months ended June 30, 2021, compared to the same period in 2020.

Operating loss decreased $12.0 million, or 42%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $2.5 million, or 22%, for the three months ended June 30, 2021, compared to the same period in 2020. Net loss decreased $5.1 million, or 20%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, and $9.5 million, or 75%, for the three months ended June 30, 2021, compared to the same period in 2020. When the Company’s PPP Loan was forgiven in June 2021, it recognized a gain on extinguishment of debt in the amount of $3.6 million. For the six months ended June 30, 2021, this gain was offset by a day one loss on warrants issued in January 2021 of $5.2 million plus a loss on the change in fair value of common stock warrant liability of $2.2 million, which are primarily responsible for other expense of $3.8 million for the six months ended June 30, 2021, and the $3.8 million difference between the Company’s operating loss and net loss for the six months ended June 30, 2021.

The table below details adjusted net loss, which is a non-GAAP measure that shows net loss before fair value adjustments relating to the Company’s common stock warrant liability and warrant inducement loss. The Company believes this measure is useful to investors because it eliminates the effect of non-operating items that can significantly fluctuate from period to period due to fair value remeasurements. For purposes of calculating non-GAAP per share metrics, the same denominator is used as that which was used in calculating net loss per share under GAAP.

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