NOTES TO UNAUDITED CONSOLIDATED
FINANCIAL STATEMENTS
1.
|
Overview and Basis of Presentation
|
Overview
Biostage, Inc. (Biostage or the Company) is a biotechnology
company developing bioengineered organ implants based on the Company’s novel 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”.
Basis of Presentation
The consolidated financial statements reflect the Company’s
financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United
States (GAAP).
Going Concern
The Company has incurred substantial operating losses since
its inception, and as of September 30, 2019 has an accumulated deficit of approximately $62.5 million and will require additional
financing to fund future operations. The Company expects that its cash at September 30, 2019 of $1.1 million will enable it to
fund its operating expenses and capital expenditure requirements through the middle of November 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 to fund its
operations, including continuing regulatory requirements related to the Company’s first Investigational New Drug Application
(IND) filed on October 29, 2019 for the Company’s adult esophageal disease product candidate, clinical trial costs if its
IND is approved, and other operational activities. 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 of the financial and other resource needs that will be required to complete ongoing development, 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 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 September
30, 2019, consolidated interim statements of operations and stockholders’ equity for the three and nine months ended September
30, 2019 and 2018, and consolidated statements of cash flows for the nine months ended September 30, 2019 and 2018 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, 2019, its results of operations and stockholders’ equity for the three and nine-month periods
ended September 30, 2019 and 2018, and its consolidated statements of cash flows for the nine months ended September 30, 2019 and
2018. The financial data and other information disclosed in these notes related to the three and nine-month periods ended September
30, 2019 and 2018 are unaudited. The results for the three and nine months ended September 30, 2019 are not necessarily indicative
of results to be expected for the year ending December 31, 2019, 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, 2018 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 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 Company
has recognized $0.6 million from Phase II as of September 30, 2019 and plans to discuss carryover funding with the NIH for the
$0.5 million of the Phase II award not incurred. The Phase II grant includes an additional $0.5 million for future period support
through September 2020, subject to availability of funding and satisfactory progress on the project. Accordingly, the SBIR grant
has the potential to provide a total award of $1.8 million if carryover funding is allowed.
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. The Company recognized $0.5 million of grant income from the Phase II award
during the nine months ended September 30, 2019 and $0.2 million of grant income from the Phase I award during the nine months
ended September 30, 2018.
Restricted Cash
Restricted cash consists of $50,000 held as collateral for the
Company’s credit card program as of September 30, 2019 and December 31, 2018. 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:
|
|
September 30,
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
Cash
|
|
$
|
1,098
|
|
|
$
|
1,305
|
|
Restricted cash
|
|
|
50
|
|
|
|
50
|
|
Total cash and restricted cash as shown in the statements of cash flows
|
|
$
|
1,148
|
|
|
$
|
1,355
|
|
Recently Adopted Accounting Pronouncements
In June 2018, the FASB issued ASU 2018-07, Improvements to
Nonemployee Share-Based Payment Accounting (ASU 2018-07). The new standard simplifies the accounting for share-based payments
to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. The Company
adopted ASU 2018-07 as required on January 1, 2019, and its adoption did not have any material impact on the Company’s consolidated
results of operations.
In July 2017, the FASB issued ASU 2017-11, Earnings
Per Share, Distinguishing Liabilities from Equity, Derivatives and Hedging (Part I) Accounting for Certain Financial Instruments
with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of
Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception (ASU 2017-11).
This guidance is intended to reduce the complexity associated with accounting for certain financial instruments with characteristics
of liabilities and equity. Specifically, a down round feature would no longer cause a freestanding equity-linked financial instrument
(or an embedded conversion option) to be considered “not indexed to an entity’s own stock” and therefore accounted
for as a derivative liability at fair value with changes in fair value recognized in current earnings. Down round features are
most often found in warrants and conversion options embedded in debt or preferred equity instruments. In addition, the guidance
re-characterized the indefinite deferral of certain provisions on distinguishing liabilities from equity to a scope exception with
no accounting effect. The Company adopted ASU 2017-11 as of the required effective date of January 1, 2019, and the adoption
of ASU 2017-11 did not have a material impact on its consolidated financial statements and related disclosures.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic
842), a new standard issued to increase transparency and comparability among organizations related to their leasing activities.
This standard established a right-of-use model that requires all lessees to recognize right-of-use assets and lease liabilities
on their balance sheet that arise from leases as well as provide disclosures with respect to certain qualitative and quantitative
information related to a company's leasing arrangements to meet the objective of allowing users of financial statements to assess
the amount, timing and uncertainty of cash flows arising from leases.
The FASB subsequently issued the following amendments to ASU
2016-02 that have the same effective date and transition date: ASU 2018-01, Leases (Topic 842): Land Easement Practical Expedient
for Transition to Topic 842, ASU 2018-10, Codification Improvements to Topic 842, Leases, ASU 2018-11, Leases (Topic
842): Targeted Improvements, ASU 2018-20, Narrow-Scope Improvement for Lessors, and ASU 2019-01, Leases (Topic 842):
Codification Improvements. The Company adopted these amendments with ASU 2016-02 (collectively, the new leasing standards)
effective January 1, 2019 using the modified retrospective transition approach with no restatement of prior periods or cumulative
adjustment to accumulated deficit. Upon adoption, the Company elected the package of transition practical expedients, which allowed
the Company to carry forward prior conclusions related to whether any expired or existing contracts are or contain leases, the
lease classification for any expired or existing leases and initial direct costs for existing leases. The Company also elected
the practical expedient to not reassess certain land easements and made an accounting policy election to not recognize leases with
an initial term of 12 months or less within its consolidated balance sheet and to recognize those lease payments on a straight-line
basis in its consolidated statements of operations over the lease term.
Upon adoption of the new leasing standards on January 1, 2019,
the Company recognized a right-of-use asset of approximately $0.2 million and a corresponding operating lease liability of approximately
$0.2 million, which are included in the Company’s consolidated balance sheet. The adoption of the new leasing standards did
not have an impact on the Company’s consolidated statements of operations.
The Company determines if an arrangement is a lease at contract
inception. Operating lease assets represent the Company’s right to use an underlying asset for the lease term and operating
lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease assets and liabilities
are recognized at the commencement date of the lease based upon the present value of lease payments over the lease term. When determining
the lease term, the Company includes options to extend or terminate the lease when it is reasonably certain that the Company will
exercise that option. The Company uses the implicit rate when readily determinable and uses its incremental borrowing rate when
the implicit rate is not readily determinable based upon the information available at the commencement date in determining the
present value of the lease payments. Since the Company does not have similar term secured borrowing arrangements as its lease arrangements
and, therefore, its incremental borrowing rate is not readily determinable, the Company used an incremental borrowing rate based
on the lowest grade of debt available in the marketplace for the same term as the associated lease.
The lease payments used to determine the Company’s operating
lease assets may include lease incentives, stated rent increases and escalation clauses linked to rates of inflation when determinable
and are recognized in the Company’s right-of-use assets in the Company’s consolidated balance sheets.
The Company’s operating leases are reflected in right-of-use
assets, current portion of operating lease liability and operating lease liability, net of current portion, in the Company’s
consolidated balance sheets. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.
For additional information on the adoption of the new leasing
standards, see Note 7, Leases, to the consolidated financial statements.
Recently Issued 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 ASU is effective for all entities for fiscal years, and
interim periods within those fiscal years, beginning after December 31, 2019. The Company is currently evaluating the impact that
the adoption of this standard may have on the Company’s consolidated financial statements.
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 January 3, 2018, the Company issued 50,000 shares of 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 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 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. Connecticut Children’s Chief Executive Officer, James Shmerling,
is a member of the Company’s Board of Directors as well as the Board of Directors of Connecticut Children’s.
On February 20, 2018, the Company issued 302,115 shares of common
stock to an investor at a purchase price of $3.31 per share for aggregate gross and net proceeds of approximately $1.0 million
in an unregistered private placement transaction.
On May 23, 2018, the Company issued 1,000,000 shares of common
stock to two new investors at a purchase price of $3.60 per share for aggregate gross and net proceeds of approximately $3.6 million
and $3.4 million, respectively, in an unregistered private placement. Following the issuance of these shares, the holders of Series
D preferred stock exercised their right to convert all of their 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.
On January 31, 2019, the Company issued 500,000 shares of its
common stock to an investor in connection with the exercise of 500,000 warrants, which were previously issued on December 27, 2017,
at $2.00 per share in exchange for total gross proceeds in the amount of $1.0 million.
On April 24, 2019 and May 3, 2019, the Company issued a total
of 500,000 shares of its common stock to an investor in connection with the exercise of 500,000 warrants, which were previously
issued on December 27, 2017, at $2.00 per share in exchange for total gross proceeds in the amount of $1.0 million.
On June 12, 2019, the Company issued a total of 345,174 shares
of its common stock and warrants to purchase 345,174 shares of common stock to a group of investors at an exercise price of $3.70
per share, in exchange for aggregate gross proceeds of approximately $1.3 million. The Company allocated approximately $0.7 million
to common stock and $0.6 million to the warrants to purchase common stock using the relative fair value method approach. 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
inputs:
|
|
June 12,
2019
|
|
Risk-free interest rate
|
|
|
1.86
|
%
|
Expected volatility
|
|
|
117.1
|
%
|
Expected term (in years)
|
|
|
5.0
|
|
Expected dividend yield
|
|
|
-
|
|
Exercise price
|
|
$
|
3.70
|
|
Market value of common stock
|
|
$
|
2.55
|
|
On August 30, 2019 and September 4, 2019, the Company issued
a total of 595,000 shares of its common stock to a group of investors in connection with the assignment and exercise of 595,000
warrants, which were previously issued on December 27, 2017, at $2.00 per share in exchange for total gross proceeds in the amount
of approximately $1.2 million.
On September 30, 2019, the Company issued a total of 30,000
shares of its common stock to a group of investors in connection with the assignment and exercise of 30,000 warrants, which were
previously issued on December 27, 2017, at $2.00 per share in exchange for total gross proceeds in the amount of $60,000.
During the nine months ended September 30, 2019, the Company
issued a total of 3,506 shares of its common stock to employees due to the vesting of restricted stock units.
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 September 30, 2019 and December 31, 2018. 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 September 30, 2019:
|
|
Fair Value Measurement as of September 30, 2019
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
Total
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
103
|
|
|
$
|
103
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
103
|
|
|
$
|
103
|
|
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, 2018:
|
|
Fair Value Measurement as of December 31, 2018
|
|
|
|
(In thousands)
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
|
|
Assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted cash
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
Total
|
|
$
|
50
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
50
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98
|
|
|
$
|
98
|
|
Total
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
98
|
|
|
$
|
98
|
|
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, 2019:
|
|
Warrant Liability
|
|
|
|
(In thousands)
|
|
Balance at December 31, 2018
|
|
$
|
98
|
|
Change in fair value upon re-measurement
|
|
|
5
|
|
Balance at September 30, 2019
|
|
$
|
103
|
|
There were no transfers between Level 1, Level 2 and
Level 3 in any of the periods reported.
The Company has re-measured the warrant liability to estimated
fair value at inception, prior to modification and at each reporting date using the Black-Scholes option pricing model with the
following weighted average assumptions:
|
|
September 30,
2019
|
|
|
December 31,
2018
|
|
Risk-free interest rate
|
|
|
1.60
|
%
|
|
|
2.46
|
%
|
Expected volatility
|
|
|
118.3
|
%
|
|
|
121.9
|
%
|
Expected term (in years)
|
|
|
2.4
|
|
|
|
3.1
|
|
Expected dividend yield
|
|
|
-
|
|
|
|
-
|
|
Exercise price
|
|
$
|
8.00
|
|
|
$
|
8.00
|
|
Market value of common stock
|
|
$
|
2.60
|
|
|
$
|
2.06
|
|
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 (as amended,
the Plan) for the benefit of certain of its officers, employees, non-employee directors, and other key persons (including consultants
and advisory board members). All options and awards granted under the Plan consist of the Company’s shares of common stock.
In May 2018, the Company’s shareholders approved the increase of the number of shares of the Company’s common stock
available for issuance pursuant to the Plan by 1,600,000 shares, which increased the total shares authorized to be issued under
the Plan to 2,098,000.
The Company also issued equity awards under the Plan at the
time of the HBIO Distribution to all holders of Harvard Bioscience equity awards as part of an adjustment (the Adjustment Awards)
to prevent a loss of value due to the HBIO 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 September 30, 2019 there was no unrecognized compensation costs
since all the Adjustment Awards were fully vested.
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, 2019 was as follows:
|
|
Stock Options
|
|
|
Restricted Stock Units
|
|
|
|
Amount
|
|
|
Weighted –
average
exercise price
|
|
|
Amount
|
|
|
Weighted –
average
grant date
fair value
|
|
Outstanding at December 31, 2018
|
|
|
1,577,983
|
|
|
$
|
6.58
|
|
|
|
7,735
|
|
|
$
|
7.68
|
|
Granted
|
|
|
373,058
|
|
|
|
2.59
|
|
|
|
-
|
|
|
|
-
|
|
Vested (RSUs)
|
|
|
-
|
|
|
|
-
|
|
|
|
(3,506
|
)
|
|
|
7.68
|
|
Canceled
|
|
|
(160,752
|
)
|
|
|
3.68
|
|
|
|
(929
|
)
|
|
|
7.68
|
|
Outstanding at September 30, 2019
|
|
|
1,790,289
|
|
|
$
|
6.00
|
|
|
|
3,300
|
|
|
$
|
7.68
|
|
The Company uses the Black-Scholes option pricing model to value
its stock options. The weighted average assumptions for valuing options granted during the nine months ended September 30, 2019
were as follows:
Expected volatility
|
|
|
115.4
|
%
|
Expected dividends
|
|
|
n/a
|
|
Expected term (in years)
|
|
|
5.3
|
|
Risk-free rate
|
|
|
1.74
|
%
|
The Company’s outstanding stock options include 475,650
performance-based awards that have vesting provisions subject to the achievement of certain business milestones. As of September
30, 2019, the Company deemed the achievement of one of the performance-based milestones totaling 95,131 shares probable for accounting
purposes and recognized $253,000 of the total $269,000 expense associated with this milestone during the three months ended September
30, 2019. Total unrecognized compensation expense for the remaining 380,519 performance-based awards is approximately $1.1 million.
No expense has been recognized for these awards as of September 30, 2019 given that the milestone achievements for these awards
have not yet been deemed probable for accounting purposes.
In June 2019, the Company modified certain options to purchase
common stock for an employee, resulting in recording $92,000 of share-based compensation.
The Company recorded share-based compensation expense in the
following expense categories of its consolidated statements of operations:
|
|
Three Months Ended September 30,
|
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
|
(In thousands)
|
|
|
(In thousands)
|
|
Research and development
|
|
$
|
245
|
|
|
$
|
62
|
|
|
$
|
398
|
|
|
$
|
140
|
|
General and administrative
|
|
|
284
|
|
|
|
132
|
|
|
|
955
|
|
|
|
321
|
|
Total share-based compensation
|
|
$
|
529
|
|
|
$
|
194
|
|
|
$
|
1,353
|
|
|
$
|
461
|
|
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 from 1 year to 4 years. The laboratory and office arrangement is under a sublease with Harvard
Bioscience that currently extends through May 31, 2020 and automatically renews annually for a one-year period unless the Company
or Harvard Bioscience provides a notice of termination within one hundred and eighty days prior to May 31 of each year. The equipment
lease, which has a term through April 2023, includes the purchase or return of the equipment, or continuation of the lease for
6-month intervals at the end of the lease, at the Company’s sole discretion.
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
|
|
As of
September 30,
2019
|
|
Assets:
|
|
|
|
|
|
|
Operating lease assets
|
|
Right-of-use asset
|
|
$
|
95
|
|
Liabilities:
|
|
|
|
|
|
|
Current operating lease liabilities
|
|
Current portion of operating lease liabilities
|
|
$
|
72
|
|
Non-current operating lease liabilities
|
|
Operating lease liabilities, net of current portion
|
|
|
23
|
|
Total operating lease liabilities
|
|
|
|
$
|
95
|
|
The following table summarizes the effect of lease costs in the Company’s condensed consolidated statements of operations:
(In thousands)
|
|
Statement of Operations Classification
|
|
For the Three
Months
Ended
September 30,
2019
|
|
|
For the Nine
Months
Ended
September 30,
2019
|
|
Operating lease expense
|
|
Research and development
|
|
$
|
18
|
|
|
$
|
54
|
|
|
|
Selling, general and administrative
|
|
$
|
10
|
|
|
|
30
|
|
|
|
|
|
$
|
28
|
|
|
$
|
84
|
|
The minimum lease payments for the next five years and thereafter
are expected to be as follows:
(In thousands)
|
|
As of
September 30,
2019
|
|
2019 (remaining three months)
|
|
$
|
28
|
|
2020
|
|
|
53
|
|
2021
|
|
|
11
|
|
2022
|
|
|
11
|
|
2023
|
|
|
3
|
|
Thereafter
|
|
|
0
|
|
Total lease payments
|
|
$
|
106
|
|
Less: imputed interest
|
|
|
11
|
|
Present value of operating lease liabilities
|
|
$
|
95
|
|
The weighted average remaining lease term and weighted average
discount rate of the Company’s operating leases are as follows:
|
|
As of
September 30,
2019
|
|
Weighted average remaining lease term (in years)
|
|
|
1.7
|
|
Weighted average discount rate
|
|
|
13.55
|
%
|
8.
|
Related Party Transactions
|
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 repaid in January 2018.
The following potential common shares were excluded from the
calculation of diluted net loss per share attributable to common stockholders for the nine months ended September 30, 2019 and
2018 because including them would have had an anti-dilutive effect:
|
|
Nine Months Ended September 30,
|
|
|
|
2019
|
|
|
2018
|
|
Unvested restricted common stock units
|
|
|
3,300
|
|
|
|
7,735
|
|
Warrants to purchase common stock
|
|
|
2,898,821
|
|
|
|
4,178,647
|
|
Options to purchase common stock
|
|
|
1,790,289
|
|
|
|
1,456,069
|
|
Total
|
|
|
4,692,410
|
|
|
|
5,642,451
|
|
The Company did not provide for any income taxes in its statement
of operations for the three and nine months ended September 30, 2019 and 2018. The Company has provided a valuation allowance for
the full amount of its net deferred tax assets because, at September 30, 2019 and December 31, 2018, it was more likely than
not that any future benefit from deductible temporary differences and net operating loss and tax credit carryforwards would not
be realized.
The Company has not recorded any amounts for unrecognized tax
benefits as of September 30, 2019 or December 31, 2018. As of September 30, 2019, and December 31, 2018, 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 September 30, 2019, 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.
On November 11, 2019, the Company issued a total of
75,000 shares of its common stock to Connecticut Children’s in connection with the exercise of a total of 75,000
warrants, which were previously issued on January 3, 2018, at $2.00 per share for total gross proceeds in the amount of
$150,000. See Note 3.
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 already disclosed.