Harvard Apparatus Regenerative Technology, Inc. 10-K

Item 9A. Controls and Procedures. This Report includes the certifications of our principal executive officer and principal financial officer required by Rule 13a-14 of the Securities Exchange Act of 1934, as amended (the Exchange Act). See Exhibits 31.1 and 31.2. This Item 9A includes information concerning the controls and control evaluations referred to in those certifications. (a) Evaluation of Disclosure Controls and Procedures Disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) are designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission’s rules and forms and that such information is accumulated and communicated to management, including our President, who is our acting principal executive officer, and our Vice President of Finance, who is our acting principal financial officer, to allow timely decisions regarding required disclosures. In connection with the preparation of this Annual Report on Form 10-K, our management, under the supervision and with the participation of our principal executive officer and principal financial officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. Our disclosure controls and procedures are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and our management necessarily was required to apply its judgment in evaluating and implementing our disclosure controls and procedures. Based upon the evaluation described above, our principal executive officer and principal financial officer have concluded that they believe that our disclosure controls and procedures were effective, as of the end of the period covered by this report, in providing reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, to allow timely decisions regarding required disclosures, and is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. (b) Management’s Annual Report on Internal Control Over Financial Reporting Our management, under the supervision of the principal executive officer and the principal financial officer, is responsible for establishing and maintaining an adequate system of internal control over financial reporting. Internal control over financial reporting (as defined in Rules 13a-15(f) and 15d(f) under the Exchange Act) is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with U.S. GAAP. A company’s internal control over financial reporting includes those policies and procedures that: (a) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets; (b) provide reasonable assurance that transactions are recorded as necessary to permit preparation of consolidated financial statements in accordance with U.S. GAAP; (c) provide reasonable assurance that receipts and expenditures are being made only in accordance with appropriate authorization of management and the Board of Directors; and (d) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the consolidated financial statements. Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In connection with the preparation of this report, our management conducted an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2020 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As a result of that evaluation, management has concluded that a material weakness in internal control over financial reporting existed as of December 31, 2020, being that w e did not design or maintain effective internal controls over the timely identification and recording of financial statement adjustments. Specifically, we did not identify, analyze, record, and disclose certain non-routine accounting matters, such as a lease extension and a grant contract, timely and accurately. As a smaller reporting company, we are exempt from the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002. As a result, RSM US LLP, our independent registered public accounting firm, has not audited or issued an attestation report with respect to the effectiveness of our internal control over financial reporting as of December 31, 2020. 45 (c) Changes in Internal Controls Over Financial Reporting Our management, with the participation of the principal executive officer and the principal financial officer, has evaluated whether any change in our internal control over financial reporting occurred during the fourth quarter ended December 31, 2020. Based on that evaluation, management concluded that there were no changes in our internal controls over financial reporting during the quarter ended December 31, 2020 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting. (d) Remediation Plan We are committed to remediating the material weaknesses in a timely fashion, including through the engagement of Point Providence Consulting and related appointment of Mr. Pellegrino as our Interim Vice President of Finance . As management continues to evaluate and work to improve its internal control over financial reporting, management may determine it is necessary to take additional measures to address the material weakness. Until the controls have been operating for a sufficient period of time and management has concluded, through testing, that these controls are operating effectively, the material weakness described above will continue to exist. Item 9B. Other Information. None. 46 PART III Item 10. Directors, Executive Officers and Corporate Governance. Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act, in connection with our 2021 Annual Meeting of Stockholders. Information concerning executive officers of our company is included in Part I of this Annual Report on Form 10-K as Item 1. Business - Information about our Executive Officers and incorporated herein by reference. Item 11. Executive Compensation. Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders. Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters. Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders. Item 13. Certain Relationships and Related Transactions, and Director Independence. Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders. Item 14. Principal Accounting Fees and Services. Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2021 Annual Meeting of Stockholders. 47 PART IV Item 15. Exhibits, Financial Statement Schedules. (a) Documents Filed. The following documents are filed as part of this Annual Report on Form 10-K: (1) Financial Statements. The consolidated financial statements of Biostage, Inc. and its subsidiaries filed under this Item 15: Page Index to Consolidated Financial Statements F-1 Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-4 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 F-5 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 (2) Financial Statement Schedules: None. Financial statement schedules have been omitted since the required information is included in our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K. (3) Exhibits. The exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report on Form 10-K. (b) Exhibits: The exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report on Form 10-K. (c) Separate Financial Statements and Schedules: None. Financial statement schedules have been omitted since the required information is included in our consolidated financial statements contained elsewhere in this Annual Report on Form 10-K. 48 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS BIOSTAGE, INC. Page Report of Independent Registered Public Accounting Firm F-2 Consolidated Balance Sheets as of December 31, 2020 and 2019 F-4 Consolidated Statements of Operations for the years ended December 31, 2020 and 2019 F-5 Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2020 and 2019 F-6 Consolidated Statements of Cash Flows for the years ended December 31, 2020 and 2019 F-7 Notes to Consolidated Financial Statements F-8 F- 1 Report of Independent Registered Public Accounting Firm To the Shareholders and the Board of Directors of Biostage, Inc. Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Biostage, Inc. and its subsidiaries (the Company) as of December 31, 2020 and 2019, the related consolidated statements of operations, stockholders’ equity and cash flows for the years then ended, and the related notes to the consolidated financial statements (collectively, the financial statements). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Emphasis of Matter Regarding Going Concern The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit, uses cash flows in operations, and will require additional financing to continue to fund operations. This raises substantial doubt about the Company's ability to continue as a going concern. Management's plans in regard to these matters also are described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. Critical Audit Matters The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate. Share-based Compensation – Performance-Based Awards As described in Note 15 to the consolidated financial statements, the Company has 243,532 unvested performance-based options outstanding for which there is unrecognized compensation expense of $0.8 million at December 31, 2020. No expense has been recognized for these unvested awards as of December 31, 2020 given that the milestone achievements for these awards have not yet been deemed probable for accounting purposes. As described in Note 2 to the consolidated financial statements, the Company measures all stock options and restricted stock awards granted to employees, directors and non-employees based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of estimated forfeitures, over the requisite service period. Expense on share-based awards for which vesting is performance or milestone based is recognized on a straight-line basis from the date when it is determined that the achievement of the milestone is probable to the vesting/milestone achievement date. F- 2 We identified the Company’s expense recognition for share-based awards that contain performance-based vesting provisions as a critical audit matter. The principal considerations for our determination that the expense recognition for share-based awards that contain performance-based vesting provision awards is a critical audit matter are the assumptions and risk of bias related to the conclusion of the probability of achievement of the performance conditions impacting vesting of the awards, or more specifically the achievement of the business milestones, as defined in the grant agreements. Auditing management’s assumptions regarding the probability of achievement of the business milestones defined in the grant agreements was complex and required a high degree of auditor judgment and increased audit effort. Our audit procedures related to the expense recognition of share-based awards that contain performance-based vesting provisions included the following, among others: · We obtained and read the grant agreements for all outstanding share-based awards with performance-based vesting provisions, · We recalculated the total outstanding share-based awards with performance-based vesting provisions at year-end based upon cumulative grants, net of cumulative forfeitures, and · We discussed with management their conclusion and we evaluated their conclusion on the probability of achievement of the business milestone within the performance-based awards by assessing the Company’s liquidity requirements needed to fund achievement of milestones outlined in the grant agreements and review of the Company’s public press releases through issuance date. /s/ RSM US LLP We have served as the Company's auditor since 2018. Boston, Massachusetts April 13, 2021 F- 3 BIOSTAGE, INC. CONSOLIDATED BALANCE SHEETS ( In thousands, except par value and share data ) December 31, December 31, 2020 2019 ASSETS Current assets: Cash $ 1,026 $ 913 Restricted cash 50 50 Grant receivable 77 - Prepaid expenses and other current assets 524 444 Total current assets 1,677 1,407 Property, plant and equipment, net 217 394 Right-of-use assets 182 191 Total assets $ 2,076 $ 1,992 LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 31 $ 241 Accrued and other current liabilities 317 438 Current portion of notes payable 284 - Warrant liability 17 33 Current portion of operating lease liability 107 102 Total current liabilities 756 814 Notes payable, net of current portion 120 - Operating lease liability, net of current portion 75 89 Total liabilities $ 951 $ 903 Commitments and contingencies (Note 9) Stockholders' equity: Preferred stock, $0.01 par value; 2,000,000 shares authorized as of December 31, 2020 and 2019,0 issued and outstanding - - Common stock, par value $0.01 per share, 60,000,000 shares authorized as of December 31, 2020 and 2019; 9,388,407 and 8,155,555 issued and outstanding at December 31, 2020 and 2019, respectively 94 82 Additional paid-in capital 69,991 65,102 Accumulated deficit (68,960 ) (64,095 ) Total stockholders' equity 1,125 1,089 Total liabilities and stockholders' equity $ 2,076 $ 1,992 See accompanying notes to consolidated financial statements. F- 4 BIOSTAGE, INC. CONSOLIDATED STATEMENTS OF OPERATIONS (In thousands, except per share data) Year ended December 31, 2020 2019 Revenues $ - $ - Operating expenses: Research and development 2,069 4,852 Selling, general and administrative 3,256 4,018 Total operating expenses 5,325 8,870 Operating loss (5,325 ) (8,870 ) Other income (expense), net: Grant income 447 473 Change in fair value of warrant liability 16 65 Other expense (3 ) - Total other income (expense), net 460 538 Net loss $ (4,865 ) $ (8,332 ) Basic and diluted net loss per share $ (0.55 ) $ (1.21 ) Weighted average common shares, basic and diluted 8,794 6,898 See accompanying notes to consolidated financial statements. F- 5 BIOSTAGE, INC. CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (In thousands) Number of Common Shares Outstanding Common Stock Additional Paid-in Capital Accumulated Deficit Total Stockholders' Equity Balance at December 31, 2018 5,670 $ 57 $ 57,677 $ (55,763 ) $ 1,971 Net loss - - - (8,332 ) (8,332 ) Share-based compensation - - 1,654 - 1,654 Issuance of common stock and warrants to purchase common stock 492 5 1,802 - 1,807 Issuance of common stock from exercise of warrants 1,994 20 3,969 - 3,989 Balance at December 31, 2019 8,156 $ 82 $ 65,102 $ (64,095 ) $ 1,089 Net loss - - - (4,865 ) (4,865 ) Share-based compensation 38 - 1,144 - 1,144 Common stock withheld for taxes (12 ) (42 ) (42 ) Issuance of common stock and warrants to purchase common stock 276 2 1,056 - 1,058 Issuance of common stock from exercise of warrants 930 10 2,731 - 2,741 Balance at December 31, 2020 9,388 $ 94 $ 69,991 $ (68,960 ) $ 1,125 See accompanying notes to unaudited consolidated financial statements. F- 6 BIOSTAGE, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands) Year ended December 31, 2020 2019 OPERATING ACTIVITIES Net loss $ (4,865 ) $ (8,332 ) Adjustments to reconcile net loss to net cash used in operating activities: Share-based compensation expense 1,144 1,654 Depreciation 184 214 Change in fair value of warrant liability (16 ) (65 ) Changes in operating assets and liabilities: Grant receivable (77 ) 176 Prepaid expenses and other current assets (80 ) 179 Accounts payable (210 ) 81 Accrued and other current liabilities (121 ) 34 Net cash used in operating activities (4,041 ) (6,059 ) INVESTING ACTIVITIES Purchases of property, plant and equipment (7 ) (129 ) Net cash used in investing activities (7 ) (129 ) FINANCING ACTIVITIES Proceeds from issuance of common stock and warrants 1,058 1,807 Proceeds from exercise of warrants 2,741 3,989 Proceeds from notes payable 404 - Acquisition of common stock for tax withholding obligations (42 ) - Net cash provided by financing activities 4,161 5,796 Net increase (decrease) in cash and restricted cash 113 (392 ) Cash and restricted cash at the beginning of the year 963 1,355 Cash and restricted cash at the end of the year $ 1,076 $ 963 Supplemental disclosure of non-cash investing and financing activities: Issuance of vested common stock $ 42 $ - Supplemental disclosure of non-cash operating activities: Increase of right-of-use asset and liability due to lease extension $ 94 $ 90 See accompanying notes to consolidated financial statements. F- 7 BIOSTAGE, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Years Ended December 31, 2020 and 2019 1. Organization Overview Biostage, Inc. (Biostage or the Company) is a biotechnology company developing bioengineered organ implants based on the Company’s novel Cellframe ™ and Cellspan ™ technology. The Company’s technology is comprised of a biocompatible scaffold that is seeded with the recipient’s own 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 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. On October 31, 2013, Harvard Bioscience, Inc. (Harvard Bioscience) contributed its regenerative medicine business assets, plus $15 million of cash, into Biostage (the Separation). On November 1, 2013, the spin-off of the Company from Harvard Bioscience was completed. On that date, the Company became an independent company that operates the regenerative medicine business previously owned by Harvard Bioscience. The spin-off was completed through the distribution to Harvard Bioscience stockholders of all the shares of common stock of Biostage (the Distribution). Basis of Presentation The consolidated financial statements reflect the Company’s financial position, results of operations and cash flows in conformity with generally accepted accounting principles in the United States (U.S. GAAP). Going Concern The Company has incurred substantial operating losses since its 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. The Company expects that its operating cash on-hand as of December 31, 2020 of approximately $1.0 million, along with cash proceeds of approximately $0.2 million received during the first quarter of 2021 from Phase II of the SBIR grant will enable it to fund its operating expenses and capital expenditure requirements into June of 2021. Therefore, these conditions raise substantial doubt about the Company’s ability to continue as a going concern. The Company will need to raise additional funds to fund its operations. In the event the Company does not raise additional capital from outside sources in the second quarter, 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 is currently seeking and will continue to seek financings from other existing and/or new investors to raise necessary funds through a combination of public or private equity offerings. The Company may also pursue debt financings, other financing mechanisms, research grants, or strategic collaborations and licensing arrangements. The Company may not be able to obtain additional financing on favorable terms, if at all. The Company’s operations will be adversely affected if it is unable to raise or obtain needed funding and 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. F- 8 2. Summary of Significant Accounting Policies Principles of Consolidation The consolidated financial statements include the accounts of Biostage, and three wholly-owned subsidiaries, Harvard Apparatus Regenerative Technology Limited (Hong Kong), Harvard Apparatus Regenerative Technology GmbH (Germany) and Biostage Limited (UK). The three wholly-owned subsidiaries do not have any net assets as of December 31, 2020. The functional currency for these subsidiaries is the U.S dollar. All intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The process of preparing consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, share-based compensation, valuation of warrant liability, accrued expenses and the valuation allowance for deferred income taxes. Actual results could differ from those estimates. Segment The Company has one business segment and does not have significant costs or assets outside the U.S. Restricted Cash Restricted cash consists of $50,000 held as collateral for the Company’s credit card program as of December 31, 2020 and December 31, 2019. Property, Plant and Equipment Property, plant and equipment are carried at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows: Leasehold improvements Shorter of expected useful life or lease term Furniture, machinery and equipment, computer equipment and software 3-7 years Maintenance and repairs are charged to expense as incurred, while any additions or improvements are capitalized. Impairment of Long-Lived Assets Assessments of long-lived assets and the remaining useful lives of such long-lived assets are reviewed for impairment whenever a triggering event occurs or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. An asset, or group of assets, are considered to be impaired when the undiscounted estimated net cash flows expected to be generated by the asset, or group of assets, are less than its carrying amount. The impairment recognized is the amount by which the carrying amount exceeds the fair market value of the impaired asset, or group of assets, based on the present value of the expected future cash flows associated with the use of the asset. Through December 31, 2020, no such impairment charge has been recorded. Research and Development Research and development costs are expensed as incurred. Share-based Compensation The Company measures all stock options and restricted stock awards granted to employees, directors and non-employees based on the fair value on the date of the grant and recognizes compensation expense of those awards, net of forfeitures, over the requisite service period, which is generally the vesting period of the respective award. Generally, the Company issues stock options and restricted stock awards with only service-based vesting conditions on a straight-line basis over the requisite service period for the entire award (that is, over the requisite service period of the last separately vesting portion of the award). Expense on share-based awards for which vesting is performance or milestone based is recognized on a straight-line basis from the date when it is determined that the achievement of the milestone is probable to the vesting/milestone achievement date. F- 9 The Company elected to use the Black-Scholes option-pricing model for valuation of stock-based payment awards. The determination of fair value of stock-based payment awards on the date of grant using the Black-Scholes option-pricing model is affected by its stock price as well as assumptions regarding a number of subjective variables. These variables include, but are not limited to, its expected stock price volatility over the term of the awards and actual and projected employee stock option exercise behaviors. When performance-based grants are issued, the Company recognizes no expense until achievement of the performance requirement is deemed probable. Share-based compensation expense is based on awards ultimately expected to vest and has been reduced for annualized estimated forfeiture where the minimum amount of expense recorded is at least equal to the percent of an award vested. Forfeitures are estimated based on historical experience and weighting of various employee classes under the respective plan at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. The fair value of Restricted Stock Units (RSU) are based on the number of shares granted and market price of the stock on the date of grant and are recorded as compensation expense ratably over the applicable service period, which is generally four years. Unvested restricted stock units and vested and unvested stock options are forfeited in the event of termination of employment. Income Taxes Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to be applied to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Deferred tax assets and liabilities are recorded net as long-term on the consolidated balance sheets. A valuation allowance is recorded when it is more likely than not that some or all of the deferred tax assets will not be realized. Accordingly, the Company provides a valuation allowance, if necessary, to reduce deferred tax assets to amounts that are expected to be realizable. Tax positions taken or expected to be taken in the course of preparing the Company’s tax returns are required to be evaluated to determine whether the tax positions are “more-likely-than-not” of being sustained by the applicable tax authority. Tax positions not deemed to meet a “more-likely-than-not” threshold would be recorded as a tax expense in the current year. When necessary, the Company recognizes interest and penalties related to uncertain tax positions in income tax expense. 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. F- 10 Warrant Liability The Company classifies warrants to purchase shares of its common stock as a liability on its consolidated balance sheets when the warrant is a free-standing financial instrument that may require the Company to transfer cash consideration upon exercise and that cash transfer event would be out of the Company’s control. Such a “liability warrant” is initially recorded at fair value on date of grant using the Black-Scholes model and 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), net in the consolidated statements of operations. The Company will continue to adjust the liability for changes in fair value until the earlier of the exercise or expiration of the warrant. For warrants that do not meet the criteria of a liability warrant and are classified on the Company’s consolidated balance sheets as equity instruments, the Company uses the Black-Scholes model to measure the value of the warrants at issuance and then applies the relative fair-value of the equity transaction between common stock, preferred stock and warrants. Common stock, and equity-classified warrants each are considered permanent equity. Concentration of Credit Risk Financial investments that potentially subject the Company to credit risk consists of cash. Deposits at banks may exceed the insurance provided on such deposits. Generally, these deposits may be redeemed upon demand and, therefore, bear minimal risk. Grant Income 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. On March 28, 2018, the Company was awarded a Fast-Track Small Business Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health and Human Development (NICHD) 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, the Company was 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, the Company was 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, the Company filed and was 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, the Company 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, the Company received additional cash proceeds of $0.2 million from the Phase II of the SBIR grant. Recently Adopted Accounting Pronouncements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement . This standard modifies certain disclosure requirements on fair value measurements. This standard was effective for the Company on January 1, 2020. The adoption of this standard did not have a material impact on the Company’s disclosures. F- 11 Recently Issued Accounting Pronouncements Not Yet Adopted In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-12) . The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. It also limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value and also requires the reversal of previously recognized credit losses if fair value increases. The Company expects to delay adoption until January 1, 2023 and is evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements. In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging —Contracts in Entity’s Own Equity (Subtopic 815-40) . This standard amends the guidance on convertible instruments and the derivatives scope exception for contracts in an entity’s own equity and improves and amends the related earnings per share (“EPS”) guidance for both Subtopics. The ASU will be effective for annual reporting periods after December 15, 2023 and interim periods within those annual periods and early adoption is permitted in annual reporting periods ending after December 15, 2020. The Company does not expect this pronouncement to have a material impact on its condensed 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. 3. Notes Payable On May 4, 2020, the Company obtained a loan (Loan) from the Bank of America (Lender) in the aggregate amount of $0.4 million, pursuant to the Paycheck Protection Plan (PPP), established as part of the CARES Act. The Loan is evidenced by a promissory note dated May 4, 2020 issued by the Company and will accrue interest at a fixed interest rate of 1% per annum from the funding date of May 4, 2020. Payments of principal and interest have been deferred since the funding under the original terms of the promissory note. However, the Loan and accrued interest may be forgivable at the conclusion of this period. Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The terms of the promissory note, including eligibility and forgiveness, may be subject to additional requirements adopted by the SBA. Any unforgiven portion of the PPP loan, including principal and interest, will mature on May 4, 2022 and will be required to be payable monthly. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties. The Company has accounted for the loan under FASB ASC 470, Debt . Repayment amounts due within one year have been recorded as current liabilities, and the remaining amounts due in more than one year as long-term liabilities. On December 18, 2020, the Company submitted the loan forgiveness application for the entire borrowings of $0.4 million to the Lender and was notified on January 7, 2021 that the application was submitted to the Small Business Administration (SBA) for review. The SBA has up to 90 days from the date of submittal to make a final decision on loan forgiveness. The Company has yet to be notified of the SBA’s forgiveness decision. If the Company is successful in receiving forgiveness for any portion of the loan used for qualifying expenses, those amounts will be recorded as a gain upon extinguishment. 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. F- 12 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 2. 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 has concluded that warrants to purchase common stock, which are accounted for as liabilities as discussed in Note 7 are classified as Level 3. 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, 2020 and 2019: Fair Value Measurement as of December 31, 2020 (in thousands) Level 1 Level 2 Level 3 Total Assets: Restricted cash $ 50 $ - $ - $ 50 Total $ 50 $ - $ - $ 50 Liabilities: Warrant liability $ - $ - $ 17 $ 17 Total $ - $ - $ 17 $ 17 Fair Value Measurement as of December 31, 2019 (in thousands) Level 1 Level 2 Level 3 Total Assets: Restricted cash $ 50 $ - $ - $ 50 Total $ 50 $ - $ - $ 50 Liabilities: Warrant liability $ - $ - $ 33 $ 33 Total $ - $ - $ 33 $ 33 There were no transfers between Level 1, Level 2 and Level 3 in either of the years ended December 31, 2020 and December 31, 2019. F- 13 5. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets consist of the following: December 31, 2020 2019 (in thousands) Insurance $ 403 $ 284 Sponsored research 97 123 Other current assets 24 37 Total prepaid expenses and other current assets $ 524 $ 444 6. Property, Plant and Equipment, Net Property, plant and equipment, net consist of the following: December 31, 2020 2019 (in thousands) Leasehold improvements $ 584 $ 584 Furniture, machinery and equipment 1,553 1,546 Computer equipment and software 477 477 Total property, plant and equipment 2,614 2,607 Less: accumulated depreciation (2,397 ) (2,213 ) Property, plant and equipment, net $ 217 $ 394 Depreciation expense amounted to $184,000 and $214,000 for the years ended December 31, 2020 and 2019, respectively. 7. Accrued and Other Current Liabilities Accrued and other current liabilities consist of the following: December 31, 2020 2019 (in thousands) Professional fees $ 178 $ 179 Advisory costs 75 65 Payroll 39 177 Other 25 17 Total accrued and other current liabilities $ 317 $ 438 8. Warrant Liability On May 19, 2016 and February 10, 2017, the Company closed a sale of shares of the Company’s common stock, the issuance of warrants to purchase shares of common stock, and the issuance of warrants to the placement agent for each transaction. Due to a cash put provision within the warrant agreement, which could be enacted in certain change in control events, a liability associated with those warrants was initially recorded at fair value in the Company’s consolidated balance sheets upon issuance, and subsequently re-measured each fiscal quarter. The changes in the fair value between issuance and the end of each reporting period is recorded as a component of other income (expense), net in the consolidated statements of operations. During 2017, warrant holders of 952,184 warrants agreed to a modification of the terms of their warrants which resulted in placing all situations that would allow the warrant holder to put the warrant for cash fully in control of the Company. As a result of the modification, the modified warrants are no longer liability classified and do not need to be re-measured. These modifications resulted in a $3.7 million value of those warrants being reclassified from Warrant Liabilities to Additional Paid in Capital. The remaining un-modified 92,212 warrants, which remain outstanding as of December 31, 2020, continue to be re-measured at each reporting period as long as they are outstanding and un-modified. F- 14 The Company has re-measured the liability to estimated fair value at inception, prior to modification and at each reporting date using the Black-Scholes option pricing model with the following weighted average assumptions: Assumptions for Estimating Fair Value on Reporting Dates of: December 31, 2020 December 31, 2019 Risk-free interest rate 0.12 % 1.58 % Expected volatility 137.89 % 90.53 % Expected term (in years) 1.1 years 2.1 years Expected dividend yield - - Exercise Price $ 8.00 $ 8.00 Market value of common stock $ 1.25 $ 2.01 Warrants to purchase shares of common stock 92,212 92,212 The following table presents a reconciliation of the Company’s warrant liabilities for the years ended December 31, 2020 and 2019: Warrant Liability (in thousands) Balance as of December 31, 2018 $ 98 Change in fair value upon re-measurement (65 ) Balance as of December 31, 2019 33 Change in fair value upon re-measurement (16 ) Balance as of December 31, 2020 $ 17 9. Commitments and Contingencies On April 14, 2017, representatives for the estate of a deceased individual filed a civil lawsuit in the Suffolk Superior Court, in Boston, Massachusetts, against the Company and Harvard Bioscience, Inc., the Company’s former parent company. 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 CEI. 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 the Separation and Distribution agreement between Harvard Bioscience and the Company relating to the spin-off of the Company in 2013, 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 has not accrued for a potential liability as it is not considered probable at this time. F- 15 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. 10. Leases The Company leases laboratory and office space and certain equipment with remaining terms ranging from 1 year to 5 years. The laboratory and office arrangement is under a sublease that was renewed in December of 2020 and currently extends through May 31, 2022. This lease 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. 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: December 31, 2020 2019 (in thousands) Balance Sheet Classification Assets: Operating lease assets Right-of-use asset $ 182 $ 191 Liabilities: Current portion of operating lease liabilities Current portion of operating lease liabilities 107 102 Operating lease liabilities, net of current portion Operating lease liabilities, net of current portion 75 89 Total operating lease liabilities $ 182 $ 191 Cash paid for leases included in cash used in operating activities in the Company’s consolidated statement of cash flows during the years ended December 31, 2020, and 2019 amounted to approximately $121,000 and $114,000, respectively. The weighted average remaining lease terms and weighted average discount rates as of December 31, 2020 and 2019 were as follows: Year ended December 31, 2020 2019 Remaining lease term (in years) 1.92 2.37 Discount rate 10.16 % 13.13 % The following table summarizes the effect of lease costs in the Company’s condensed consolidated statements of operations: For the Year Ended December 31 (in thousands) Statement of Operations Classification 2020 2019 Operating lease expense Research and development $ 77 $ 73 Selling, general and administrative 44 41 $ 121 $ 114 F- 16 The minimum lease payments for the next five years and thereafter are expected to be as follows: (In thousands) As of December 31, 2020 2021 121 2022 62 2023 12 2024 7 Total lease payments $ 202 Less: imputed interest 20 Present value of operating lease liabilities $ 182 11. Income Taxes The Company’s net loss was generated entirely in the U.S. in 2020 and 2019. Income taxes for the years ended December 31, 2020 and 2019 differed from the amount computed by applying the U.S. federal income tax rate of 21% for both 2020 and 2019 to pre-tax loss as a result of the following: Years ended December 31, 2020 2019 (in thousands) Computed “expected” income tax benefit $ (1,022 ) $ (1,750 ) State income tax benefit, net of federal income tax benefit (307 ) (527 ) Permanent items, primarily change in fair value of warrants and non-deductible share-based compensation 32 76 Tax credits (126 ) (280 ) Stock-option cancellations 402 - Adjustment of prior year income tax - (192 ) Change in valuation allowance 1,021 2,673 Total income taxes $ - $ - The components of the Company’s deferred tax asset are as follows: Years ended December 31, 2020 2019 (in thousands) Deferred tax assets: Operating loss and credit carryforwards $ 15,217 $ 13,734 Capitalized research and development 1,873 2,276 Stock-based compensation 1,078 1,054 Lease liabilities 30 52 Excess book over tax depreciation 34 103 Accrued expenses - 12 Total deferred tax assets 18,252 17,231 Less: valuation allowance (18,200 ) (17,179 ) Deferred tax assets 52 52 Deferred tax liability: Operating lease assets (52 ) (52 ) Total deferred tax liability (52 ) (52 ) $ - $ - F- 17 The Company has recorded a valuation allowance against its deferred tax assets for the years ended December 31, 2020 and 2019, because the Company’s management believes that it is more likely than not that these assets will not be realized. The valuation allowance increased by approximately $1.0 million and $2.7 million for the years ended December 31, 2020 and 2019, respectively, primarily as a result of operating losses generated with no corresponding financial statement benefit. As of December 31, 2020, the Company had federal net operating loss carryforwards (NOLs) of approximately $47.9 million to offset future federal taxable income and state NOLs of approximately $47.4 million to offset future state taxable income. The federal and state NOLs generated for annual periods prior to January 1, 2018 begin to expire in 2033. The Company’s federal NOL generated for the years ended December 31, 2018 through December 31, 2020, which amounted to $21.4 million, can be carried forward indefinitely. As of December 31, 2020, the Company also has federal and state tax research and development credit carryforwards of approximately $1.4 million and $1.0 million, respectively, to offset future income taxes. The federal and state research and development tax credit carryforwards begin to expire in 2033 and 2029, respectively. 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%, 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. For all years through December 31, 2020, the Company generated research credits but has not conducted a study to document the qualified activities. This study may result in an adjustment to the Company's research and development credit carryforwards; however, until a study is completed, and any adjustment is known, no amounts are being presented as an uncertain tax position. A full valuation allowance has been provided against the Company's research and development credits and, if an adjustment is required, this adjustment would be offset by an adjustment to the deferred tax asset established for the research and development credit carryforwards and the valuation allowance. Harvard Bioscience received a Supplemental Ruling to the Private Letter Ruling dated March 22, 2013 from the IRS to the effect that, among other things, the Separation and Distribution by Harvard Bioscience will qualify as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 and 368(a)(1)(D) of the Internal Revenue Code continuing in effect. The private letter and supplemental rulings and the tax opinion that Harvard Bioscience received from legal counsel to Harvard Bioscience rely on certain representations, assumptions and undertakings, including those relating to the past and future conduct of the Biostage business, and neither the private letter and supplemental rulings nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter and supplemental rulings do not address all the issues that are relevant to determining whether the Distribution will qualify for tax-free treatment. Notwithstanding the private letter and supplemental rulings and opinion, the IRS could determine the Distribution should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines any of the representations, assumptions or undertakings that were included in the request for the private letter and supplemental rulings are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling. To preserve the tax-free treatment to Harvard Bioscience of the Separation and Distribution, for the two-year period following the Distribution, which such period ended November 1, 2015, the Company was limited, except in specified circumstances, from entering into certain transactions pursuant to which all or a portion of the Company’s stock would be acquired, whether by merger or otherwise; issuing equity securities beyond certain thresholds; repurchasing the Company’s common stock; and ceasing to actively conduct the Company’s regenerative medicine business. In addition, at all times, including during and following such two-year period, the Company may not take or fail to take any other action that prevents the Separation and Distribution and related transactions from being tax-free. If the Distribution fails to qualify for tax-free treatment, in general, Harvard Bioscience would be subject to tax as if it had sold the Company’s common stock in a taxable sale for its fair market value, and Harvard Bioscience stockholders who receive shares of Biostage common stock in the Distribution would be subject to tax as if they had received a taxable Distribution equal to the fair market value of such shares. F- 18 Under the tax sharing agreement between Harvard Bioscience and the Company, the Company would generally be required to indemnify Harvard Bioscience against any tax resulting from the Distribution to the extent that such tax resulted from (i) an acquisition of all or a portion of the Company’s stock or assets, whether by merger or otherwise, (ii) other actions or failures to act by the Company, or (iii) any of the Company’s representations or undertakings being incorrect or violated. The Company’s indemnification obligations to Harvard Bioscience and its subsidiaries, officers and directors are not limited by any maximum amount. If the Company is required to indemnify Harvard Bioscience or such other persons under the circumstances set forth in the tax sharing agreement, the Company may be subject to substantial liabilities. All deferred tax assets prior to the Separation remained with Harvard Bioscience. The Company has determined that any uncertain tax positions would have no material impact on the consolidated financial statements of the Company and there are no unrecognized tax benefits or related interest and penalties accrued for the period for the years ended December 31, 2020 and 2019. 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, 2019; currently, no federal or state income tax returns are under examination by the respective taxing authorities. On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was signed into law making several changes to the Internal Revenue Code. The changes include but are not limited to increasing the limitation on the amount of deductible interest expense, allowing companies to carryback certain net operating losses, and increasing the amount of net operating loss carryforwards that corporations can use to offset taxable income. The tax law changes in the CARES Act did not have a material impact on the Company’s income tax provision. 12. Employee Benefit Plan The Company sponsors a retirement plan for its U.S. employees, which includes an employee savings plan established under Section 401(k) of the U.S. Internal Revenue Code (the 401(k) Plan). The 401(k) Plan covers substantially all full-time employees who meet certain eligibility requirements. Contributions to the retirement plan are at the discretion of management. The Company’s matching contributions to the plan were approximately $62,000 and $109,000 for the years ended December 31, 2020 and 2019, respectively. 13. Preferred Stock There are no shares of any class of preferred stock outstanding as of December 31, 2020 or December 31, 2019. Authorized shares for each preferred stock class is as follows: Authorized Undesignated Preferred Stock 984,000 Series B Convertible Preferred Stock 1,000,000 Series C Convertible Preferred Stock 4,000 Series D Convertible Preferred Stock 12,000 F- 19 14. Common Stock During 2019, the Company decreased the number of authorized shares of common stock from 120 million to 60 million. As of December 31, 2020, there were approximately 50.6 million shares of common stock available for issuance. The following represent the Company’s common stock transactions during December 31, 2020 and 2019: 2020 Capital Transactions During the year ended December 31, 2020, the Company issued a total of 151,027 and 125,000 shares of its common stock at 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, of which, $1.0 million and $0.1 million was allocated to the common stock and warrants, respectively, utilizing the relative fair value. The Company classified these warrants on its consolidated balance sheets as equity, and valued using the Black-Scholes model based on the following weighted average assumptions: Risk-free interest rate 0.88 % Expected volatility 107 % Expected term 2 months Expected dividend yield - Exercise price $ 3.7 Market value of common stock $ 3.11 During the year ended December 31, 2020, the Company 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. During the year ended December 31, 2020, the Company 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. During the year ended December 31, 2020, the Company issued a total of 25,948 shares of our common stock to former chief executive officer and an employee due to the vesting of restricted stock units and issuance of a common stock award. 2019 Capital Transactions On June 12, 2019, the Company 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, of which $0.7 million and $0.6 million was allocated to the common stock and warrants, respectively. On December 31, 2019, the Company 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 aggregate gross and net proceeds in the amount of $0.5 million, of which $0.4 million and $0.1 million was allocated to the common stock and warrants, respectively. During the year ended December 31, 2019, the Company 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 of approximately $4.0 million. During the year ended December 31, 2019, the Company issued a total of 3,506 shares of our common stock to employees due to the vesting of restricted stock units. F- 20 Warrant to purchase common stock activity for the year ended December 31, 2020 was as follows: Amount Weighted-average exercise price Outstanding at December 31, 2019 2,673,051 $ 5.20 Issued 151,027 3.70 Exercised (930,877 ) 2.94 Outstanding at December 31, 2020 1,893,201 $ 6.44 Employee Stock Purchase Plan In 2013, the Company approved the 2013 Employee Stock Purchase Plan (the ESPP Plan). Under the ESPP Plan, participating employees can authorize the Company to withhold a portion of their base pay during consecutive six-month payment periods for the purchase of shares of the Company’s common stock. At the conclusion of the period, participating employees can purchase shares of the Company’s common stock at 85% of the lower of the fair market value of the Company’s common stock at the beginning or end of the period. Shares are issued under the plan for the six-month periods ending June 30 and December 31. Under this plan, 7,500 shares of common stock are authorized for issuance of which 4,534 shares have been issued as of December 31, 2020. There are 2,966 shares available for issuance as of December 31, 2020 and December 31, 2019. There was no ESPP Plan activity in 2020 or 2019. 15. Share-based Compensation Biostage Amended and Restated Equity Incentive Plan The Company maintains the Amended and Restated Equity Incentive Plan (the Plan) for the benefit of certain officers, employees, non-employee directors, and other key persons (including consultants and advisory board members). All options and awards granted under the Plan consist of the Company’s shares of common stock. The Company’s policy is to issue stock available from its registered but unissued stock pool through its transfer agent to satisfy stock option exercises and the vesting of restricted stock units. The vesting period for awards is generally four years and the contractual life is ten years. Canceled and forfeited options and awards are available to be reissued under the Plan. In June 2020, the Company’s shareholders approved the Amended and Restated Equity Incentive Plan (the 2013 Equity Incentive Plan) to, among other things, increase of the number of shares of the Company’s common stock available for issuance pursuant thereto by 3,000,000 shares, which increased the total shares authorized to be issued under the Plan to 5,098,000. There are 3,477,504 shares available for issuance as of December 31, 2020. Stock option activity under the Plan for the year ended December 31, 2020 was as follows: Amount Weighted-average exercise price Weighted-average contractual life Outstanding at December 31, 2019 1,772,761 $ 6.04 7.94 Granted 313,261 2.70 Canceled (486,302 ) 2.83 Outstanding at December 31, 2020 1,599,720 $ 6.33 5.77 Options exercisable 1,152,581 $ 7.75 5.02 Options vested and expected to vest 1,504,040 $ 6.58 The Company’s outstanding stock options include 338,663 performance-based awards that have vesting provisions subject to the achievement of certain business milestones. In September 2019, the Company deemed the achievement of one of the performance-based milestones totaling 95,131 shares probable for accounting purposes, are now exercisable, and has recognized approximately $0.3 million expense associated with this milestone during the year ended December 31, 2019. Total unrecognized compensation expense for the remaining 243,532 performance-based awards is approximately $0.8 million. No expense has been recognized for these awards as of December 31, 2020 given that the milestone achievements for these awards have not yet been deemed probable for accounting purposes. F- 21 Aggregate intrinsic value for outstanding options and exercisable options for the year ended December 31, 2020 was $0 based on the Company’s closing stock price of $1.25 per share as of December 31, 2020. As of December 31, 2020, unrecognized compensation cost related to unvested non-performance-based awards amounted to $0.4 million, which will be recognized over a weighted-average period of 0.5 years. The weighted average assumptions for valuing the Company’s stock options granted were as follows: Year Ended December 31, 2020 2019 Risk-free interest rate 0.68 % 1.70 4% Expected volatility 111.47 % 115.5 4% Expected term (in years) 4.4 years 5.3 years Expected dividend yield n/a n/a The grant date fair value of stock options is estimated using the Black-Scholes option pricing model that takes into account the fair value of its common stock, the exercise price, the expected life of the option, the expected volatility of its common stock, expected dividends on its common stock, and the risk-free interest rate over the expected life of the option. The risk-free interest rate assumption is based upon observed Treasury bill interest rates (risk-free) appropriate for the expected term of the Company’s employee stock options. The computation of expected volatility is based on the historical volatility of the Company’s common stock. The simplified method of estimating expected term was used. The Company has not paid and do not anticipate paying cash dividends on the Company’s shares of common stock; therefore, the expected dividend yield is assumed to be zero. In February 2020, as part of the termination arrangement with the Company’s former chief executive officer, the Company modified certain options to purchase 236,970 shares of common stock, issued an 80,000 fully vested stock option grant, and accelerated the vesting of 3,300 restricted stock units resulting in recording $153,000, $70,000, and $4,000, respectively, of share-based compensation for the year ended December 31, 2020. In June 2019, the Company modified certain options to purchase common stock and issued a 35,000 fully vested stock option grant as part of the termination arrangement for the Company’s former chief financial officer, resulting in recording $92,000 and $62,000, respectively, of share-based compensation. The Company also estimated the fair value of non-employee share options using the Black-Scholes option pricing model reflecting the same assumptions as applied to employee and director options in each of the reporting periods, other than the expected life, which is assumed to be the remaining contractual life of the options. The weighted average estimated fair value of stock options granted using the Black-Scholes model was $1.84 per share during 2020 and $2.12 per share during 2019. The Company also has issued restricted stock units under the Plan. Unvested shares of restricted common stock may not be sold or transferred by the holder. The following table summarizes the Company’s unvested restricted stock unit activity under the Plan for the year ended December 31, 2020: Amount Unvested at December 31, 2019 3,300 Canceled - Vested (3,300 ) Unvested at December 31, 2020 - The grant date fair value for all restricted stock units activity during the year ended December 31, 2020 was $7.68 per share. The fair value of restricted shares of common stock vested during the year ended December 31, 2020 amounted to approximately $8,000 in the aggregate. F- 22 Share-based compensation expense related to the Plan for the years ended December 31, 2020 and 2019 was allocated as follows: Years Ended December 31, 2020 2019 (in thousands) Research and development $ 311 $ 523 Selling, general and administrative 833 1,131 Total stock-based compensation $ 1,144 $ 1,654 16. Net Loss per Share Basic and diluted net loss per share was calculated as follows: Years Ended December 31, 2020 2019 (in thousands, except per share data) Net loss $ (4,865 ) $ (8,332 ) Weighted-average shares outstanding 8,794 6,898 Net loss per share – basic and diluted $ (0.55 ) $ (1.21 ) The Company’s potentially dilutive securities, which include stock options, unvested restricted common stock units and warrants, have been excluded from the computation of diluted net loss per share whenever the effect of including them would be to reduce the net loss per share. In periods where there is a net loss, the weighted average number of common shares outstanding used to calculate both basic and diluted net loss per share attributable to common stockholders is the same. The following potential common shares were excluded from the calculation of diluted net loss per share attributable to common stockholders for the years ended December 31, 2020 and 2019 because including them would have had an anti-dilutive effect: Years Ended December 31, 2020 2019 Warrants to purchase common stock 1,893,201 2,673,051 Options to purchase common stock 1,599,720 1,772,761 Unvested restricted common stock units - 3,300 Total 3,492,921 4,449.112 17. Subsequent Events The Company has performed an evaluation of subsequent events through the time of filing this Annual Report on Form 10-K with the SEC and has determined that there are no such events to report other than those already disclosed. F- 23 Item 16. Form 10-K Summary. None. 49 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. Biostage, Inc. Date: April 13, 2021 By: /s/ Hong Yu Hong Yu President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated: Signature Title Date /s/ Hong Yu Hong Yu President (principal executive officer) April 13, 2021 /s/ Peter A. Pellegrino Jr. Peter Pellegrino Interim Vice President of Finance (principal financial officer and principal accounting officer) April 13, 2021 /s/ Jason Jing Chen Jason Jing Chen Chairman April 13, 2021 /s/ Ting Li Ting Li Director April 13, 2021 /s/ Herman Sanchez Herman Sancez Director April 13, 2021 /s/ James Shmerling James Shmerling Director April 13, 2021 /s/ Wei Zhang Wei Zhang Director April 13, 2021 50 EXHIBIT INDEX The following exhibits are filed as part of this Annual Report on Form 10-K. Where such filing is made by incorporation by reference to a previously filed document, such document is identified. Exhibit Number Description of Exhibit 2.1§ Separation and Distribution Agreement between Biostage, Inc. and Harvard Bioscience, Inc. dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto). 3.1 Amended and Restated Certificate of Incorporation of Biostage, Inc. (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 3.2 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc. dated March 30, 2016 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on March 31, 2016, and incorporated by reference thereto). 3.3 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc. dated May 26, 2016 (previously filed as an exhibit to the Company’s Annual Report on Form 10-K, filed on March 17, 2017, and incorporated by reference thereto). 3.4 Certificate of Designations, Preferences and Rights of Series A Preferred Stock of Biostage, Inc. classifying and designating the Series A Junior Participating Cumulative Preferred Stock (previously filed as an exhibit to the Company’s Registration Statement on Form 8-A, filed October 31, 2013, and incorporated by reference thereto). 3.5 Certificate of Designation of Series B Convertible Preferred Stock of Biostage, Inc. classifying and designating the Series B Convertible Preferred Stock (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on February 12, 2015, and incorporated by reference thereto). 3.6 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc. dated April 26, 2017 (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on April 27, 2017, and incorporated by reference thereto). 3.7 Certificate of Designations, Preferences, Rights and Limitations of Series C Convertible Preferred Stock of Biostage, Inc. classifying and designating the Series C Convertible Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on August 17, 2017, and incorporated by reference thereto). 3.8 Certificate of Elimination of Series A Junior Participating Cumulative Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on August 17, 2017, and incorporated by reference thereto). 3.9 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc. dated December 22, 2017 (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on December 22, 2017, and incorporated by reference thereto). 3.10 Certificate of Designations, Preferences, Rights and Limitations of Series D Convertible Preferred Stock of Biostage, Inc. classifying and designating the Series D Convertible Preferred Stock (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on January 3, 2018, and incorporated by reference thereto). 3.11 Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc. dated May 24, 2019 (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on May 28, 2019, and incorporated by reference thereto). 3.12 Amended and Restated By-laws of the Biostage, Inc. (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on March 31, 2016, and incorporated by reference thereto). 4.1 Specimen Stock Certificate evidencing shares of common stock (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 4.2 Specimen Series B Convertible Preferred Stock Certificate (previously filed as an exhibit to the Company’s Annual Report on Form 10-K, filed on March 27, 2015, and incorporated by reference thereto). 4.3 Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on May 16, 2016, and incorporated by reference thereto). 51 4.4 Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Amendment No. 2 to Form S-1 Registration Statement, filed on February 7, 2017, and incorporated by reference thereto). 4.5 Form of Placement Agent Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Amendment No. 2 to Form S-1 Registration Statement, filed on February 7, 2017, and incorporated by reference thereto). 4.6 Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on January 3, 2018, and incorporated by reference thereto). 4.7 Form of Amendment to Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on December 18, 2019, and incorporated by reference thereto). 4.8 Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on January 2, 2020, and incorporated by reference thereto). 4.9 Description of Securities (previously filed as an exhibit to the Company’s Annual Report on Form 10-K, filed on March 27, 2020, and incorporated by reference thereto). 10.1 Intellectual Property Matters Agreement between Biostage, Inc. and Harvard Bioscience, Inc. dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto). 10.2 Product Distribution Agreement between Biostage, Inc. and Harvard Bioscience, Inc. dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto). 10.3 Tax Sharing Agreement between Biostage, Inc. and Harvard Bioscience, Inc. dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto). 10.4 Sublease by and between Biostage, Inc. and Harvard Bioscience, Inc. dated as of October 31, 2013 (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 6, 2013, and incorporated by reference thereto). 10.5 Form of Indemnification Agreement for Officers and Directors (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.6# Amended and Restated Equity Incentive Plan (previously filed as an exhibit to the Company’s Definitive Proxy Statement on Schedule 14A, filed on April 28, 2020, and incorporated by reference thereto). 10.7 Employee Stock Purchase Plan (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.8# Form of Incentive Stock Option Agreement (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.9# Form of Non-Qualified Stock Option Agreement for executive officers (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.10# Form of Non-Qualified Stock Option Agreement for directors (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.11# Form of Deferred Stock Award Agreement (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.12† Sublicense Agreement dated as of December 7, 2012 between Biostage, Inc. and Harvard Bioscience, Inc., and related Trademark License Agreement, dated December 19, 2002, by and between Harvard Bioscience, Inc. and President and Fellows of Harvard College (previously filed as an exhibit to the Company’s Amendment No. 2 to Form S-1 Registration Statement, filed on February 15, 2013, and incorporated by reference thereto). 10.13 Patent Rights Assignment dated December 21, 2012 between Biostage, Inc. and Dr. Paolo Macchiarini (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.14 Novel Surgery Agreement dated as of May 21, 2012 between Biostage, Inc. and State Budget Institution of Public Health Department Regional Clinical Hospital #1 and Vladimir Alekseevich Porhanov (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 52 10.15 Novel Surgery Agreement dated as of May 24, 2012 between Biostage, Inc. and OSF Healthcare System, owner and operator of Saint Francis Medical Center and Children’s Hospital of Illinois, and Mark Holterman, M.D. (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.16 Amendment to Novel Surgery Agreement dated as of April 5, 2013 between Biostage, Inc. and OSF Healthcare System, owner and operator of Saint Francis Medical Center and Children’s Hospital of Illinois, and Mark Holterman, M.D. (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.17 Amendment to Novel Surgery Agreement dated as of June 26, 2013 between Biostage, Inc. and State Budget Institution of Public Health Department Regional Clinical Hospital #1 and Igor S. Polyakov (previously filed as an exhibit to the Company’s Registration Statement on Form 10-12B, filed July 31, 2013, and incorporated by reference thereto). 10.18# Offer Letter, dated June 4, 2018, between Biostage, Inc. and William Fodor, PhD (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on July 10, 2018, and incorporated by reference thereto). 10.19# Separation and Release Agreement, dated June 14, 2019, between Biostage, Inc. and Thomas McNaughton (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on June 17, 2019, and incorporated by reference thereto). 10.20# Separation and Release Agreement, dated January 31, 2020, between Biostage, Inc. and James McGorry (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on February 7, 2020, and incorporated by reference thereto). 10.21 Promissory Note, dated May 1, 2020, by Biostage, Inc. in favor of Bank of America, N.A. (previously filed as an exhibit to the Company's Current Report on Form 8-K, filed on May 5, 2020, and incorporated by reference thereto). 21.1* Subsidiaries of Biostage, Inc. 23.1* Consent of RSM US LLP. 31.1* Certification of President of Biostage., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certification of Interim Vice President of Finance of Biostage, Inc., pursuant to Rules 13a-15(e) and 15d-15(e), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1** Certification of President of Biostage, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 32.2** Certification of Interim Vice President of Finance of Biostage, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 101.INS* XBRL Instance Document. 101.SCH* XBRL Taxonomy Extension Schema Document. 101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document. 101.DEF* XBRL Taxonomy Extension Definition Linkbase Document. 101.LAB* XBRL Taxonomy Extension Label Linkbase Document. 101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document. * Filed herewith. ** This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934. # Management contract or compensatory plan or arrangement. 53 § The schedules and exhibits to the Separation and Distribution Agreement have been omitted. A copy of any omitted schedule or exhibit will be furnished to the SEC supplementally upon request. The Company will furnish to stockholders a copy of any exhibit without charge upon written request. † Confidential portions of this exhibit have been redacted and filed separately with the SEC pursuant to a confidential treatment request in accordance with Rule 24b-2 of the Securities Exchange Act of 1934, as amended. 54