NOTES TO UNAUDITED CONSOLIDATED FINANCIAL
STATEMENTS
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1.
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Overview and Basis of Presentation
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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 June 30, 2018 has an accumulated deficit of approximately $51.8 million and will require
additional financing to fund future operations. The Company expects that its cash at June 30, 2018 of $5.8 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 June 30, 2018 and consolidated interim statements of operations and comprehensive loss and cash flows for
the three and six months ended June 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 June 30, 2018 and
its results of operations and cash flows for the six-month periods ended June 30, 2018 and 2017. The financial data and other
information disclosed in these notes related to the three and six-month periods ended June 30, 2018 and 2017 are unaudited. The
results for the three and six months ended June 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.
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2.
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Summary of Significant Accounting Policies and Recently
Issued Accounting Pronouncements
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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. The award for Phase I, which is expected to be earned through the third quarter of 2018, provides for the reimbursement
of up to $225,000 of qualified research and development costs or expenditures. The SBIR grant has the potential to provide
a total award up to $1.7 million. If Phase I is successful, and funding is available, a Phase II award of up to approximately
$1.5 million would support pre-clinical testing of pediatric Cellspan™ Esophageal Implants planned to begin later in 2018.
The Phase II Funds, if awarded, would be spent over an estimated two years.
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. 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 expects to elect the modified retrospective transition
option on January 1, 2019, however, is currently evaluating the impact that the adoption of ASU 2016-02 will have on
its consolidated financial statements and related disclosures.
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 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.
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4.
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Fair Value Measurements
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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 June 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 June 30, 2018:
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Fair Value Measurement as of June 30, 2018
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(In thousands)
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Level 1
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Level 2
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Level 3
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Total
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|
|
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|
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|
|
|
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Warrant liability
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$
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-
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$
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-
|
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$
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236
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$
|
236
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Total
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$
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-
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$
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-
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$
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236
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$
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236
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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:
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Fair Value Measurement as of December 31, 2017
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(In thousands)
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Level 1
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Level 2
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Level 3
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Total
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|
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Warrant liability
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$
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-
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$
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-
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$
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16
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$
|
16
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Total
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$
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-
|
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$
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-
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|
$
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16
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|
|
$
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16
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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 six months ended June 30, 2018:
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Warrant Liability
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(in thousands)
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Balance at December 31, 2017
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$
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16
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Change in fair value upon re-measurement
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220
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Balance at June 30, 2018
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$
|
236
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There were no transfers between Level 1
and Level 2 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:
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June 30,
2018
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December 31,
2017
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|
Risk-free interest rate
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2.68
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%
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|
|
2.09
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%
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Expected volatility
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|
98.4
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%
|
|
|
85.0
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%
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Expected term (in years)
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|
3.6
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|
|
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4.1
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Expected dividend yield
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|
|
-
|
|
|
|
-
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Exercise price
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$
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8.00
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|
$
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8.00
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Market value of common stock
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$
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4.52
|
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|
$
|
0.87
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Warrants to purchase shares of common stock
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92,212
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|
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92,212
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5.
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Stock-Based Compensation
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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 2016, 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 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 six
months ended June 30, 2018 was as follows:
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Stock Options
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Restricted Stock Units
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Amount
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Weighted-average
exercise price
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Amount
|
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|
Weighted
-average
grant date
fair value
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2017
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167,474
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$
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45.84
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|
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14,875
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|
|
$
|
7.68
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Granted
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|
1,239,079
|
|
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2.72
|
|
|
|
-
|
|
|
|
-
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Vested (RSUs)
|
|
|
-
|
|
|
|
-
|
|
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|
(6,228
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)
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7.68
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Canceled
|
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|
(18,201
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)
|
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|
47.14
|
|
|
|
(912
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)
|
|
|
7.68
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|
Outstanding at June 30, 2018
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1,388,352
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$
|
7.34
|
|
|
|
7,735
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|
$
|
7.68
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The underlying common shares for the 6,228
vested RSUs were unissued as of June 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 six months
ended June 30, 2018 were as follows:
|
Expected volatility
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|
88.0-90.6
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%
|
|
Expected dividends
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|
|
0.00
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%
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Expected term
|
|
|
5.75-6.05
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years
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Risk-free rate
|
|
|
2.65-2.78
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%
|
The Company’s outstanding stock
options include 536,355 performance-based awards as of June 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:
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Three Months Ended June 30,
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Six Months Ended June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
|
|
(in thousands)
|
|
|
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
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|
$
|
69
|
|
|
$
|
111
|
|
|
$
|
78
|
|
|
$
|
182
|
|
|
General and administrative
|
|
|
123
|
|
|
|
95
|
|
|
|
189
|
|
|
|
215
|
|
|
Total stock-based compensation
|
|
$
|
192
|
|
|
$
|
206
|
|
|
$
|
267
|
|
|
$
|
397
|
|
|
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6.
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Commitments and Contingencies
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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 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 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, Harvard Bioscience and other defendants. 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 litigation is at a relatively early stage
and 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.
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.
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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 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.
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 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 six months ended
June 30, 2018 and 2017 because including them would have had an anti-dilutive effect:
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|
|
Six Months Ended June 30,
|
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
|
|
Unvested restricted common stock units
|
|
|
7,735
|
|
|
|
20,237
|
|
|
Warrants to purchase common stock
|
|
|
4,178,647
|
|
|
|
1,128,041
|
|
|
Options to purchase common stock
|
|
|
1,388,352
|
|
|
|
263,528
|
|
|
Total
|
|
|
5,574,734
|
|
|
|
1,411,806
|
|
The Company did not provide for any income
taxes in its statement of operations for the three and six months ended June 30, 2018 and 2017. The Company has provided a valuation
allowance for the full amount of its net deferred tax assets because, at June 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 June 30, 2018 or December 31, 2017. As of June 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 accounting is expected to be complete
when the Company’s 2017 U.S. corporate income tax return is filed in 2018.
For all periods through June 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.
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10.
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Headcount Reduction in 2017
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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
has accrued the $104,000 difference between the officers’ contracted rates and amounts paid as of June 30, 2018, which the
Company paid in July 2018. In the 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.