Harvard Apparatus Regenerative Technology, Inc. 10-K

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 ii of this Annual Report on Form 10-K. Overview We are a clinical-stage biotechnology company that intends to use cell therapy to treat cancer, injuries, and birth defects in the esophagus. We believe our technology is likely to be used to treat esophageal cancer, esophageal injuries, and birth defects in the esophagus. Additional product candidates in our pipeline may treat bronchial cancer, intestinal cancer and colon cancer. Our first esophageal product candidate, our esophageal implant was used in the first successful regeneration of the esophagus in a patient with esophageal cancer. This successful first-in-human experience, plus the research we have performed on over 50 pigs, led the FDA to approve our 10-patient combined phase 1 and phase 2 clinical trial. This combination trial will measure both safety and efficacy in the patient population. We were incorporated and commenced operations on November 1, 2013 as a result of a spin-off from Harvard Bioscience, Inc., or 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. 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. 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. 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, 2022 and December 31, 2021. Our product candidates 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, 2022 had an accumulated deficit of approximately $83.0 million and will require additional financing to fund future operations. We expect that our operating cash on-hand as of December 31, 2022 of approximately $1.2 million will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2023. We expect to continue to incur operating losses and negative cash flows from operations for 2022 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. 45 We will need to raise additional funds to fund our operations. In the event we do not raise additional capital from outside sources before or during the second quarter of 2023, we may be forced to curtail or cease our 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 product candidates, 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 we are 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. 2022 Financing Activities During the year ended December 31, 2022, we completed the following financing activities: ● In May 2022, we sold 854,771 shares of common stock and warrants to purchase 427,390 shares of common stock for the aggregate purchase price of approximately $5.1 million and a purchase price per unit of $5.92. Each unit consisted of one share of common stock and a warrant to purchase one half of one share of common stock, subject to adjustment as provided in the warrants. The warrants have an exercise price of $8.88 per share, subject to adjustments as provided under the terms thereof, and were immediately exercisable. The warrants are exercisable until five years (5) from the warrant issuance date. In May 2022, we also issued options to acquire 38,564 shares of common stock to satisfy sales commissions in the approximate amount of $155,660 incurred in relation to this private placement. ● In June 2022, the Company issued 4,000 shares of Series E Convertible Preferred Stock at a price of $1,000 per share to satisfy certain indemnification obligations in the amount of $4.0 million, in lieu of paying cash. The Company issued an aggregate of 180 shares of Series E Convertible Preferred Stock relating to accrued dividends during the year ended December 31, 2022. 2021 Financing Activities During the year ended December 31, 2021, we completed the following financing activities: ● On May 4, 2020, we obtained a loan from Bank of America in the aggregate amount of approximately $0.4 million, pursuant to the Paycheck Protection Program, established as part of the CARES Act. Such loan was evidenced by a promissory note dated May 4, 2020 issued by us whereas certain amounts of the loan where eligible for forgiveness if used for qualifying expenses. On December 18, 2020, we submitted the loan forgiveness application for the entire borrowings of approximately $0.4 million to the lender and were notified on January 7, 2021 that the application was submitted to the Small Business Administration, or SBA, for review. On May 23, 2021, we were notified by the lender that the SBA determined that the application for our loan forgiveness was approved, and the SBA remitted the forgiven amount to the lender. We have accounted for this loan forgiveness as a gain on extinguishment of approximately $0.4 million (See Note 3 in the Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K for further discussion). ● During the year ended December 31, 2021, we issued a total of 1,300,000 shares of our common stock at a purchase price of $2.00 per share and warrants to purchase 650,000 shares of common stock at an exercise price of $2.00 per share to a group of investors for aggregate gross and net proceeds of approximately $2.6 million. ● During the year ended December 31, 2021, we issued 72,464 shares of our common stock to our Chief Executive Officer at a purchase price of $3.45 per share and warrants to purchase 36,232 shares of common stock at an exercise price of $3.45 per share for aggregate gross and net proceeds of approximately $250 thousand. Small Business Innovation Research Grant On March 28, 2018, we were awarded a Fast-Track Small Business Innovation Research, or SBIR, grant by the Eunice Kennedy National Institute of Child Health and Human Development, or NICHD, to support testing of a pediatric esophageal implant. 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, 2022 and 2021, we recognized approximately $0 and $0.2 million of grant income, respectively, from Phase II of the SBIR grant. The aggregate SBIR grant to date provided a total award of $1.8 million, of which approximately $1.5 million has been recognized through December 31, 2022. The Phase II portion of the award expired effective September 30, 2021. 46 Management Effective as of November 26, 2021, we appointed David Green as Chief Executive Officer. Effective as of March 1, 2023, we transitioned the role of Chief Executive Officer to Junli (Jerry) He, our existing director, and Mr. Green remains on our Board of Directors. On August 8, 2022, we appointed Joseph Damasio Jr. as Chief Financial Officer. In such role, Mr. Damasio serves as the Company’s principal accounting officer and principal financial officer. As of December 31, 2022, we had 8 employees, 7 of whom were full-time and one part-time. 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 3-D 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. General and Administrative Expense . 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. Forgiveness of Notes Payable. On May 23, 2021, we were notified by our lender that provided our related Loan that the SBA determined that our application for loan forgiveness was approved, and the SBA remitted the forgiveness amount to our lender. We have accounted for this loan forgiveness as an extinguishment. 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 outstanding common stock warrants that were classified as liability awards during the years ended December 31, 2022 and 2021. We use the Black-Scholes pricing model to value the related warrant liability. 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. 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 vesting period (generally the service period), which we recognize 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 each of the years ended December 31, 2022 and 2021 was approximately $1.0 million. Share-based compensation is further described in Note 15 to our Consolidated Financial Statements included in Item 15 of this Annual Report on Form 10-K. Warrant Liability Most of the warrants to purchase shares of our common stock have been classified on our consolidated balance sheets as equity. We classify warrants as a liability in our consolidated balance sheets if the warrant is a free-standing financial instrument that may require us to transfer cash consideration upon exercise and that cash transfer event would be out of our control. Such a “liability warrant” is initially recorded at fair value on the date of grant using the Black-Scholes model, net of issuance costs, and it is subsequently re-measured to fair value at each subsequent balance sheet date. Changes in fair value of the warrant are recognized as a component of other income (expense) in the consolidated statements of operations. We continued to adjust the liability for changes in fair value until the expiration of the warrant liability in February 2022. 47 Results of Operations The following table summarizes the results of our operations for the years ended December 31, 2022 and 2021 ($ in thousands): For the Year Ended Change 2022 vs. 2021 2022 2021 Change % Operating expenses Research and development $ 1,742 $ 1,592 $ 150 9 % General and administrative 4,411 7,044 (2,633 ) (37 )% Total operating expenses 6,153 8,636 (2,483 ) (29 )% Other income (expense) Forgiveness of notes payable — 408 (408 ) (100 )% Sublease income 87 — 87 100 % Grant income — 165 (165 ) (100 )% Change in fair value of warrant liability 2 15 (13 ) (87 )% Other income (expense), net (9 ) 70 (79 ) (113 )% Total other income (expense), net 80 658 (578 ) (88 )% Net loss $ (6,073 ) $ (7,978 ) $ 1,905 (24 )% Year Ended December 31, 2022 Compared to Year Ended December 31, 2021 Research and Development Expense Research and development expense increased approximately $0.2 million, or 9%, to approximately $1.7 million for the year ended December 31, 2022 as compared to approximately $1.6 million for the year ended December 31, 2021. This was due primarily to higher headcount and preclinical trial activities. General and Administrative Expense General and administrative expense decreased approximately $2.6 million, or 37%, to approximately $4.4 million for the year ended December 31, 2022 as compared to approximately $7.0 million for the year ended December 31, 2021. This decrease was due primarily to a charge in the prior year of approximately $3.3 million relating to the contingency matter for our litigation for a wrongful death complaint and related matters more fully described in Note 9 to our consolidated financial statements. The decrease is offset, in part, by approximately $0.4 million of higher employee and share-based expenses and approximately $0.2 million for increased costs for supporting our ongoing public company requirements. Forgiveness of notes payable On May 23, 2021, we were notified by our lender that provided our related Loan that the SBA determined that our application for loan forgiveness was approved, and the SBA remitted the forgiven amount to our lender. As a result, we recorded a gain from forgiveness of our notes payable of approximately $0.4 million for the year ended December 31, 2021 compared to none for 2022. Sublease income On January 5, 2022, the Company executed a four-month sublease agreement for certain laboratory and office space at its Holliston, Massachusetts facility. The Company further extended the sublease agreement to a month-to-month basis until August 31, 2022, when the other party vacated the premises. For the year ended December 31, 2022, the Company recorded sublease income of approximately $87,000 relating to this agreement. Grant income For the year ended December 31, 2022, we recorded grant income of approximately $0 for qualified expenditures under the SBIR grant as the Phase II portion of the award expired effective September 30, 2021. For the year ended December 31, 2021, we recorded grant income of approximately $165,000 for qualified expenditures under the SBIR grant. 48 Change in Fair Value of Warrant Liability For the year ended December 31, 2022, the change in fair value of our warrant liability resulted in other income of approximately $2,000. This compared to other income of approximately $15,000 for the year ended December 31, 2021, which was due primarily to a reduction in the expected term of the outstanding warrants. These warrants expired unexercised in February of 2022. Other income (expense), net During the year ended December 31, 2022, we recorded interest expense of approximately $9,000 on insurance installment payments. In June 2021, we received a refund payment of approximately $71,000 for certain withholding taxes paid in previous years to the German tax authorities which were remitted to us on behalf of Harvard Apparatus Regenerative Technology GmbH, our German subsidiary. Liquidity and Capital Resources Sources of Liquidity. We have incurred operating losses since inception and as of December 31, 2022, we had an accumulated deficit of approximately $83.0 million. We are currently investing significant resources in the development and commercialization of our product candidates 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 flows for the foreseeable future. Operating Activities. Net cash used in operating activities of approximately $5.1 million for the year ended December 31, 2022 was primarily a result of our net loss of approximately $6.1 million and $0.6 million for deferred financing costs, offset by approximately $1.1 million of non-cash items related to share-based compensation and depreciation, and an increase of approximately $0.5 million of cash provided from working capital due to the timing of prepaid expenses, accounts payable, and accrued and other current liabilities. Net cash used in operating activities of approximately $2.6 million for the year ended December 31, 2021 was primarily a result of our net loss of approximately $8.0 million, offset by approximately $0.7 million of non-cash items related to the forgiveness of our notes payable, share-based compensation and depreciation, and an increase of approximately $4.7 million of cash provided from working capital due to the timing of prepaid expenses, accounts payable, accrued and other current liabilities and contingency accrual more fully described in Note 9 to our consolidated financial statements. Investing Activities. Net cash used in investing activities for the years ended December 31, 2022 and 2021 totaled $5,000 and $0, respectively, and represented purchases of property, plant and equipment. Financing Activities. Net cash generated from financing activities was approximately $5.1 million during the year ended December 31, 2022 and consisted of net proceeds received from private placement transactions for the issuance of common stock and warrants to purchase common stock. Net cash generated from financing activities was approximately $2.8 million during the year ended December 31, 2021 and consisted of net proceeds received from private placement transactions for the issuance of common stock and warrants to purchase common stock. 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 the second quarter of 2023. 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 elsewhere in this Annual Report on Form 10-K. 49 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. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure. None.