NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1.
|
Overview and Basis of Presentation
|
Overview
Biostage, Inc. (Biostage or the Company) is a
clinical-stage biotechnology company developing bioengineered organ implants based on the Company’s novel
CellspanTM technology. The Company’s Cellspan 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 Cellspan technology to treat life-threatening conditions of the esophagus, bronchus and 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.
On October 31, 2013, Harvard Bioscience, Inc. (Harvard Bioscience)
contributed its regenerative medicine business assets, plus $15 million of cash, into Biostage (formerly “Harvard Apparatus
Regenerative Technologies” at time of 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 stockholders of Harvard Bioscience (the “HBIO Distribution”).
The Company’s common stock is currently traded on the
OTCQB Venture Market under the symbol “BSTG”.
On January 30, 2020, the World Health Organization declared
the COVID-19 outbreak a “Public Health Emergency of International Concern” and on March 11, 2020, declared it a pandemic.
The full extent to which the COVID-19 pandemic will directly or indirectly impact our business, results of operations and financial
condition, expenses, clinical trial, research and development costs and employee-related amounts, will depend on future developments
that are highly uncertain, including as a result of new information that may emerge concerning COVID-19 and the actions taken to
contain it or treat COVID-19, as well as the economic impact that may impact the Company. Biostage’s employees have been
working remotely since early March 2020, and the Company continues to conduct limited operations including administration functions
and planning for our future Cellspan Esophageal Implant (CEI) clinical trial that was removed from clinical hold on March 19, 2020.
While Biostage is currently planning the clinical trial, the Company expects that COVID-19 precautions may directly or indirectly
impact the timeline of the clinical trial. The global outbreak of the COVID-19 coronavirus continues to rapidly evolve. The extent
to which the COVID-19 coronavirus may impact our business and clinical trials will depend on future developments, which are highly
uncertain and cannot be predicted with confidence, such as the duration of the outbreak, travel restrictions and social distancing
in the U.S. and other countries, business closures or business disruptions and the effectiveness of actions taken in the U.S. and
other countries to contain and treat the disease.
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).
Use of Estimates
The preparation of our consolidated financial statements requires
us to make estimates, judgments and assumptions that may affect the reported amounts of assets, liabilities, equity, expenses and
related disclosures. On an ongoing basis we evaluate our estimates, judgments and methodologies. We base our estimates on historical
experience and on various other assumptions that we believe are reasonable, the results of which form the basis for making judgments
about the carrying values of assets, liabilities and equity and the amount of expenses. Actual results may differ from these estimates.
Going Concern
The Company has incurred substantial operating losses since
its inception, and as of March 31, 2020 has an accumulated deficit of approximately $66.1 million and will require additional financing
to fund future operations. The Company expects that its operating cash on-hand at March 31, 2020 of $0.8 million, along with net
proceeds received subsequent to the end of the quarter of approximately $0.5 million from the issuance of 141,553 shares of our
common stock from the exercise of 141,553 previously issued warrants at $3.70 per share, and the Company being granted a $0.4 million
loan on May 4, 2020 pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (CARES
Act), will enable it to fund its operating expenses and capital expenditure requirements into the third quarter of 2020. 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 to fund its
operations. In the event the Company does not raise additional capital from outside sources before the third quarter of 2020, it
may be forced to curtail or cease its operations. Cash requirements and cash resource needs will vary significantly depending upon
the timing of the financial and other resource needs that will be required to complete ongoing pre-clinical and clinical testing
of products, research and development, and regulatory efforts and collaborative arrangements necessary for the Company’s
products that are currently under development. The Company is currently seeking and will continue to seek financings from other
existing and/or new investors to raise necessary funds through a combination of public or private equity offerings. The Company
may also pursue debt financings, other financing mechanisms, research grants, or strategic collaborations and licensing arrangements.
The Company may not be able to obtain additional financing on favorable terms, if at all.
The Company’s operations will be adversely affected if
it is unable to raise or obtain needed funding and such circumstance 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 consolidated 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 March
31, 2020, consolidated interim statements of operations and stockholders’ equity for the three months ended March 31, 2020
and 2019, and consolidated statements of cash flows for the three months ended March 31, 2020 and 2019 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 March 31, 2020, its consolidated results of operations, consolidated statement of cash flows, and consolidated stockholders’
equity for the three month periods ended March 31, 2020 and 2019. The financial data and other information disclosed in these notes
related to the three-month periods ended March 31, 2020 and 2019 are unaudited. The results for the three months ended March 31,
2020 are not necessarily indicative of results to be expected for the year ending December 31, 2020, 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 consolidated financial statements for the year ended December
31, 2019 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 (NICHD)
of the National Institutes of Health (NIH) to support testing of pediatric Cellspan Esophageal Implants. The award for Phase I,
which was earned over the nine months ended September 30, 2018, provided for the reimbursement for up to $0.2 million 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. In December 2019, the Company submitted a modified Phase II grant development plan which
has not yet been approved by the NICHD. The SBIR grant has the potential to provide a total award of approximately $1.8 million.
The Company has expended $0.9 million of the awarded $1.1 million SBIR grant as of December 31, 2019. The Company did not recognize
grant income from Phase II of the SBIR grant for the three months ended March 31, 2020.
Grant income is recognized when qualified research and development
costs are incurred and recorded in other income (expense), net in the consolidated statements of operations. When evaluating grant
revenue from the SBIR grant, the Company considered accounting requirements under the Financial Accounting Standards Board (FASB)
Accounting Standards Codification (ASC) 606, Revenue From Contracts With Customers. The Company concluded that ASC
606 did not apply as there is no exchange of goods or services or an exchange of intellectual property between the parties; therefore,
the Company presents grant income in other income.
Restricted Cash
Restricted cash consists of $50,000 held as collateral for the
Company’s credit card program as of March 31, 2020 and December 31, 2019. The Company’s statements of cash flows include
restricted cash with cash when reconciling the beginning-of-period and end-of-period total amounts shown on such statements.
A reconciliation of the cash and restricted cash reported within
the balance sheet that sum to the total of the same amounts shown in the statements of cash flows is as follows:
|
|
March 31,
|
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Cash
|
|
$
|
806
|
|
|
$
|
913
|
|
Restricted cash
|
|
|
50
|
|
|
|
50
|
|
Total cash and restricted cash as shown in the statements of cash flows
|
|
$
|
856
|
|
|
$
|
963
|
|
Recently Adopted Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement
(Topic 820), Disclosure Framework – Changes to the Disclosure Requirement for Fair Value Measurement. This ASU removes,
modifies and adds certain disclosure requirements of ASC Topic 820. The Company has adopted this ASU effective January 1, 2020
as required and its adoption did not have a material impact on the Company’s consolidated financial statements for the reporting
period.
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.
During the three months ended March 31, 2020, the Company issued
a total of 151,027 shares of our common stock at a purchase price of $3.70 per share and warrants to purchase 151,027 shares of
common stock at an exercise price of $3.70 per share to a group of investors for aggregate gross and net proceeds of approximately
$0.6 million, of which $0.5 million and $0.1 million was allocated to the common stock and warrants, respectively. The Company
classified these warrants on its consolidated balance sheets as equity as the warrants do not have any redemption features nor
a right to put for cash that is outside the control of the Company, and valued using the Black-Scholes model based on the following
weighted average assumptions:
Risk-free interest rate
|
|
|
0.88
|
%
|
Expected volatility
|
|
|
106.7
|
%
|
Expected term
|
|
|
2
|
months
|
Expected dividend yield
|
|
|
-
|
|
Exercise price
|
|
$
|
3.70
|
|
Market value of common stock
|
|
$
|
3.11
|
|
The Company also issued 214,000 shares of our common stock to
a group of investors in connection with the exercise of 214,000 previously issued warrants at $2.00 per share for aggregate gross
and net proceeds of approximately $0.4 million.
During the three months ended March 31, 2020, the Company issued
a total of 11,950 shares of our common stock to employees due to the vesting of restricted stock units and issuance of a common
stock award.
Warrant to purchase common stock activity for the three months
ended March 31, 2020 was as follows:
|
|
Amount
|
|
|
Weighted-average
exercise price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2019
|
|
|
2,673,051
|
|
|
$
|
5.38
|
|
Issued
|
|
|
151,027
|
|
|
|
3.70
|
|
Exercised
|
|
|
(214,000
|
)
|
|
|
2.00
|
|
Outstanding at March 31, 2020
|
|
|
2,610,078
|
|
|
$
|
5.56
|
|
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 that prioritizes the inputs into three broad levels. 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 2
as of March 31, 2020 and December 31, 2019. The Company’s restricted cash that serves as collateral for the Company’s
credit card program is held in a demand money market account and is measured at fair value based on quoted prices, which are Level
1 inputs. The Company classifies warrants to purchase common stock that are accounted for as liabilities as Level 3 liabilities,
as discussed below.
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 March 31, 2020:
|
|
Fair Value Measurement as of March 31, 2020
|
|
|
|
(In thousands)
|
|
Assets:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Restricted cash
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
Total
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
|
|
|
$
|
133
|
|
|
$
|
133
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
133
|
|
|
$
|
133
|
|
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, 2019:
|
|
Fair Value Measurement as of December 31, 2019
|
|
|
|
(In thousands)
|
|
Assets:
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Restricted cash
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
Total
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
33
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
33
|
|
|
$
|
33
|
|
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 three months
ended March 31, 2020:
|
|
Warrant
Liability
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2019
|
|
$
|
33
|
|
Change in fair value upon re-measurement
|
|
|
100
|
|
Balance at March 31, 2020
|
|
$
|
133
|
|
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:
|
|
March 31,
2020
|
|
|
December 31,
2019
|
|
Risk-free interest rate
|
|
|
0.23
|
%
|
|
|
1.58
|
%
|
Expected volatility
|
|
|
104.4
|
%
|
|
|
90.53
|
%
|
Expected term (in years)
|
|
|
1.9
|
|
|
|
2.1
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Exercise price
|
|
$
|
8.00
|
|
|
$
|
8.00
|
|
Market value of common stock
|
|
$
|
4.00
|
|
|
$
|
2.01
|
|
Warrants to purchase shares of common stock
|
|
|
92,212
|
|
|
|
92,212
|
|
5.
|
Share-Based Compensation
|
Biostage 2013 Equity Incentive Plan
The Company maintains the 2013 Equity Incentive Plan (the Plan)
for the benefit of certain 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. The Company’s
policy is to issue stock available from its registered but unissued stock pool through its transfer agent to satisfy stock option
exercises and vesting of the restricted stock units. The vesting period for awards is generally four years and the contractual
life is ten years. Canceled and forfeited options and awards are available to be reissued under the Plan. Total shares of common
stock authorized to be issued under the Plan as of March 31, 2020 is 2,098,000 shares. There are 435,582 shares available for issuance
as of March 31, 2020.
The Company also issued equity awards under the Plan at the
time of the Distribution to all holders of Harvard Bioscience equity awards as part of an adjustment (the Adjustment) to prevent
a loss of value due to the Distribution. Compensation expense recognized under the Plan relates to service provided by employees,
board members and a non-employee of the Company. There was no required compensation associated with the Adjustment awards to employees
who remained at Harvard Bioscience, and as of March 31, 2020 there was no unrecognized compensation costs since all the Adjustment
Awards were fully vested. During 2020 and 2019, no options or restricted stock units were granted to Harvard Bioscience employees
or directors, and the Company does not anticipate issuing any to Harvard Bioscience employees in the future.
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 three months ended March
31, 2020 was as follows:
|
|
Stock Options
|
|
|
Restricted Stock Units
|
|
|
|
Amount
|
|
|
Weighted –average
exercise price
|
|
|
Amount
|
|
|
Weighted –average
grant date
fair value
|
|
Outstanding at December 31, 2019
|
|
|
1,772,761
|
|
|
$
|
6.04
|
|
|
|
3,300
|
|
|
$
|
7.68
|
|
Granted
|
|
|
120,000
|
|
|
|
3.33
|
|
|
|
-
|
|
|
|
-
|
|
Vested (RSUs)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,300
|
)
|
|
|
7.68
|
|
Canceled
|
|
|
(285,191
|
)
|
|
|
2.69
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at March 31, 2020
|
|
|
1,607,570
|
|
|
$
|
6.43
|
|
|
|
-
|
|
|
$
|
-
|
|
The Company’s outstanding stock options include 338,663
performance-based awards that have vesting provisions subject to the achievement of certain business milestones. In September 2019,
the Company deemed the achievement of one of the performance-based milestones totaling 95,131 shares probable for accounting purposes,
are now exercisable, and recognized approximately $0.3 million of expense associated with this milestone during the year ended
December 31, 2019. Total unrecognized compensation expense for the remaining 243,532 performance-based awards is approximately
$0.8 million. No expense has been recognized for these unvested awards as of March 31, 2020 given that the milestone achievements
for these awards have not yet been deemed probable for accounting purposes.
Aggregate intrinsic value for outstanding options and exercisable
options for the year ended March 31, 2020 was $1.8 million based on the Company’s closing stock price of $4.00 per share
as of March 31, 2020. As of March 31, 2020, unrecognized compensation cost related to unvested nonperformance-based awards amounted
to $0.7 million, which will be recognized over a weighted average period of 0.9 years.
The Company uses the Black-Scholes option pricing model to value
its stock options. The weighted average assumptions for valuing options granted during the three months ended March 31, 2020 were
as follows:
Risk-free interest rate
|
|
|
1.17
|
%
|
Expected volatility
|
|
|
97.0
|
%
|
Expected term
|
|
|
2.9
|
years
|
Expected dividend yield
|
|
|
n/a
|
|
In February 2020, as part of the termination arrangement with
the Company’s former chief executive officer, the Company modified certain options to purchase 236,970 shares of common stock,
issued an 80,000 fully vested stock option grant, and accelerated the vesting of 3,300 restricted stock units resulting in recording
$153,000, $70,000, and $4,000, respectively, of share-based compensation.
In March 2020 the Company issued 35,000 common stock awards
to an employee that will be earned upon the achievement of certain milestones. One of the milestones for 15,000 common shares was
achieved on March 27, 2020, and the Company issued 9,795 fully vested share of common stock to the employee with 5,205 common shares
withheld to cover taxes. During the three months ended March 31, 2020, the Company recognized a total of $74,800 and the remaining
expense of $65,200 will be recognized upon the achievement of certain milestones over the requisite service period. The Company
considers the achievement of the remaining milestones probable for accounting purposes.
The Company recorded share-based compensation expense in the
following expense categories of its consolidated statements of operations:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
92
|
|
|
$
|
72
|
|
General and administrative
|
|
|
496
|
|
|
|
221
|
|
Total share-based compensation
|
|
$
|
588
|
|
|
$
|
293
|
|
The Company estimates the fair value of non-employee share options
using the Black-Scholes option pricing model reflecting the same assumptions as applied to employee and director options in each
of the reporting periods, other than the expected life, which is assumed to be the remaining contractual life of the options.
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 the 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 the 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 was not entitled to any termination
fee thereunder, as the failure to consummate the Pecos Placement resulted from the 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 Cellspan 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 does not believe a loss is probable at this time and therefore has not accrued any amounts for this contingent
liability.
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, results of operations, or cash flows.
The Company leases laboratory and office space and certain equipment
with remaining terms ranging approximately from 1 year to 4.5 years.
The laboratory and office space arrangement is under a sublease
that was renewed in December of 2019 and currently extends through May 31, 2021. This lease automatically renews annually for a
one-year period unless the Company or the counterparty provides a notice of termination within one hundred and eighty days prior
to May 31 of each year.
All of the Company’s leases qualify as operating leases.
The following table summarizes the presentation of the Company’s operating leases in its consolidated balance sheets:
(In thousands)
|
|
Balance Sheet Classification
|
|
At
March 31, 2020
|
|
Assets:
|
|
|
|
|
|
Operating lease assets
|
|
Right-of-use asset
|
|
$
|
166
|
|
Liabilities:
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
Current portion of operating lease liabilities
|
|
$
|
105
|
|
Non-current operating lease liabilities
|
|
Operating lease liabilities, net of current portion
|
|
$
|
61
|
|
Total operating lease liabilities
|
|
|
|
$
|
166
|
|
The Company recorded lease expense in the following expense
categories of its consolidated statements of operations:
|
|
|
|
For the Three Months
Ended March 31,
|
|
(In thousands)
|
|
Statement of Operations Classification
|
|
2020
|
|
|
2019
|
|
Operating lease expense
|
|
Research and development
|
|
$
|
19
|
|
|
$
|
18
|
|
|
|
Selling, general and administrative
|
|
|
11
|
|
|
|
10
|
|
|
|
|
|
$
|
30
|
|
|
$
|
28
|
|
The minimum lease payments for the next five years are expected
to be as follows:
(In thousands)
|
|
As Of
March 31, 2020
|
|
2020
|
|
$
|
91
|
|
2021
|
|
|
62
|
|
2022
|
|
|
19
|
|
2023
|
|
|
12
|
|
2024
|
|
|
7
|
|
Total lease payments
|
|
$
|
191
|
|
Less: imputed interest
|
|
|
25
|
|
Present value of operating lease liabilities
|
|
$
|
166
|
|
Cash paid included in the computation of the right of use asset
and lease liability during the three months ended March 31, 2020 and 2019 amounted to approximately $30,000 and $28,000, respectively.
The weighted average remaining lease term and weighted average
discount rate of the Company’s operating leases are as follows:
|
|
As Of
March 31, 2020
|
|
Weighted average remaining lease term (in years)
|
|
|
2.20
|
|
Weighted average discount rate
|
|
|
13.13
|
%
|
The following potential common shares were excluded from the
calculation of diluted net loss per share attributable to common stockholders for the three months ended March 31, 2020 and 2019
because including them would have had an anti-dilutive effect:
|
|
Three Months Ended March 31,
|
|
|
|
2020
|
|
|
2019
|
|
Warrants to purchase common stock
|
|
|
2,610,078
|
|
|
|
3,678,647
|
|
Options to purchase common stock
|
|
|
1,607,570
|
|
|
|
1,585,464
|
|
Unvested restricted common stock units
|
|
|
-
|
|
|
|
5,517
|
|
Common stock awards
|
|
|
20,000
|
|
|
|
-
|
|
Total
|
|
|
4,237,648
|
|
|
|
5,269,628
|
|
The Company did not provide for any income taxes in its statement
of operations for the three months ended March 31, 2020 and 2019. The Company has provided a valuation allowance for the full amount
of its net deferred tax assets because, at March 31, 2020 and December 31, 2019, 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 March 31, 2020 or December 31, 2019. As of March 31, 2020 and December 31, 2019, 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, 2018; 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 IRS 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 financing 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.
For all periods through March 31, 2020, 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.
Coronavirus Aid, Relief and Economic Security Act
In response to the COVID-19 pandemic, the CARES Act was signed
into law in March 2020. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017
(2017 Tax Act). Corporate taxpayers may carryback federal and state net operating losses (NOLs) originating during 2018 through
2020 for up to five years, which was not previously allowed under the 2017 Tax Act. The CARES Act also eliminates the 80% of taxable
income limitations by allowing corporate entities to fully utilize NOL carryforwards to offset taxable income in 2018, 2019 or
2020. Taxpayers may generally deduct interest up to the sum of 50% of adjusted taxable income plus business interest income (30%
limit under the 2017 Tax Act) for tax years beginning January 1, 2019 and 2020. The CARES Act allows taxpayers with alternative
minimum tax credits to claim a refund in 2020 for the entire amount of the credits instead of recovering the credits through refunds
over a period of years, as originally enacted by the 2017 Tax Act.
In addition, the CARES Act raises the corporate charitable deduction
limit to 25% of taxable income and makes qualified improvement property generally eligible for 15-year cost-recovery and 100% bonus
depreciation. The enactment of the CARES Act did not result in any material adjustments to our income tax provision for the three months
ended March 31, 2020, or to our net deferred tax assets as of March 31, 2020.
Equity Transactions
Subsequent to end of the quarter, the Company issued 141,553
shares of our common stock to a group of investors in connection with the exercise of 141,553 previously issued warrants at $3.70
per share for aggregate gross and net proceeds of approximately $0.5 million. See Note 3.
Biostage 2013 Equity Incentive Plan
On April 22, 2020, the Company’s Board of Directors approved
an amendment and restatement of our 2013 Equity Incentive Plan, which such amendment and restatement is subject to shareholder
approval and included an increase of the number of shares authorized to be issued under the Plan by 3,000,000 shares to 5,098,000
shares.
Paycheck Protection Program Loan
On May 4, 2020, the Company was granted a loan (Loan) from the
Bank of America in the aggregate amount of $404,221, pursuant to the Paycheck Protection Program (PPP), established as part of
the CARES Act. The Loan is evidenced by a Promissory Note issued by the Company dated May 1, 2020, and will accrue interest at
a fixed interest rate of 1% per annum from the funding date of May 4, 2020. Payments are deferred for the first six months
following funding. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses
as described in the CARES Act. Any unforgiven portion of the PPP loan, including principal and interest, will mature on May
4, 2022 and will be payable monthly commencing on November 4, 2020. The Note may be prepaid by the Company at any time prior to
maturity with no prepayment penalties.
The Company has performed an evaluation of subsequent events
through the time of filing this Quarterly Report on Form 10-Q with the SEC, and has determined that there are no such events
to report other than those disclosed above.