Harvard Apparatus Regenerative Technology, Inc. 10-K

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities. Market Information Our common stock was initially quoted on the OTCQB Venture Marketplace at the opening of business on October 6, 2017 under the symbol “BSTG.” Prior to that time, our common stock traded on the NASDAQ Capital Market also under the symbol “BSTG.” From our initial public offering on October 21, 2013 until April 1, 2016, in connection with our name change, our common stock traded on the NASDAQ Capital Market under the symbol “HART.” There were 155 holders of record of our common stock as of April 8, 2021, which does not include persons or entities that hold their stock in nominee or “street” name through various brokerage firms. We believe that the number of beneficial owners of our common stock at that date was substantially greater. Dividend Policy We have never declared or paid cash dividends on our common stock in the past and do not intend to pay cash dividends on our common stock in the foreseeable future. Any future determination to pay cash dividends will be at the discretion of our Board of Directors and will depend on our financial condition, results of operations, capital requirements and other factors our Board of Directors deems relevant. Recent Sales of Unregistered Securities During the fiscal year ended December 31, 2020, in addition to unregistered sales we previously disclosed in our Quarterly Reports on Form 10-Q or in Current Reports on Form 8-K in relation to the applicable periods, we also completed the following transactions 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. Item 6. Selected Financial Data. Not Applicable. 37 Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. Forward-Looking Statements The following section of this Annual Report on Form 10-K entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” contains statements that are not statements of historical fact and are forward-looking statements within the meaning of federal securities laws. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. In some cases, you can identify forward-looking statements by terms such as “believe,” “may,” “estimate,” “continue,” “anticipate,” “intend,” “should,” “could,” “would,” “target,” “seek,” “aim,” “believe,” “predicts,” “think,” “objectives,” “optimistic,” “new,” “goal,” “strategy,” “potential,” “is likely,” “will,” “expect,” “plan” “project,” “permit” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events, are based on assumptions and are subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. We discuss many of these risks in greater detail in Item 1A.“Risk Factors” of this Annual Report on Form 10-K. You should carefully review all of these factors, as well as the comprehensive discussion of forward-looking statements on page 1 of this Annual Report on Form 10-K. Overview We are a biotechnology company developing bioengineered organ implants based on our novel technology. Our technology is comprised of a proprietary biocompatible scaffold, which is the foundation of our Cellframe TM technology, that is seeded with the recipient’s own mesenchymal stromal cells to form our Cellspan TM implant, combining the clinically proven principles of tissue engineering, cell biology and materials science. This technology is being developed to treat life-threatening conditions of the esophagus, trachea and bronchus with the objective of dramatically improving the treatment paradigm for those patients. We believe our technology will provide surgeons with new ways to address damage to the esophagus, bronchus, and trachea due to congenital abnormalities, diseases, infections and traumas. Products being developed based on our technology for those indications are called Cellspan TM products. Our Cellspan Esophageal Implant (CEI) product candidates have been our lead development product candidates. At this time our resources have been primarily focused on pursuing a development program that addresses conditions of the esophagus: esophageal atresia in pediatric patients and esophageal disease in adult patients. Our Cellspan esophageal product candidate is intended to provide a surgical solution to stimulate regeneration of a segment of the esophagus missing due to a congenital abnormality or following surgical removal, to establish or reestablish the organ’s continuity and integrity. We are working to develop a CEI product candidate to address newborns’ esophageal atresia to provide a simpler, more effective and potentially organ-sparing solution. A portion of all patients diagnosed with esophageal diseases, infections traumas or congenital abnormalities are treated via a surgical procedure known as an esophagectomy. The current standard of care for an esophagectomy requires a complex surgical procedure that involves moving the patient’s stomach or a portion of their colon into the chest to replace the portion of esophagus resected by the removal of the tumor. These current procedures have high rates of complications, can lead to a severely diminished quality of life and require costly ongoing care. Our CEIs aim to simplify the procedure, reduce complications, result in a better quality of life and reduce the overall cost of these patients to the healthcare system. In November 2016, we were granted Orphan Drug Designation for our CEI by the U.S. Food and Drug Administration (FDA) to restore the structure and function of the esophagus subsequent to esophageal damage due to cancer, injury or congenital abnormalities. Orphan drug status provides market exclusivity in the U.S. for seven years from the date of the product’s approval for marketing. This exclusivity is in addition to any exclusivity we may obtain due to our patents. Additionally, orphan designation provides certain incentives, including tax credits and a waiver of the Biologics License Application (BLA) fee. We also intend to apply for Orphan Drug Designation for our CEI in Europe in the future. Orphan drug status in Europe provides market exclusivity there for ten years from the date of the product’s approval for marketing. 38 In October 2019, we filed an IND application with the FDA to treat patients with esophageal disease, absent of cancer, in adults that would require a short segment esophageal implant following clinically indicated short segment resection of the thoracic esophagus with our CEI product candidate. In November 2019, we received notice from the FDA placing our IND on clinical hold and providing a preliminary list of clinical hold and non-clinical hold questions. In December 2019, we received the formal letter with clinical hold and non-clinical hold questions and submitted our response to the clinical hold questions on February 18, 2020. On March 19, 2020, the FDA notified us that the IND for our CEI product candidate has been removed from clinical hold and that we can proceed with our study. This FDA approval enables us to start our transition to a clinical-stage biotechnology company, and start clinical planning, engaging with a clinical research organization and site readiness in advance of starting the clinical trial for our CEI product candidate. On May 7, 2020, we submitted responses to certain non-clinical hold questions and finalized a majority of remaining non-clinical hold responses in the third quarter of 2020, and submitted the remaining responses in the fourth quarter of 2020, except for responses to our clinical trial details that we will submit once a clinical research organization is selected. The COVID-19 pandemic could adversely impact our business, including planned clinical trials, as discussed elsewhere in this document. We have also formed a subsidiary in Hong Kong, Harvard Apparatus Regenerative Technology Limited, as we continue to assess the market and regulatory approval pathway in China as to our implant products. We are not certain at this time as to which market, including U.S. or China for example, may provide the most viable initial pathway for regulatory approval to a commercial product. This will depend on a number of factors, including the approval and development processes, related costs, ability to raise capital and the terms and conditions thereof, as well as the ongoing impact of the COVID-19 pandemic, among other factors. Any development and capital raising efforts in China may include a joint venture in relation to our Hong Kong subsidiary, and would also involve a number of commercial variables, including rights and obligations pertaining to licensing, development and financing, among others. Our failure to receive or obtain such clearances or approvals on a timely basis or at all, whether that be in the U.S., China or otherwise, would have an adverse effect on our results of operations. We were incorporated and commenced operations on November 1, 2013 as a result of a spin-off from Harvard Bioscience, Inc. (Harvard Bioscience). On that date, we 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. Since our incorporation, we have devoted substantially all of our resources to developing our programs, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations with proceeds from the sales of common stock and preferred stock. In December 2017, we sold the inventory and rights to manufacture and sell research-only versions of our bioreactors to Harvard Bioscience. We did not recognize any revenues during the years ended December 31, 2020 and December 31, 2019. Our products are currently in development and have not yet received regulatory approval for sale anywhere in the world. We have incurred substantial operating losses since our inception, and as of December 31, 2020 had an accumulated deficit of approximately $69.0 million and will require additional financing to fund future operations. We expect that our operating cash on-hand as of December 31, 2020 of approximately $1.0 million, along with proceeds of approximately $0.2 million during the first quarter of 2021 from the receipt of Phase II of the SBIR grant will enable us to fund our operating expenses and capital expenditure requirements into June of 2021. We expect to continue to incur operating losses and negative cash flows from operations for 2021 and in future years. Therefore, as disclosed in Note 1 to our consolidated financial statements, these conditions raise substantial doubt about our ability to continue as a going concern. We will need to raise additional funds to fund our operations. In the event we do not raise additional capital from outside sources in the second quarter, we 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 our products that are currently under development. We are currently seeking and will continue to seek financings from other existing and/or new investors to raise necessary funds through a combination of public or private equity offerings. We may also pursue debt financings, other financing mechanisms, research grants, or strategic collaborations and licensing arrangements. We may not be able to obtain additional financing on favorable terms, if at all. Our operations will be adversely affected if it is unable to raise or obtain needed funding and may materially affect our ability to continue as a going concern. Our consolidated financial statements have been prepared assuming that we 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. 2020 Financing Activities During 2020 we completed the following financing activities: · During the year ended December 31, 2020, we issued a total of 151,027 and 125,000 shares, respectively, of our common stock at a purchase prices of $3.70 and $4.00 per share, respectively, and warrants to purchase 151,027 shares of common stock at an exercise price of $3.70 per share to a group of investors for aggregate gross and net proceeds of approximately $1.1 million. · During the year ended December 31, 2020, we issued 414,000 shares of our common stock to a group of investors in connection with the exercise of 414,000 previously issued warrants at $2.00 per share for aggregate gross and net proceeds of approximately $0.8 million. 39 · During the year ended December 31, 2020, we issued 516,877 shares of our common stock to a group of investors in connection with the exercise of 516,877 previously issued warrants at $3.70 per share for aggregate gross and net proceeds of approximately $1.9 million. · On May 4, 2020, we were granted a loan from the Bank of America in the aggregate amount of $0.4 million, pursuant to the Paycheck Protection Program (PPP), established as part of the CARES Act (See Note 3 in the Consolidated Financial Statements included in Part I “Financial Information”, Item 1 of this report for further discussion). · During the year ended December 31, 2020, we issued a total of 25,948 shares of our common stock to the former chief executive officer and an employee due to the vesting of restricted stock units and issuance of a common stock award. 2019 Financing Activities During 2019 we completed the following financing activities: · On June 12, 2019, we issued a total of 345,174 shares of our 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 and net proceeds of approximately $1.3 million. · On December 31, 2019, we issued a total of 143,230 shares of our common stock at a purchase price of $3.70 per share and warrants to purchase 143,230 shares of common stock at an exercise price of $3.70 per share to a group of investors for gross and net proceeds in the amount of $0.5 million. · During the year ended December 31, 2019, we issued 1,994,000 shares of our common stock to a group of investors in connection with the exercise of 1,994,000 previously issued warrants at $2.00 per share for aggregate gross and net proceeds in the amount of approximately $4.0 million. Small Business Innovation Research Grant On March 28, 2018, we were awarded a Fast-Track Small Business Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health and Human Development (NICHD) to support testing of pediatric Cellspan™ Esophageal Implants (CEIs). The award for Phase I provided for the reimbursement of approximately $0.2 million of qualified research and development costs which was received and recognized as grant income during 2018. On October 26, 2018, we were awarded the Phase II Fast-Track SBIR grant from the Eunice Kennedy NICHD grant aggregating $1.1 million to support development, testing, and translation to the clinic through September 2019 and represented years one and two of the Phase II portion of the award. On August 3, 2020, we were awarded a third year of the Phase II grant totaling $0.5 million for support of development, testing, and translation to the clinic covering qualified expenses incurred from October 1, 2019 through September 30, 2020. In September of 2020, we filed and were granted a one year, no-cost extension for the Phase II grant period extending through September 30, 2021. For the years ended December 31, 2020 and 2019, we recognized $0.4 million and $0.5 million of grant income, respectively, from Phase II of the SBIR grant. The aggregate SBIR grant to date provides a total award of $1.8 million, of which, approximately $1.3 million has been recognized through December 31, 2020. In March 2021, we received additional cash proceeds of $0.2 million from the Phase II grant. Management We disclosed in our Current Report on Form 8-K dated February 7, 2020 that James McGorry, our former Chief Executive Officer, resigned from his role effective February 7, 2020. We also disclosed in our Current Report on Form 8-K dated August 31, 2020 that Peter Chakoutis, our Vice President of Finance and Principal Accounting Officer, had taken a leave of absence from his role for personal reasons effective August 24, 2020. We disclosed in our Current Report on Form 8-K dated October 30, 2020 that Mr. Chakoutis would not be returning to the Company and we named Peter Pellegrino as Interim Vice President of Finance. We are currently in the process of evaluating our options to fill these positions. As of December 31, 2020, we had 7 employees, 6 of whom were full-time and one part-time. 40 Components of Operating Loss Research and Development Expense . Research and development expense consists of salaries and related expenses, including share-based compensation, for personnel and contracted consultants and various materials and other costs to develop our new products, primarily: synthetic scaffolds, including investigation and development of materials and investigation and optimization of cellularization, autoseeders, and 3D bioreactors, as well as studies of cells and cell behavior. Other research and development expenses include the costs of outside service providers and material costs for prototype and test units and outside laboratories and testing facilities performing cell growth and materials experiments, as well as the costs of all other preclinical research and testing including animal studies and expenses related to potential patents. We expense research and development costs as incurred. Selling, General and Administrative Expense . Selling, general and administrative expense consists primarily of salaries and other related expenses, including share-based compensation, for personnel in executive, accounting, information technology and human resources roles. Other costs include professional fees for legal and accounting services, insurance, investor relations and facility costs. Other Income (Expense) Grant Income. Grant income reflects income earned under the SBIR grant. Grant income is recognized based on timing of when qualified research and development costs are incurred. Changes in Fair Value of Warrant Liability. Changes in fair value of warrant liability represent the change in the fair value of common stock warrants classified as liability awards during the years ended December 31, 2020 and 2019. We use the Black-Scholes pricing model to value the related warrant liability. The costs associated with the issuance of the warrants have been recorded as an expense upon issuance. Critical Accounting Estimates Management’s discussion and analysis of our financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with Generally Accepted Accounting Principles in the United States (U.S. GAAP). The preparation of these consolidated financial statements requires us to make estimates and assumptions for the reported amounts of assets, liabilities, revenues, expenses and related disclosures. We believe the following policies to be critical to the judgments and estimates used in the preparation of our financial statements. 41 Share-based Compensation We account for our share-based compensation in accordance with the fair value recognition provisions of current authoritative guidance. Share-based awards, including stock options, are measured at fair value as of the grant date and recognized as expense over the requisite service period (generally the vesting period), which we have elected to amortize on a straight-line basis. Expense on share-based awards for which vesting is performance or milestone based is recognized on a straight-line basis from the date when we determine the achievement of the milestone is probable to the vesting/milestone achievement date. We estimate the fair value of options granted using the Black-Scholes option valuation model. Significant judgment is required in determining the proper assumptions used in these models. The assumptions used include the risk-free interest rate, expected term, expected volatility and expected dividend yield. We base our assumptions on historical data when available or, when not available, on a peer group of companies. However, these assumptions consist of estimates of future market conditions, which are inherently uncertain and subject to our judgment, and therefore any changes in assumptions could significantly impact the future grant date fair value of share-based awards. Total share-based compensation expense for the years ended December 31, 2020 and 2019 was $1.1 million and $1.7 million, respectively. Share-based compensation is further described in Note 15 to our consolidated financial statements. Warrant Liability Most of the warrants to purchase shares of our common stock have been classified on our consolidated balance sheets as equity. We classify warrants as a liability in our consolidated balance sheets if the warrant is a free-standing financial instrument that may require us to transfer cash consideration upon exercise and that cash transfer event would be out of our control. Such a “liability warrant” is initially recorded at fair value on the date of grant using the Black-Scholes model, net of issuance costs, and it is subsequently re-measured to fair value at each subsequent balance sheet date. Changes in fair value of the warrant are recognized as a component of other income (expense) in the consolidated statements of operations. We will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant. 42 The following table summarizes the results of our operations for the years ended December 31, 2020 and 2019 ($ in thousands): For the Year Ended Change 2020 vs. 2019 2020 2019 Change % Operating expenses Research and development $ 2,069 $ 4,852 $ (2,783 ) (57 )% Selling, general and administrative 3,256 4,018 (762 ) (19 )% Total operating expenses 5,325 8,870 (3,545 ) (40 )% Other income (expense) Grant income 447 473 (26 ) (5 )% Change in fair value of warrant liability 16 65 (49 ) (75 )% Other income (expense), net (3 ) - nm nm Net loss $ (4,865 ) $ (8,332 ) $ 3,467 (42 )% nm = not meaningful Results of Operations Year Ended December 31, 2020 Compared to Year Ended December 31, 2019 Research and Development Expense Research and development expense decreased approximately $2.8 million, or approximately 57%, to $2.1 million for the year ended December 31, 2020 as compared to $4.9 million for the year ended December 31, 2019. This was due primarily to $1.1 million of lower outsourced study costs and lab operating supplies, a $0.8 million decrease in regulatory consulting expenses, $0.8 million of lower employee and share-based compensation expenses, and a $0.2 million decrease in all other expenses. Selling, General and Administrative Expense Selling, general and administrative expense decreased approximately $0.7 million, or approximately 19%, to $3.3 million for the year ended December 31, 2020 compared to $4.0 million for the year ended December 31, 2019. This decrease was due primarily to $0.9 million of lower employee and share-based expenses due to the separations of our former chief executive officer and chief financial officer partially offset by $0.2 million increase to consulting fees to support public company requirements. Grant income For the year ended December 31, 2020 we recorded grant income of $0.4 million for qualified expenditures under the SBIR grant for the period October 1, 2019 to September 30, 2020. In September of 2020, we filed and were granted a one year, no-cost extension for the Phase II grant period extending through September 30, 2021. For the year ended December 31, 2019 we recorded grant income of $0.5 million for qualified expenditures under the SBIR grant. Change in Fair Value of Warrant Liability For the year ended December 31, 2020, the change in fair value of our warrant liability resulted in other income of $16,000 due primarily to a lower stock price of the underlying common shares during the year. This compared to other income of $65,000 for the year ended December 31, 2019 due primarily to a lower volatility of the underlying common shares and a decrease in the expected term. 43 Liquidity and Capital Resources Sources of Liquidity. We have incurred operating losses since inception, and as of December 31, 2020 we had an accumulated deficit of approximately $69.0 million. We are currently investing significant resources in the development and commercialization of our products for use by clinicians and researchers in the field of regenerative medicine. As a result, we expect to incur operating losses and negative operating cash flow for the foreseeable future. Operating Activities. Net cash used in operating activities of $4.0 million for the year ended December 31, 2020 was primarily a result of our net loss of $4.9 million, offset by $1.3 million of non-cash expenses related to share-based compensation and depreciation, and increased by $0.4 million of cash provided from working capital due to the timing of prepaid expenses and accounts payable. Net cash used in operating activities of $6.1 million for the year ended December 31, 2019 was primarily a result of our net loss of $8.3 million, partially offset by $1.8 million of non-cash expenses related to share-based compensation and depreciation, and $0.4 million of cash provided from working capital due to the timing of prepaid expenses and accounts payable. Investing Activities. Net cash used in investing activities for the years ended December 31, 2020 and 2019 totaled $7,000 and $129,000, respectively, and represented purchases of property, plant and equipment. Financing Activities. Net cash generated from financing activities of $4.2 million during the year ended December 31, 2020 consisted of $1.1 million of net proceeds received from private placement transactions that resulted in the issuance of 276,027 shares of our common stock and warrants to purchase 151,027 shares of common stock to a group of investors at exercise prices of $3.70 and $4.00 per share, respectively, $2.7 million received from the issuance of 930,877 shares of our common stock to a group of investors in connection with previously issued warrants, and $0.4 million received under the paycheck protection program loan. Net cash generated from financing activities of $5.8 million during the year ended December 31, 2019 consisted of $1.8 million of net proceeds received from private placement transactions and $4.0 million received from the exercise of warrants. We continue to pursue our esophageal program, including advancing to operate as a clinical stage company. Given our current limited cash resources, we intend to closely monitor our cash expenses as such cash resources are expected to only allow us to meet our operating needs into June of 2021. Recently Issued Accounting Pronouncements A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2 to our consolidated financial statements appearing at the end of this Annual Report on Form 10-K. Off-Balance Sheet Arrangements We did not have, during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined under applicable Securities and Exchange Commission rules. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not Applicable. Item 8. Financial Statements and Supplementary Data. The information required by this item is contained in the consolidated financial statements filed as part of this Annual Report on Form 10-K listed under Item 15 of Part IV below. 44 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.