PolarityTE (COOL) shares crashed Monday after a short seller called the company a “fraud” and suggested the Securities and Exchange Commission should halt its trading.
On the stock market today, PolarityTE plunged 27.3%, to 28.14, during the regular session. After hours, shares dipped another 4.4%.
Citron Research, a noted short-seller, called on the SEC to “halt this stock immediately before insiders are allowed to enrich themselves even more as the company continues to deceive investors.”
A PolarityTE spokesperson denied a number of Citron’s claims in an email to Investor’s Business Daily. In a statement, the company said it “remains focused on transforming the lives of patients by discovering, designing and developing a range of regenerative tissue products and biomaterials.”
The allegation stems from the patent application for its technology called SkinTE which aims to replace traditional skin-graft technology. PolarityTE went public in 2017 through a reverse merger with gaming company Majesco Entertainment.
On April 7, PolarityTE announced the closing of the transaction. In it, Chief Executive Denver Lough gained about 7.05 million shares of common stock.
A week before that, however, the U.S. Patent and Trademark Office issued a non-final rejection of a SkinTE patent application, according to screenshots posted by Citron. The office also mailed notice of the non-final rejection on April 7.
A week later, the SEC notified Lough his company is responsible for disclosing key events to shareholders. But Citron says “the company continued to promote themselves and raise money as if the rejection never occurred.”
In filings, PolarityTE has said it doesn’t own any granted patents. Rather, the company says it has three non-provisional patent applications related to its technology.
Insiders Sell Shares
On May 29, the company filed notice with the SEC that it would allow insiders to sell north of 5.48 million shares. Four working days later, U.S. patent officials issued a final rejection for the patent application for SkinTE, Citron said.
“Citron believes that Dr. Lough was very aware of the likelihood of the upcoming rejection and rushed to submit the (SEC) filing,” according to the report. Then “on June 5, PolarityTE issued 2.1 million shares priced at $25.50.”
PolarityTE, on the other hand, says this was a routine filing to register shares under the company’s equity incentive plan. It says management insiders aren’t allowed to sell shares under lockup agreements put in place in April.
The Citron report further calls on the SEC to investigate PolarityTE for failing to disclose that U.S. officials rejected an application to patent SkinTE technology. In a June 18 press release, PolarityTE said 12 of its trademark applications have been allowed.
PolarityTE told IBD it’s now prosecuting against multiple patient applications. The application Citron notes is one of three pending applications, the company said.
“Regarding any statements about rejection, the second office action the company received that is referred to as a ‘rejection’ is part of a routine process that can span several years,” the firm said. “The office action is expected to be responded to within three months.”