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 our novel Cellframe
TM
technology. Our Cellframe technology is comprised of a biocompatible scaffold that is seeded with the recipient’s own stem
cells. We believe 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. We are currently developing our 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.
Basis of Presentation
The 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”).
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, 2017 and consolidated interim statements of operations and comprehensive loss and cash flows for the
three and nine months ended September 30, 2017 and 2016 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, 2017 and its results of operations and cash flows for the three and nine month periods ended September 30, 2017 and 2016. The
financial data and other information disclosed in these notes related to the three and nine month periods ended September 30, 2017
and 2016 are unaudited. The results for the three and nine months ended September 30, 2017 are not necessarily indicative of results
to be expected for the year ending December 31, 2017, 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, 2016 included in the Company’s Annual Report on Form 10-K.
3.
Capital Stock, Financing and Liquidity
Capital Stock
On February 10, 2017, the Company completed
a public offering of 20,000,000 shares of common stock at a purchase price of $0.40 per share and the issuance of warrants to purchase
20,000,000 shares of common stock at an exercise price of $0.40 per warrant for gross proceeds of $8.0 million or approximately
$6.8 million net of issuance costs. Additionally, the Company issued to the placement agent warrants to purchase 1,000,000 shares
of common stock for the offering at an exercise price of $0.50 per warrant. The warrants are immediately exercisable and remain
exercisable for five years from date of grant. During the three and nine months ended September 31, 2017 holders exercised warrants
for 2,647,338 shares of common stock for proceeds of $1.1 million.
On May 19, 2016, the Company closed on
a Securities Purchase Agreement for the sale by the Company of 2,836,880 shares of the Company’s common stock at a purchase
price of $1.7625 per share and the issuance of warrants to purchase 1,418,440 shares of common stock at an exercise price of $1.7625
per warrant for gross proceeds of $5.0 million or $4.6 million, net of issuance costs. Additionally, the Company issued warrants
to purchase 141,844 shares of common stock to the placement agent for the offering at an exercise price of $1.7625 per warrant.
The warrants are initially exercisable commencing November 19, 2016 through their expiration date of May 19, 2021.
On December 15, 2015, the Company entered
into a common stock purchase agreement (the “Aspire Capital Purchase Agreement”) with Aspire Capital Fund, LLC, (“Aspire
Capital”), under which Aspire Capital was committed to purchase up to an aggregate of $15.0 million of the Company’s
common stock over the approximately thirty month term of the Aspire Capital Purchase Agreement. In consideration for entering into
the Aspire Capital Purchase Agreement, concurrently with the execution of the Aspire Capital Purchase Agreement, the Company issued
Aspire Capital 150,000 shares of common stock as a commitment fee.
Upon execution of the Aspire Capital Purchase
Agreement, the Company sold to Aspire Capital 500,000 shares of common stock at $2.00 per share, which resulted in net proceeds
of approximately $0.9 million.
On May 12, 2016, the Company issued 150,000
shares of common stock under the Aspire Capital Purchase Agreement in exchange for gross proceeds of $0.37 million, or $0.35 million
net of issuance costs. On May 17, 2016, the Company terminated the Aspire Capital Purchase Agreement without any penalty or cost.
Capital Commitment
On June 26, 2017, the Company entered
into a binding Memorandum of Understanding (the “Pecos MOU”) with First Pecos, LLC (“First Pecos”),
pursuant to which the Company agreed to issue to First Pecos in a private placement (the “Pecos Placement”)
9,700,000 shares of its common stock at a purchase price of $0.315 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 (the “Preferred Stock”) with a per-share purchase price of $1,000.
Additionally, First Pecos was to receive
warrants (the “Warrants”) to purchase 9,700,000 shares of the Company’s common stock or, to the extent First
Pecos would own more than 19.9% of the Company’s common stock, shares of Preferred Stock. The Warrants would have had an
exercise price of $0.315 per share and would not have been exercisable until six months after the closing of the Pecos Placement.
Under the Pecos Placement, the Preferred
Stock would bear a cumulative annual dividend of 15%, compounding annually, and would be senior to all of the Company’s other
common stock, but would generally not have any voting rights. Following approval by the Company’s stockholders, the Preferred
Stock would 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, would seek approval from its stockholders every six months thereafter.
In connection with the Pecos Placement,
First 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 could elect to conduct within 24 months following the closing of the Pecos Placement. Additionally,
the Company had agreed to grant board representation and nomination rights to First Pecos that would be proportional to the percentage
of the Company’s common stock owned by First Pecos and its affiliates.
3.
Capital Stock, Financing and Liquidity (continued)
The Pecos Placement was conditioned on
satisfaction of customary closing conditions, including the Company terminating its Shareholder Rights Plan, and was expected to
be consummated on or prior to August 15, 2017. The definitive agreements relating to the Pecos Placement were to include customary
representations, warranties and covenants. The Company agreed to file a resale registration statement promptly after the closing
of the Pecos Placement to register the resale of the shares of common stock issued in the Pecos Placement.
The Pecos MOU was intended to be binding upon
both the Company and First Pecos. In the event that the Company failed to perform any of its obligations under the Pecos MOU or otherwise
breached the Pecos MOU, subject to certain exceptions, First Pecos could terminate the Pecos MOU, and the Company would have been obligated
to pay a termination fee of $0.5 million (the “Termination Fee”).
The Company entered
into the Securities Purchase Agreement (the “Purchase Agreement) with First Pecos on August 11, 2017, pursuant to which the
Company agreed to sell to First Pecos, and First Pecos agreed to purchase from the Company, 9,700,000 shares of the Company’s
common stock at a purchase price of $0.315 per share or, to the extent First Pecos, following the transaction, would own more than
19.99% 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. Additionally, First Pecos was to receive a warrant to purchase 9,700,000 shares of the Company’s common stock
(or, to the extent First Pecos would own more than 19.99% of the Company’s common stock, shares of Preferred Stock). The
aggregate gross proceeds from the private placement of common stock, Preferred Stock and the Warrant would have been $3,055,500
(the “Purchase Price”). The Company did not receive the Purchase Price from First Pecos.
On October 5, 2017,
the Company delivered a notice (the “Notice”) to First Pecos and its manager, Leon “Chip” Greenblatt III,
stating that First Pecos was in breach of the Purchase Agreement as a result of its failure to deliver the Purchase Price to the
Company following satisfaction of all closing conditions in the Purchase Agreement. None of the shares of common stock, shares
of Preferred Stock or Warrants were issued to First Pecos.
On October 10, 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 the 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’s 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 the Termination Fee, as the failure to consummate the Pecos Placement resulted from First Pecos’s
breach of the Purchase Agreement. The Company is reviewing all of its rights and remedies against First Pecos that may be available
to the Company.
NASDAQ Compliance and OTCQB Exchange Quotation
The Company had been operating under a
grace period from November 18, 2016 through May 17, 2017 with respect to non-compliance of the listing requirements on NASDAQ.
The Company then requested a hearing with the NASDAQ Hearings Panel (the “Panel”), and on June 29, 2017, presented
its plan to regain compliance with the NASDAQ listing requirements, including Listing Rule 5550(a)(2), which requires an issuer
to maintain a closing bid price of at least $1.00 per share, and Listing Rule 5550(b)(1), which requires minimum stockholders’
equity of $2.5 million. The Panel accepted the Company’s plan and continued listing was subject to a number of conditions,
with the Panel’s decision ultimately requiring that the Company evidence full compliance with all requirements for continued
listing on The NASDAQ Capital Market, including the minimum bid price and stockholders’ equity requirements, by no later
than November 13, 2017.
The Company determined
that as a result of the termination of the Purchase Agreement it could not regain compliance with The NASDAQ Capital Market listing
standards by the deadline imposed by NASDAQ, and on October 4, 2017 the Company withdrew its appeal from the Panel.
On October 4, 2017,
following the withdrawal by the Company of its appeal to the Panel, the Company received written notification from NASDAQ indicating
that the Panel had determined to delist the Company’s common stock from The NASDAQ Capital Market, and suspended it from
trading on that marketplace effective with the open of business on October 6, 2017. NASDAQ also informed the Company that it would
file a Form 25-NSE with the Securities and Exchange Commission (the “SEC”) to remove the Company’s common stock
from listing on NASDAQ, which was filed with the SEC on December 7, 2017..
The Company’s
common stock began trading on the OTCQB marketplace at the open of business on October 6, 2017. The Company’s common stock
continues to trade under the symbol “BSTG”.
3.
Capital Stock, Financing and Liquidity (continued)
The delisting of the
Company’s common stock from The NASDAQ Capital Market may adversely affect the Company’s ability to raise the significant
additional capital that it will require, through public or private sales of equity securities, which may in turn adversely affect
the ability of investors to trade the Company’s securities and may negatively impact the value and liquidity of the Company’s
common stock. The delisting could also cause the Company to face significant adverse consequences affecting trading in its common
stock, including, among others:
|
●
|
because the Company’s common stock falls within the
definition of a “penny stock,” brokers trading in its common stock are required to adhere to more stringent rules,
which could result in reduced trading activity in the secondary trading market for its securities;
|
|
●
|
reduced trading levels could result in limited or no analyst
coverage for the Company;
|
|
●
|
potential limited availability of market quotations for
the Company’s common stock could adversely affect liquidity; and
|
|
●
|
restrictions on the Company’s ability to issue additional
securities (including pursuant to short-form registration statements on Form S-3) or obtain additional financing in the future.
|
Warrants
The Company has issued warrants to
purchase common stock, and the warrant activity during the nine months ended September 30, 2017 was as follows:
|
|
Warrants
|
|
|
|
Amount
|
|
|
Weighted-average
exercise price
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,560,284
|
|
|
$
|
1.76
|
|
Granted
|
|
|
21,000,000
|
|
|
|
0.40
|
|
Exercised
|
|
|
(2,647,338
|
)
|
|
|
0.40
|
|
Outstanding at September 30, 2017
|
|
|
19,912,946
|
|
|
$
|
0.49
|
|
Other
On April 26, 2017, the Company’s
stockholders approved the following proposals at the Company’s Annual Meeting of Shareholders:
|
·
|
An amendment of the Company’s 2013 Equity Incentive
Plan to increase the number of shares of the Company’s common stock available for issuance pursuant to the 2013 Plan by
4,000,000 shares; and
|
|
·
|
An amendment of the Company’s charter to effect a
reverse stock split of the shares of the Company’s common stock at a ratio of not less than 1-for-2 and not greater than
1-for-20, with the exact ratio of, effective time of and decision whether or not to implement a reverse stock split to be determined
by the Company’s board of directors. There has been no decision by the Company’s board of directors as to whether
to implement a reverse stock split as of September 30, 2017.
|
Liquidity
The Company has incurred substantial operating
losses since its inception, and as of September 30, 2017 had an accumulated deficit of approximately $47.0 million. The Company
is currently investing significant resources in development and commercialization of products for use by clinicians in the field
of regenerative medicine. The Company expects to continue to incur operating losses and negative cash flows from operations for
the remainder of 2017 and in future years. As a result of First Pecos's refusal to deliver the Purchase Price, the Company is facing
significant capital issues, as its current financial obligations exceed its cash on hand, and is exploring financing and other
strategic alternatives. The Company cannot provide any assurance that it will be able to obtain sufficient financing. 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 that the Company does not raise additional capital from outside sources
in the near future, it may be forced to further 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, or strategic collaborations and
licensing arrangements. The Company may not be able to obtain additional financing on terms favorable to it, if at all.
3. Capital Stock, Financing and Liquidity (continued)
The Company’s operations will be
adversely affected if it is unable to raise or obtain needed funding, which materially affects our 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.
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.
On May 19, 2016 and February 10, 2017,
the Company closed on the sale of shares of the Company’s common stock, the issuance of warrants to purchase shares of common
stock, and the issuance of warrants to the placement agent for each transaction.
Due to a cash put provision within the
warrant agreement, which could be enacted in certain change in control events, a liability associated with those warrants was initially
recorded at fair value in the Company’s consolidated balance sheets upon issuance, and subsequently re-measured each fiscal
quarter. The changes in the fair value between issuance and the end of each reporting period is recorded as a component of other
income (expense), net in the consolidated statement of operations and comprehensive loss.
During the three and nine months ended
September 30, 2017, warrant holders of 19,043,696 warrants agreed to the modification of the terms of their warrants, which resulted
in placing all situations that would allow the warrant holder to put the warrant for cash fully in control of the Company. As a
result of the modification, the warrants are no longer liability classified and do not need to be re-measured. These modifications
resulted in the $4.3 million fair value of those warrants being reclassified from Warrant Liabilities to Additional Paid in Capital.
The remaining un-modified 1,844,250 warrants will continue to be re-measured at each reporting period as long as they are outstanding
and un-modified.
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. The Company has concluded that its warrants meet the definition of a liability under
ASC 480 Distinguishing Liabilities From Equity
and has classified the liability as Level 3.
The Company
has re-measured the 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:
|
|
Assumptions for estimating fair value of warrants
|
|
|
Assumptions for estimating fair value on reporting
|
|
|
|
modified during the three months ended
|
|
|
dates of
|
|
|
|
September 30, 2017
|
|
|
June 30, 2017
|
|
|
September 30, 2017
|
|
|
December 31, 2016
|
|
Risk-free interest rate
|
|
|
1.89
|
%
|
|
|
1.77
|
%
|
|
|
1.93
|
%
|
|
|
1.93
|
%
|
Expected volatility
|
|
|
82.3
|
%
|
|
|
82.4
|
%
|
|
|
85.0
|
%
|
|
|
72.7
|
%
|
Expected term (in years)
|
|
|
4.6
|
|
|
|
4.6
|
|
|
|
4.4
|
|
|
|
4.9
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercise price
|
|
$
|
0.40
|
|
|
$
|
0.50
|
|
|
$
|
0.40
|
|
|
$
|
1.76
|
|
Market value of common stock
|
|
$
|
0.41
|
|
|
$
|
0.33
|
|
|
$
|
0.31
|
|
|
$
|
0.89
|
|
Warrants to purchase shares of common stock
|
|
|
2,002,037
|
|
|
|
16,568,846
|
|
|
|
1,844,250
|
|
|
|
1,560,284
|
|
4.
Fair Value Measurements (continued)
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, 2017:
|
|
Fair Value Measurement as of September 30, 2017
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
339
|
|
|
$
|
339
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
339
|
|
|
$
|
339
|
|
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, 2016:
|
|
Fair Value Measurement as of December 31, 2016
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
605
|
|
|
$
|
605
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
605
|
|
|
$
|
605
|
|
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, 2017:
|
|
Warrant Liability
|
|
|
|
(in thousands)
|
|
Balance at December 31, 2016
|
|
$
|
605
|
|
Issuance of warrants
|
|
|
3,787
|
|
Change in fair value upon re-measurement
|
|
|
274
|
|
Reclassification of warrant liability to additional paid in capital upon modification
|
|
|
(3,746
|
)
|
Reclassification of warrant liability to additional paid in capital upon exercise
|
|
|
(581
|
)
|
Balance at September 30, 2017
|
|
$
|
339
|
|
Issuance costs allocated to the warranty
liability issued in the first quarter of 2017 amounted to $385,000 and have been included in the change in fair value of the warranty
liability in the accompanying consolidated statements of operations.
There were no transfers between Level 1
and Level 2 in any of the periods reported.
5.
Relationship with Harvard Bioscience
On October 31, 2013, Harvard Bioscience,
Inc. (“Harvard Bioscience”) contributed its regenerative medicine business assets, plus $15 million of cash, into Biostage
(the “Separation”). 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
(the “Distribution”).
At the time of the Separation, the Company
entered into a 10-year product distribution agreement with Harvard Bioscience under which each company will become 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 has 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 will be
the exclusive manufacturer of such bioreactors and Harvard Bioscience will purchase such bioreactors from the Company. Since inception
of the Company, sales to Harvard Bioscience accounted for 100% of the Company’s revenues and receivables.
From the time of the Company’s spin-off
from Harvard Bioscience through 2016, the Company manufactured research bioreactors. That business represented a small portion
of the Company’s operations. In late 2016, the Company ceased the manufacture of research bioreactors to concentrate its
efforts solely on development of its clinical product candidates. On November 3, 2017, in exchange for settlement of outstanding
rent due to Harvard Bioscience, the Company sold its supply of research bioreactor parts, a royalty free perpetual sublicensable
and transferable right and license to use the intellectual property, including certain patents covering research bioreactors, and
relinquished exclusive manufacturing or distribution rights with respect to research bioreactors to Harvard Bioscience. 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.
6.
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.
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.
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, 2017 was as follows:
|
|
Stock Options
|
|
|
Restricted Stock Units
|
|
|
|
Amount
|
|
|
Weighted-average
exercise price
|
|
|
Amount
|
|
|
Weighted -average
grant date fair value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
3,877,681
|
|
|
$
|
2.81
|
|
|
|
268
|
|
|
$
|
6.00
|
|
Granted
|
|
|
1,896,500
|
|
|
|
0.40
|
|
|
|
404,750
|
|
|
|
0.38
|
|
Vested (RSUs)
|
|
|
-
|
|
|
|
-
|
|
|
|
(268
|
)
|
|
|
6.00
|
|
Canceled
|
|
|
(569,865
|
)
|
|
|
1.67
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at September 30, 2017
|
|
|
5,204,316
|
|
|
$
|
2.05
|
|
|
|
404,750
|
|
|
$
|
0.38
|
|
6.
Stock-Based Compensation (continued)
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, 2017 were as follows:
Expected volatility
|
|
|
78.71
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
Expected term
|
|
|
6.26
|
years
|
Risk-free rate
|
|
|
2.25
|
%
|
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,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
98
|
|
|
$
|
198
|
|
|
$
|
281
|
|
|
$
|
535
|
|
General and administrative
|
|
|
96
|
|
|
|
164
|
|
|
|
310
|
|
|
|
492
|
|
Total stock-based compensation
|
|
$
|
194
|
|
|
$
|
362
|
|
|
$
|
591
|
|
|
$
|
1,027
|
|
Included in the above table for 2016 is
stock-based compensation related to the Harvard Bioscience Plan, which is described below. There is no expense related to the Harvard
Bioscience Plan in 2017.
Harvard Bioscience Stock Option and Incentive Plan
Harvard Bioscience maintains the Third
Amended and Restated 2000 Stock Option and Incentive Plan (as amended, the “Harvard Bioscience Plan”) for the benefit
of certain of its officers, directors and employees. In connection with the Separation, those employees of Harvard Bioscience who
became employees of Biostage were allowed to continue vesting in their stock-based awards of stock options and restricted stock
units granted under the Harvard Bioscience Plan. Accordingly, the Company recognized compensation expense as services were provided
by those employees through the time of their vesting. All stock-based awards granted to Biostage employees were fully vested as
of January 1, 2017.
7.
Commitments and Contingencies
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, Harvard Bioscience and other defendants. The complaint alleges that the decedent was harmed 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, which harm caused her injury and death. 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 litigation is at an early stage
and the Company intends to vigorously defend this case. While the Company believes that such claim lacks merit, and has filed a
motion seeking dismissal of the lawsuit, 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 Separation, 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.
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.
8.
Subsequent Events
NASDAQ Delisting and OTCQB Quotation
On October 4, 2017,
following the withdrawal by the Company of its appeal to the NASDAQ Hearings Panel, the Company received written notification from
NASDAQ indicating that the Panel had determined to delist the Company’s common stock from The NASDAQ Capital Market, and
suspended the stock’s trading on that marketplace effective with the open of business on October 6, 2017. NASDAQ also informed
the Company that it would file a Form 25-NSE with the SEC to formally remove the Company’s common stock from listing on NASDAQ,
which was filed with the SEC on December 7, 2017.
The Company’s
common stock began trading on the OTCQB marketplace at the open of business on October 6, 2017. The Company’s common stock
continues to trade under the symbol “BSTG”.
First Pecos Breach Notice
On October 5, 2017,
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, as described in note 3, as a result of its failure to deliver the Purchase Price to the
Company following satisfaction of all closing conditions in the Purchase Agreement. None of the shares of common stock, shares
of Preferred Stock or Warrants were issued to First Pecos.
On October 10, 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 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 is reviewing all of its rights and remedies against First Pecos that may be available
to the Company.
Headcount Reduction
During October and November, 2017,
the Company completed a reduction in headcount of 21 of its employees, which represents 78% of its employees prior to such
reduction. The reductions were made with the objective of conserving the Company’s remaining cash on hand while the
Company explores strategic alternatives with its advisors. The Company estimates that it will incur charges for one-time
termination benefits in connection with the headcount reduction of approximately $165,000 for employee severance and related
costs, payment of which has been deferred until cash resources become available. At the time of the first reduction the
remaining officers reduced their salaries by 50%.
Bioreactor Sale to Harvard Bioscience
On November 3, 2017, in exchange for settlement
of outstanding rent 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 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.
December 2017 Private Placement MOU
On December 11, 2017, the Company
entered into a binding Memorandum of Understanding (the “MOU”) with Bin Zhao, pursuant to which the Company will
issue to Ms. Zhao and her designees in a private placement (the “Private Placement”) 40,000,000 shares of its
common stock at a purchase price of $0.10 per share or, to the extent Ms. Zhao and her designees, following the
transaction, would own more than 49.99% 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, Ms. Zhao and her
designees will receive warrants (the “Warrants”) to purchase 60,000,000 shares of the Company’s
common stock (or, to the extent Ms. Zhao and her designees would more than 49.99% of the Company’s common stock, shares
of Preferred Stock). The Warrants will have an exercise price of $0.10 per share.
The investor advanced a $300,000
deposit on the private placement proceeds concurrently with the MOU’s execution.
The Preferred Stock
will be entitled to vote on any matters to which shares of the Company’s common stock are entitled to vote, on an as-if-converted
basis. The Preferred Stock will include an ownership limitation that will limit Ms. Zhao and her affiliates to owning no more than
49.99% of the Company’s common stock. Additionally, the Company has agreed to grant board representation and nomination rights
to Ms. Zhao and her affiliates, with two director nominees initially and, to the extent that Ms. Zhao and her affiliates beneficially own
more than 50% of the Company’s common stock (assuming conversion of all shares of Preferred Stock held by such persons),
enough director nominees such that the director nominees of Ms. Zhao and her affiliates shall constitute a majority of the Company’s
board of directors (but no more than is necessary to constitute such a majority).
Pursuant to the MOU,
the Company may identify other investors who may participate in the Private Placement on the same financial terms as Ms. Zhao and her
designees, for gross proceeds of up to $2.0 million. In the event such other investors participate in the Private Placement, then
Ms. Zhao and her designees may elect to purchase additional securities in the Private Placement, on the same terms, to the extent necessary
to maintain the same post-transaction percentage of voting power that Ms. Zhao and her designees would have received if no such additional
parties participated in the Private Placement.
The Private Placement
is conditioned on satisfaction of customary closing conditions and on the Company completing a reverse stock split, as previously
approved by its stockholders, such that the Company will have sufficient authorized but unissued shares of common stock to accommodate
the issuance of shares of common stock in the Private Placement, along with all shares of common stock issuable upon exercise of
the Warrants or conversion of the Preferred Stock. The numbers of securities, purchase price per share of common stock and exercise
price of the Warrants will be adjusted to reflect such reverse stock split. The definitive agreements relating to the Private Placement
will include customary representations, warranties and covenants.
The MOU is intended
to be binding upon both the Company and Ms. Zhao. The shares of common stock, the Warrants (including shares of common stock issuable
upon exercise of the Warrants) and the shares of Preferred Stock (including shares of common stock issuable upon conversion of
the Preferred Stock) will be sold and issued without registration under the Securities Act of 1933 (the “Securities Act”)
in reliance on the exemptions provided by Section 4(a)(2) of the Securities Act as transactions not involving a public
offering and Rule 506 promulgated under the Securities Act as sales to accredited investors, and in reliance on similar exemptions
under applicable state laws.