BSTG Biostage Inc (QB)

On June 26, 2017, Biostage, Inc. (the “Company”) entered into a binding Memorandum of Understanding (the “MOU”) with First Pecos, LLC (“Pecos”), pursuant to which the Company will issue to Pecos in a private placement (the “Private Placement”) 9,700,000 shares of its common stock at a purchase price of $0.315 per share or, to the extent Pecos, following the transaction, would own more than 19.9% of the Company’s common stock, shares of a new class of preferred stock of the Company (the “Preferred Stock”) with a per-share purchase price of $1,000.

Additionally, Pecos will receive warrants (the “Warrants”) to purchase 9,700,000 shares of the Company’s common stock (or, to the extent Pecos would more than 19.9% of the Company’s common stock, shares of Preferred Stock). The Warrants will have an exercise price of $0.315 per share and will not be exercisable until six months after the closing of the Private Placement.

The Preferred Stock will bear a cumulative annual dividend of 15%, compounding annually, and will be senior to all of the Company’s other common stock, but will generally not have any voting rights. The Preferred Stock will include an ownership limitation that will limit Pecos and its affiliates to owning no more than 19.9% of the Company’s common stock. Following approval by the Company’s stockholders, the Preferred Stock will automatically convert into shares of the Company’s common stock. The Company agreed to include a proposal for such stockholder approval in the definitive proxy statement for its 2018 annual meeting of stockholders and, if not approved at such meeting, will seek approval from its stockholders every six months thereafter.

In connection with the Private Placement, Pecos agreed to serve as a backstopping party with respect to two pro rata rights offerings with aggregate gross proceeds of up to $14.0 million that the Company may elect to conduct within 24 months following the closing of the Private Placement. Additionally, the Company has agreed to grant board representation and nomination rights to Pecos that will be proportional to the percentage of the Company’s common stock owned by Pecos and its affiliates.

The Private Placement is conditioned on satisfaction of customary closing conditions and on the Company terminating its Shareholder Rights Plan, and must be consummated on or prior to August 15, 2017. The definitive agreements relating to the Private Placement will include customary representations, warranties and covenants. The Company agreed to file a resale registration statement promptly after the closing of the Private Placement to register the resale of the shares of common stock issued in the Private Placement.

The MOU is intended to be binding upon both the Company and Pecos. In the event that the Company fails to perform any of its obligations under the MOU or otherwise breaches the MOU, subject to certain exceptions, Pecos may terminate the MOU, and the Company must pay a termination fee of $500,000.

The MOU is filed as Exhibit 10.1 to this Current Report on Form 8-K. The foregoing summary of the MOU is subject to, and qualified in its entirety by, the text of the MOU, which is incorporated herein by reference.