NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1.
|
Overview and Basis of Presentation
|
Overview
Biostage, Inc. (“Biostage” or
the “Company”) is a biotechnology company developing bioengineered organ implants based on the Company’s novel
Cellframe
TM
technology. The Company’s Cellframe technology is comprised of a biocompatible scaffold that is seeded
with the recipient’s own stem cells. The Company believes that this technology may prove to be effective for treating patients
across a number of life-threatening medical indications who currently have unmet medical needs. The Company is currently developing
its Cellframe technology to treat life-threatening conditions of the esophagus, bronchus or trachea with the objective of dramatically
improving the treatment paradigm for those patients. Since inception, the Company has devoted substantially all of its efforts
to business planning, research and development, recruiting management and technical staff, and acquiring operating assets. The
Company has one business segment and does not have significant costs or assets outside the United States.
The Company’s common stock is currently
traded on the OTCQB Venture Market under the symbol “BSTG”. On December 22, 2017, the Company effected a reverse stock
split of its shares of common stock at a ratio of 1-for-20. All references to numbers of common shares and per-share information
in this Quarterly Report on Form 10-Q have been adjusted retroactively to reflect the 1-for-20 reverse stock split.
Basis of Presentation
The consolidated financial statements reflect
the Company’s financial position, results of operations and cash flows in conformity with accounting principles generally
accepted in the United States (“GAAP”).
Going Concern
The Company has incurred substantial operating
losses since its inception, and as of September 30, 2018 has an accumulated deficit of approximately $53.9 million and will require
additional financing to fund future operations. The Company expects that its cash at September 30, 2018 of $3.5 million will enable
it to fund its operating expenses and capital expenditure requirements into the first quarter of 2019. Therefore, these conditions
raise substantial doubt about the Company’s ability to continue as a going concern.
The Company will need to raise additional
funds in future periods to fund its operations. In the event the Company does not raise additional capital from outside sources
in the near future, it may be forced to curtail or cease its operations. Cash requirements and cash resource needs will vary significantly
depending upon the timing and the financial and other resource needs that will be required to complete ongoing development and
pre-clinical and clinical testing of products as well as regulatory efforts and collaborative arrangements necessary for the Company’s
products that are currently under development. The Company will seek to raise necessary funds through a combination of public or
private equity offerings, debt financings, other financing mechanisms, research grants, or strategic collaborations and licensing
arrangements. The Company may not be able to obtain additional financing on terms favorable to us, if at all.
The Company’s operations will be adversely
affected if it is unable to raise or obtain needed funding and may materially affect the Company’s ability to continue as
a going concern. The accompanying consolidated financial statements have been prepared assuming that the Company will continue
as a going concern and therefore, the financial statements do not include any adjustments to reflect the possible future effects
on the recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome
of this uncertainty.
Net loss per Share
Basic net loss per share is computed using
the weighted average number of common shares outstanding during the period. Diluted net loss per share is computed using the sum
of the weighted average number of common shares outstanding during the period and, if dilutive, the weighted average number of
potential shares of common stock, including the assumed exercise of stock options, warrants, and the impact of unvested restricted
stock.
The Company applies the two-class method
to calculate basic and diluted net loss per share attributable to common stockholders as its warrants to purchase common stock
are participating securities.
The two-class method is an earnings allocation
formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders.
However, the two-class method does not impact the net loss per share of common stock as the Company has been in a net loss position
and the warrant holders do not participate in losses.
Basic and diluted shares outstanding are
the same for each period presented as all common stock equivalents would be antidilutive due to the net losses incurred.
Unaudited Interim Financial Information
The accompanying interim consolidated balance
sheet as of September 30, 2018 and consolidated interim statements of operations and comprehensive loss and cash flows for the
three and nine months ended September 30, 2018 and 2017 are unaudited. The interim unaudited consolidated financial statements
have been prepared in accordance with GAAP on the same basis as the annual audited financial statements and, in the opinion of
management, reflect all adjustments necessary for a fair statement of the Company’s financial position as of September
30, 2018 and its results of operations and cash flows for the nine-month periods ended September 30, 2018 and 2017. The financial
data and other information disclosed in these notes related to the three and nine-month periods ended September 30, 2018 and 2017
are unaudited. The results for the three and nine months ended September 30, 2018 are not necessarily indicative of results to
be expected for the year ending December 31, 2018, any other interim periods or any future year or period.
2.
|
Summary of Significant Accounting Policies and Recently Issued Accounting Pronouncements
|
Summary of Significant Accounting Policies
The accounting policies underlying the accompanying
unaudited consolidated financial statements are those set forth in Note 2 to the financial statements for the year ended December
31, 2017 included in the Company’s Annual Report on Form 10-K.
SBIR Award
On March 28, 2018, the Company was awarded
a Fast-Track Small Business Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health and Human
Development to support testing of pediatric Cellspan™ Esophageal Implants. The award for Phase I, which was executed and
earned through the third quarter of 2018, provided for the reimbursement for up to $225,000 of qualified research and development
costs.
On October 26, 2018, the Company was
awarded Phase II of the SBIR grant for $1.1 million to support development, testing, and translation to the clinic through
September 2019. The Phase II grant includes an additional $0.5 million for future period support through September 2020,
subject to availability of funding and satisfactory progress on the project. Accordingly, the SBIR grant has the potential to
provide a total award of $1.8 million.
Grant income is recognized based on timing
of when qualified research and development costs are incurred and recorded and classified as grant income in other income (expense),
net in the consolidated statements of operations.
Recently Adopted Accounting Pronouncements
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”)
.
This amendment addresses eight classification issues related to the statement of cash flows. The Company adopted this standard
on January 1, 2018 and its adoption did not have a material impact on the Company’s consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (“ASU 2016-18”)
, which requires that amounts generally described as restricted cash
and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and
end-of-period total amounts shown on the statement of cash flows. The Company adopted this standard on January 1, 2018 and its
adoption did not have any impact on its consolidated financial statements since the Company does not have restricted cash amounts.
In May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting (“ASU 2017-09”)
, which clarifies
when to account for a change to the terms or conditions of a share-based payment award as a modification. The new standard does
not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if the fair
value, vesting conditions, or classification of the award changes as a result of the change in terms or conditions. The new standard
is effective for fiscal years, and interim periods within, beginning after December 15, 2017. Early adoption is permitted. A reporting
entity must apply the amendments in the ASU prospectively to an award modified on or after the adoption date. The Company adopted
ASU 2017-09 as of the required effective date of January 1, 2018 and its adoption did not have a material impact on the Company’s
financial statements. The adoption of ASU 2017-09 will have an impact on the accounting for the modification of stock-based awards,
if any, to the extent stock-based awards are modified.
Recently Issued Accounting Pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases (“ASU 2016-02”)
. ASU 2016-02 will
require lessees to recognize most leases on their balance sheet as a right-of-use asset and a lease liability. Leases
will be classified as either operating or finance, and classification will be based on criteria similar to current lease accounting,
but without explicit bright lines. In July 2018, the FASB issued ASU No. 2018-10,
Codification Improvements to Topic 842,
Leases (“ASU 2018-10”)
, which provides narrow amendments to clarify how to apply certain aspects of the new
lease standard, and ASU No. 2018-11,
Leases (Topic 842) – Targeted Improvements (“ASU 2018-11”)
, which
addresses implementation issues related to the new lease standard. The guidance is effective for annual reporting periods beginning
after December 15, 2018 and interim periods within those fiscal years, and early adoption is permitted. The Company is currently
evaluating the impact that the adoption of ASU 2016-02, ASU 2018-10 and ASU 2018-11 will have on its consolidated financial
statements and related disclosures.
In July 2017, the FASB issued ASU 2017-11,
Earnings Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial
Instruments with Down Round Features, (Part 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”)
. This guidance is intended to reduce the complexity associated with accounting for certain financial instruments
with characteristics of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked
financial instrument (or an embedded conversion option) to be considered “not indexed to an entity’s own stock”
and therefore accounted for as a derivative liability at fair value with changes in fair value recognized in current earnings.
Down round features are most often found in warrants and conversion options embedded in debt or preferred equity instruments. In
addition, the guidance re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity
to a scope exception with no accounting effect. This guidance becomes effective January 1, 2019. Early adoption is permitted.
The Company is currently evaluating the impact that the adoption of ASU 2017-11 will have on its consolidated financial statements.
In June 2018, the
FASB issued ASU No. 2018-07,
Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”)
.
The new standard simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for
share-based payments to employees, with certain exceptions. The new standard will be effective beginning January 1, 2019 and
early adoption is permitted. The Company is currently evaluating the impact that the adoption of ASU 2018-07 will have on its
results of operations.
Other accounting standards that have been
issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected
to have a material impact on the Company’s financial statements upon adoption.
On December 27, 2017, the Company issued
518,000 shares of its common stock at $2.00 per share, 3,108 shares of our Series D Convertible Preferred Stock at $1,000 per share,
and warrants to purchase 3,108,000 shares of common stock at an exercise price of $2.00 per share, in exchange for aggregate gross
proceeds of approximately $4.1 million in a private placement transaction of unregistered shares with a new investor. The warrants
were immediately exercisable and expire in December 2022. The Company allocated $2.1 million of consideration to the warrants and
included such amount in additional paid-in capital.
On January 3, 2018, the Company issued 50,000
shares of our common stock to Connecticut Children’s Medical Center (“Connecticut Children’s”) at $2.00
per share and warrants to purchase 75,000 shares of common stock at an exercise price of $2.00 per share, in exchange for aggregate
gross proceeds of $100,000 in a private placement transaction of unregistered shares. The warrants were immediately exercisable
and expire in January 2023. The Company has allocated $51,000 of consideration to the warrants using the relative fair-value method
and included such amount in additional paid-in capital. The Company classified these warrants as permanent equity versus liability
warrants as the warrants do not have any redemption features nor a right to put for cash that is outside the control of the Company.
Connecticut Children’s Chief Executive Officer, James Shmerling, is a member of the respective Board of Directors of each
of the Company and Connecticut Children’s.
On February 20, 2018, the Company issued
302,115 shares of common stock to an investor at a purchase price of $3.31 per share for aggregate gross and net proceeds of approximately
$1.0 million in an unregistered private placement transaction.
On May 23, 2018, the Company issued 1,000,000
shares of common stock to two new investors at a purchase price of $3.60 per share for aggregate gross and net proceeds of approximately
$3.6 million and $3.4 million, respectively, in an unregistered private placement. Following the issuance of these shares, the
holders of Series D preferred stock exercised their right to convert all of the 3,108 outstanding shares of Series D preferred
stock into 1.554 million shares of common stock as provided for under the Series D preferred stock agreement.
On June 29, 2018, the Company issued 250,000
shares of common stock to an investor at a purchase price of $3.60 per share for aggregate gross and net proceeds of approximately
$0.9 million and $0.8 million, respectively, in an unregistered private placement transaction.
4.
|
Fair Value Measurements
|
Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company utilizes a valuation hierarchy
for disclosure of the inputs to the valuations used to measure fair value. This hierarchy prioritizes the inputs into three broad
levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2
inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability,
either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level
3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is
significant to the fair value measurement.
The Company had no assets or liabilities
classified as Level 1 or Level 2 as of September 30, 2018 and December 31, 2017.
The following fair value hierarchy table
presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as
of September 30, 2018:
|
|
Fair Value Measurement as of September 30, 2018
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
187
|
|
|
$
|
187
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
187
|
|
|
$
|
187
|
|
The following fair value hierarchy table
presents information about the Company’s financial assets and liabilities measured at fair value on a recurring basis as
of December 31, 2017:
|
|
Fair Value Measurement as of December 31, 2017
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
16
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16
|
|
|
$
|
16
|
|
The following table presents a reconciliation
of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3)
for the nine months ended September 30, 2018:
|
|
Warrant Liability
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2017
|
|
$
|
16
|
|
Change in fair value upon re-measurement
|
|
|
171
|
|
Balance at September 30, 2018
|
|
$
|
187
|
|
There were no transfers between Level 1,
Level 2 and Level 3 in any of the periods reported.
The Company has re-measured the warrant
liability to estimated fair value at inception, prior to modification and at each reporting date using the Black-Scholes option
pricing model with the following weighted average assumptions:
|
|
September 30,
2018
|
|
|
December 31,
2017
|
|
Risk-free interest rate
|
|
|
2.88
|
%
|
|
|
2.09
|
%
|
Expected volatility
|
|
|
128
|
%
|
|
|
85
|
%
|
Expected term (in years)
|
|
|
3.4
|
|
|
|
4.1
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Exercise price
|
|
$
|
8.00
|
|
|
$
|
8.00
|
|
Market value of common stock
|
|
$
|
3.12
|
|
|
$
|
0.87
|
|
Warrants to purchase shares of common stock
|
|
|
92,212
|
|
|
|
92,212
|
|
5.
|
Stock-Based Compensation
|
Biostage 2013 Equity Incentive Plan
The Company maintains the 2013 Equity Incentive
Plan (the “Plan”) for the benefit of certain of its officers, employees, non-employee directors, and other key persons
(including consultants and advisory board members). All options and awards granted under the Plan consist of the Company’s
shares of common stock. In May 2018, the Company’s shareholders approved the increase of the number of shares of the Company’s
common stock available for issuance pursuant to the Plan by 1,600,000 shares, which increased the total shares authorized to be
issued under the Plan to 2,098,000.
The Company also issued equity awards
under the Plan in 2013 at the time of the spin-off discussed in Note 7 below to all holders of Harvard Bioscience equity awards
as part of an adjustment (the “Adjustment”) to prevent a loss of value due to the spin-off.
Compensation expense recognized under the
Plan relates to service provided by employees, board members and non-employees of the Company. There was no required compensation
associated with the Adjustment awards to employees who remained at Harvard Bioscience.
The Company has granted options to purchase
common stock and restricted stock units (RSUs) under the Plan. Stock option and restricted stock unit activity during the nine
months ended September 30, 2018 was as follows:
|
|
Stock Options
|
|
|
Restricted Stock Units
|
|
|
|
Amount
|
|
|
Weighted-
average
exercise price
|
|
|
Amount
|
|
|
Weighted -
average
grant date
fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
|
|
|
167,474
|
|
|
$
|
45.84
|
|
|
|
14,875
|
|
|
$
|
7.68
|
|
Granted
|
|
|
1,359,209
|
|
|
|
2.86
|
|
|
|
-
|
|
|
|
-
|
|
Vested (RSUs)
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,228
|
)
|
|
|
7.68
|
|
Canceled
|
|
|
(70,614
|
)
|
|
|
20.60
|
|
|
|
(912
|
)
|
|
|
7.68
|
|
Outstanding at September 30, 2018
|
|
|
1,456,069
|
|
|
$
|
6.94
|
|
|
|
7,735
|
|
|
$
|
7.68
|
|
The underlying common shares for 912 of
the 6,228 vested RSUs were unissued as of September 30, 2018.
The Company uses the Black-Scholes option
pricing model to value its stock options. The weighted average assumptions for valuing the options granted during the nine months
ended September 30, 2018 were as follows:
Expected volatility
|
|
|
88-118%
|
|
Expected dividends
|
|
|
n/a%
|
|
Expected term
|
|
|
5.75-6.05
|
years
|
Risk-free rate
|
|
|
2.65-2.82%
|
|
The Company’s outstanding stock options
include 583,921 performance-based awards as of September 30, 2018 that have vesting provisions subject to the achievement of certain
business milestones. Compensation expense has not yet been recognized for these performance-based awards given the milestone achievements
have not yet been deemed probable for accounting purposes.
The Company recorded equity-based compensation
expense in the following expense categories of its consolidated statements of operations:
|
|
Three Months Ended September 30,
|
|
|
Nine Months ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
62
|
|
|
$
|
98
|
|
|
$
|
140
|
|
|
$
|
281
|
|
General and administrative
|
|
|
132
|
|
|
|
96
|
|
|
|
321
|
|
|
|
310
|
|
Total stock-based compensation
|
|
$
|
194
|
|
|
$
|
194
|
|
|
$
|
461
|
|
|
$
|
591
|
|
6.
|
Commitments and Contingencies
|
First
Pecos Breach Notice
In June 2017, the Company entered into a
binding Memorandum of Understanding with First Pecos, LLC (“First Pecos”), pursuant to which the Company agreed to
issue to First Pecos in a private placement 485,000 shares of its common stock on a post-reverse split basis at a purchase price
of $6.30 per share or, to the extent First 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 with a per-share purchase price of $1,000.
In October 2017, as a result of First Pecos
failure to deliver the Purchase Price to the Company following satisfaction of all closing conditions in the Purchase Agreement,
the Company delivered a notice to First Pecos and its manager, Leon “Chip” Greenblatt III, stating that First Pecos
was in breach of the Purchase Agreement. None of the shares of common stock, shares of Preferred Stock or Warrants were issued
to First Pecos. Also in October 2017, First Pecos delivered a notice to the Company stating that, as a result of alleged breaches
by the Company of its obligations pursuant to the Purchase Agreement, First Pecos terminated the Purchase Agreement and demanded
that the Company pay a $500,000 termination fee pursuant to the terms of the Purchase Agreement.
The Company believes that it was not in
breach of the Purchase Agreement at any time, and that First Pecos’ notice was unjustified and without any legal merit or
factual basis. Accordingly, the Company believes that First Pecos was not entitled to terminate the Purchase Agreement, and is
not entitled to any termination fee thereunder, as the failure to consummate the Pecos Placement resulted from First Pecos’
breach of the Purchase Agreement. The Company has not accrued for this liability as the Company believes the claim to be without
merit.
Other
On April 14, 2017, representatives for the
estate of a deceased individual filed a civil lawsuit in the Suffolk Superior Court, in Boston, Massachusetts, against the Company
and Harvard Bioscience. The complaint alleges that the decedent’s injury and death were caused by two tracheal implants that
incorporated synthetic trachea scaffolds and a biologic component combined by the implanting surgeon with a bioreactor, and surgically
implanted in the decedent in two surgeries performed in 2012 and 2013. The civil complaint seeks a non-specific sum of money to
compensate the plaintiffs. This civil lawsuit relates to the Company’s first-generation trachea scaffold technology for which
the Company discontinued development in 2014, and not to the Company’s current Cellframe technology nor to its lead development
product candidate, the Cellspan esophageal implant. The Company intends to vigorously defend this case. While the Company believes
that such claim lacks merit, the Company is unable to predict the ultimate outcome of such litigation. In accordance with a separation
and distribution agreement between Harvard Bioscience and the Company relating to the spin-off, the Company would be required to
indemnify Harvard Bioscience against losses that Harvard Bioscience may suffer as a result of this litigation. The Company has
been informed by its insurance provider that the case has been accepted as an insurable claim under the Company’s product
liability insurance policy. The Company has not accrued for a potential liability as it is not considered probable at this time.
From time to time, the Company may be involved
in various claims and legal proceedings arising in the ordinary course of business. Other than the above matter, there are no
such matters pending that the Company expects to be material in relation to its business, financial condition, and results of
operations or cash flows.
7.
|
Related Party Transactions
|
Relationship with Harvard Bioscience
On October 31, 2013, Harvard Bioscience,
Inc. contributed its regenerative medicine business assets, plus $15 million of cash, into Biostage pursuant to the spin-off. On
November 1, 2013, the spin-off of the Company from Harvard Bioscience was completed. On that date, the Company became an independent
company that operates the regenerative medicine business previously owned by Harvard Bioscience. The spin-off was completed through
the distribution of all the shares of common stock of Biostage to Harvard Bioscience stockholders.
At the time of the spin-off, the Company
entered into a 10-year product distribution agreement with Harvard Bioscience under which each company became the exclusive distributor
for the other party for products such other party develops for sale in the markets served by the other. In addition, Harvard Bioscience
agreed that except for certain existing activities of its German subsidiary, to the extent that any Harvard Bioscience business
desires to resell or distribute any bioreactor that is then manufactured by the Company, the Company would be the exclusive manufacturer
of such bioreactors and Harvard Bioscience would purchase such bioreactors from the Company.
On November 3, 2017, in exchange for settlement
of approximately $0.1 million of outstanding rent and operating expenses due to Harvard Bioscience, Biostage sold all of its current
stock of research bioreactor parts, a royalty free perpetual sublicensable and transferable right and license to use the intellectual
property, including but not limited to certain patents covering research bioreactors, and relinquished exclusive manufacturing
or distribution rights with respect to research bioreactors to Harvard Bioscience. The Company had ceased the manufacture of research
bioreactors in late 2016, to concentrate its efforts solely on development of its clinical product candidates. This settlement
only covers research bioreactors, not to be used for clinical purposes. The Company retains full exclusive rights to all assets
and rights associated with the clinical bioreactor used in the development of the Company’s current Cellframe technology.
Due to Related Party
In connection with the Company’s private
placement transaction in December 2017, an investor placed a deposit in the amount of $0.3 million with the Company, which was
subsequently repaid in January 2018.
The following potential common shares were
excluded from the calculation of diluted net loss per share attributable to common stockholders for the nine months ended September
30, 2018 and 2017 because including them would have had an anti-dilutive effect:
|
|
Nine Months Ended September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Unvested restricted common stock units
|
|
|
7,735
|
|
|
|
20,237
|
|
Warrants to purchase common stock
|
|
|
4,178,647
|
|
|
|
995,647
|
|
Options to purchase common stock
|
|
|
1,456,069
|
|
|
|
260,215
|
|
Total
|
|
|
5,642,451
|
|
|
|
1,276,099
|
|
The Company did not provide for any income
taxes in its statement of operations for the three and nine months ended September 30, 2018 and 2017. The Company has provided
a valuation allowance for the full amount of its net deferred tax assets because, at September 30, 2018 and December 31, 2017,
it was more likely than not that any future benefit from deductible temporary differences and net operating loss and tax credit
carryforwards would not be realized.
The Company has not recorded any amounts
for unrecognized tax benefits as of September 30, 2018 or December 31, 2017. As of September 30, 2018, and December 31,
2017, the Company had no accrued interest or tax penalties recorded related to income taxes. The Company is subject to U.S. federal
income tax and Massachusetts state income tax. The statute of limitations for assessment by the IRS and state tax authorities is
open for all periods from inception through December 31, 2017; currently, no federal or state income tax returns are under examination
by the respective taxing authorities.
Under the provisions of the Internal Revenue
Code, the net operating loss and tax credit carryforwards are subject to review and possible adjustment by the Internal Revenue
Service and state tax authorities. Net operating loss and tax credit carryforwards may become subject to an annual limitation in
the event of certain cumulative changes in the ownership interest of significant shareholders over a three-year period in excess
of 50 percent, as defined under Sections 382 and 383 of the Internal Revenue Code, respectively, as well as similar state provisions.
This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.
The amount of the annual limitation is determined based on the value of the Company immediately prior to the ownership change.
Subsequent ownership changes may further affect the limitation in future years. The Company has recently completed several equity
financings transactions which have either individually or cumulatively resulted in a change in control as defined by Sections 382
and 383 of the Internal Revenue Code, or could result in a change in control in the future. The Company does not believe the impact
of any limitation on the use of its net operating loss or credit carryforwards will have a material impact on the Company’s
consolidated financial statements since the Company has a full valuation allowance against its deferred tax assets due to the uncertainty
regarding future taxable income for the foreseeable future.
As provided for in SEC Staff Accounting
Bulletin No. 118, which addresses the application of U.S. GAAP in situations when a registrant does not have the necessary information
available, prepared or analyzed (including computations) in reasonable detail to complete the accounting for certain income tax
effects of the Tax Cut and Jobs Act, or TCJA, the Company is still in the process of analyzing the impact to the Company of the
TCJA. The eventual impact to the Company’s financial statements of the TCJA may differ from the provisional amounts
due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory
guidance that may be issued, and actions the Company may take as a result of the TCJA. The Company believes its accounting for
provisional amounts recorded in connection with its tax provision for the year ended December 31, 2017 are reasonable based upon
the filing of its 2017 US federal income tax return in October 2018.
For all periods through September 30, 2018,
the Company generated research credits but has not conducted a study to document the qualified activities. This study may result
in an adjustment to the Company's research and development credit carryforwards; however, until a study is completed and any adjustment
is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the
Company's research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment
to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance.
10.
|
Headcount Reduction in 2017
|
During October and November 2017 and in
an effort to conserve cash, the Company completed a reduction in headcount of 20 of its employees. In addition, officers of the
Company agreed to a temporary reduction and deferral in their salaries of 50% effective November 2017. During the first quarter
of 2018, the salaries paid to the officers of the Company were increased to approximately 80% of the contracted amounts. The Company
accrued the $104,000 difference between the officers’ contracted rates and amounts paid. In July 2018, the Company paid these
amounts and reinstated the officers’ salaries to their contracted rates. In the fourth quarter ended December 31, 2017, the
Company recorded charges for termination benefits in connection with the headcount reduction of approximately $99,000 for employee
severance and related costs, which was recorded in accrued expenses and other current liabilities at December 31, 2017. The Company
paid the entire amount of $99,000 in January and February 2018.
On October 26, 2018, the Company was awarded
Phase II of a Fast-Track Small Business Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health
and Human Development totaling $1.1 million to support development, testing, and translation to the clinic through September 2019.
The Phase II grant includes an additional $0.5 million for future period support through September 2020, subject to availability
of funding and satisfactory progress on the project. Phase I of the SBIR grant was awarded in March 2018 totaled $225,000 and completed
in September 2018. Accordingly, the SBIR grant has the potential to provide a total award of $1.8 million.