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Item 9A. Controls and Procedures

2022-03-31 compared with 2021-04-13 · 494 added, 851 removed, 345 unchanged (80% of the section changed)

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).

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, or the Exchange Act.

See Exhibits 31.1 and 31.2.

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(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.

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

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

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.

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.

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

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.

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 Interim Chief Executive Officer, who is our acting principal executive officer, and our Interim 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, 2021.

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.

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.

(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, 2021 based on the criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission, or COSO.

As a result of that evaluation, management has concluded that our internal control over financial reporting was effective as of December 31, 2021.

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, Wei, Wei & Company 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, 2021.

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

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.

During 2020, we identified control deficiencies related to 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.

We developed a remediation plan at the time and designed and implemented certain new internal controls in an effort to remediate the material weakness.

During the fourth quarter of fiscal 2021, we successfully completed the testing necessary to conclude that the material weakness had been remediated.

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, 2021.

Except as noted above, management concluded that there were no changes in our internal controls over financial reporting during the quarter ended December 31, 2021 that materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

(d) Inherent Limitations on Effectiveness of Controls

The design of any system of control is based upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated objectives under all future events, no matter how remote, that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may not deteriorate.

Because of their inherent limitations, systems of control may not prevent or detect all misstatements.

Accordingly, even effective systems of control can provide only reasonable assurance of achieving their control objectives.

Other Information.

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.

Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act, in connection with our 2022 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.

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.

Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2022 Annual Meeting of Stockholders.

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.

Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2022 Annual Meeting of Stockholders.

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.

Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2022 Annual Meeting of Stockholders.

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.

Our independent public accounting firm is Wei, Wei & Co., LLP, Flushing, New York, PCAOB Auditor ID 2388 .

Our predecessor independent public accounting firm was RSM US LLP, Boston, Massachusetts, PCAOB Auditor ID 49.

Incorporated by reference to our definitive Proxy Statement to be filed pursuant to Regulation 14A under the Exchange Act in connection with our 2022 Annual Meeting of Stockholders.

Exhibits, Financial Statement Schedules.

(a) Documents Filed.

The following documents are filed as part of this

Annual Report on Form 10-K:

The following documents are filed as part of this Annual Report on Form 10-K:

(1) Financial Statements.

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Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firm s

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for the years ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’

Equity for the years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020

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(2) Financial Statement Schedules:

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.

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.

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(b) Exhibits:

The exhibits listed in the accompanying Exhibit Index

are filed as a part of this Annual Report on Form 10-K.

The exhibits listed in the accompanying Exhibit Index are filed as a part of this Annual Report on Form 10-K.

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.

INDEX TO CONSOLIDATED FINANCIAL

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.

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

BIOSTAGE, INC.

Report of Independent Registered Public Accounting Firm

Reports of Independent Registered Public Accounting Firms

Consolidated Balance Sheets as of December 31, 2021 and 2020

Consolidated Statements of Operations for the years ended December 31, 2021 and 2020

Consolidated Statements of Stockholders’

Equity for the years ended December 31, 2020 and 2019

Consolidated Statements of Stockholders’ Equity for the years ended December 31, 2021 and 2020

Consolidated Statements of Cash Flows for the years ended December 31, 2021 and 2020

Notes to Consolidated Financial Statements

Report of Independent Registered Public Accounting

Report of Independent Registered Public Accounting Firm

To the Shareholders and the Board of Directors of

Biostage, Inc.

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheet of Biostage, Inc.

and subsidiaries (the Company) as of December 31, 2021, the related consolidated statements of operations, changes in stockholders’ equity and cash flow for the year then ended, and the related notes to the consolidated financial statements (collectively, the consolidated financial statements).

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021, and the results of its operations and its cash flow for the year ended December 31, 2021, in conformity with accounting principles generally accepted in the United States of America.

Emphasis of Matter Regarding Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern.

As discussed in Note 1 to the consolidated financial statements, the Company has suffered recurring losses from operations, has an accumulated deficit, uses cash flows in its operations, and will require additional financing to continue to fund its 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 consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audit.

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 audit 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 consolidated 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 audit, 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 audit included performing procedures to assess the risks of material misstatement of the consolidated 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 consolidated financial statements.

Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matter

The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that:

(1) relates to accounts or disclosures that are material to the consolidated financial statements and (2) involved our especially challenging, subjective, or complex judgments.

The communication of a critical audit matter does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Share-based Compensation – Performance-Based Awards

As described in Note 15 to the consolidated financial statements, the Company has 510,742 unvested performance-based options outstanding for which there is unrecognized compensation expense of approximately $1.3 million at December 31, 2021.

No expense has been recognized for these unvested awards as of December 31, 2021 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 vesting 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.

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 and evaluated their conclusions ed on the probability of achievement of the business milestones within the performance-based awards by assessing the Company’s liquidity requirements needed to fund the achievement of the milestones outlined in the grant agreements and reviewed the Company’s public press releases through the issuance date below.

/s/ Wei, Wei & Co., LLP

We have served as the Company’s auditor since 2021.

Flushing, New York

March 31, 2022

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors of

Biostage, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheets of Biostage,

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

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.

We have audited the accompanying consolidated balance sheet of Biostage, Inc.

and its subsidiaries (the Company) as of December 31, 2020, the related consolidated statements of operations, stockholders’ equity and cash flows for the year 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 the results of its operations and its cash flows for the year 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

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.

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

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.

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 audit.

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit 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 audit 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

(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

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.

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.

Our audit 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 audit 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 audit provides a reasonable basis for our opinion.

/s/ RSM US LLP

We have served as the Company's auditor since 2018.

We served as the Company's auditor from 2018 to 2021.

Boston, Massachusetts

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BIOSTAGE, INC.

AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

( In thousands, except par value and share data )

( In thousands, except share and par value data )

Current assets:

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Property, plant and equipment, net

Right-of-use assets

LIABILITIES AND STOCKHOLDERS' EQUITY

Right-of-use assets, net

LIABILITIES AND STOCKHOLDERS’ (DEFICIT) EQUITY

Current liabilities:

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Accrued and other current liabilities

Accrual for contingency matter

Current portion of notes payable

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Commitments and contingencies (Note 9)

Stockholders' equity:

Stockholders’ (deficit) 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;

2,000,000 shares authorized and none issued and outstanding

Common stock, par value $ 0.01 per share, 60,000,000 shares authorized;

10,760,871 and 9,388,407 issued and outstanding at December 31, 2021 and 2020, respectively

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Accumulated deficit

Total stockholders' equity

Total liabilities and stockholders' equity

See accompanying notes to consolidated financial

Total stockholders’ (deficit) equity

Total liabilities and stockholders’ (deficit) equity

See accompanying notes to consolidated financial statements.

BIOSTAGE, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF OPERATIONS

(In thousands, except per share data)

(In thousands, except share and per share data)

Year Ended December 31,

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Research and development

Selling, general and administrative

General and administrative

Total operating expenses

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Other income (expense), net:

Forgiveness of notes payable

Change in fair value of warrant liability

Other expense

Total other income (expense), net

Other income (expense), net

Total other income, net

Basic and diluted net loss per share

Weighted average common shares, basic and diluted

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

BIOSTAGE, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(In thousands)

Stockholders'

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS CHANGES IN STOCKHOLDERS' EQUITY

(In thousands, except share data)

(Deficit) Equity

Balance at December 31, 2019

Share-based compensation

Issuance of common stock and warrants to purchase common

Issuance of common stock from exercise

Common stock withheld for taxes

Issuance of common stock and warrants to purchase common stock

Issuance of common stock from exercise of warrants

Balance at December 31, 2020

Share-based compensation

Common stock withheld for taxes

Issuance of common stock and warrants to purchase common

Issuance of common stock from exercise

Issuance of common stock and warrants to purchase common stock

Balance at December 31, 2021

See accompanying notes to unaudited consolidated

financial statements.

See accompanying notes to consolidated financial statements.

BIOSTAGE, INC.

AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

3 unchanged sentences

Adjustments to reconcile net loss to net cash used in operating activities:

Forgiveness of notes payable

Share-based compensation expense

5 unchanged sentences

Accrued and other current liabilities

Accrual for contingency matter

Net cash used in operating activities

8 unchanged sentences

Net cash provided by financing activities

Net increase (decrease) in cash and restricted cash

Net increase in cash and restricted cash

Cash and restricted cash at the beginning of the year

4 unchanged sentences

Increase of right-of-use asset and liability due to lease extension

See accompanying notes to consolidated financial

See accompanying notes to consolidated financial statements.

BIOSTAGE, INC.

AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1 unchanged sentence

Biostage, Inc.

(Biostage or the Company) is a biotechnology

company developing bioengineered organ implants based on the Company’s novel Cellframe ™

and Cellspan ™

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

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).

(Biostage or the Company) is a biotechnology company with a mission to cure patients of cancers, injuries, and birth defects of the gastro-intestinal tract and the airways.

The Company believes its technology is likely to be used to treat esophageal cancer, esophageal injuries, and birth defects in the esophagus.

The Company believes additional product candidates in its pipeline may treat bronchial cancer, intestinal cancer, and colon cancer.

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., or Harvard Bioscience, contributed its regenerative medicine business assets, plus $ 15 million of cash, into Biostage, or 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, or 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.

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, or U.S.

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

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 has incurred substantial operating losses since its inception, and as of December 31, 2021 had an accumulated deficit of approximately $ 76.9 million and will require additional financing to fund future operations.

The Company expects that its operating cash on-hand as of December 31, 2021 of approximately $ 1.2 million will enable it to fund its operating expenses and capital expenditure requirements only into early third quarter of 2022.

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.

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.

In the event the Company does not raise additional capital from outside sources in the third quarter of 2022, 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 product candidates, as well as regulatory efforts and collaborative arrangements necessary for the Company’s product candidates 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.

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.

functional currency for these subsidiaries is the U.S dollar.

The consolidated financial statements include the accounts of Biostage, and its three wholly-owned subsidiaries, Harvard Apparatus Regenerative Technology Limited (Hong Kong), Harvard Apparatus Regenerative Technology GmbH (Germany) and Biostage Limited (UK).

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

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.

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.

The Company has one business segment and does not have significant

costs or assets outside the U.S.

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.

The following table provides a reconciliation of cash and restricted cash reported within the consolidated balance sheets that sum to the total of the same amounts shown in the consolidated statements of cash flows:

(in thousands)

Restricted cash

Total cash and restricted cash as shown in the consolidated statements of cash flows

Restricted cash consists of approximately $ 50,000 held as collateral for the Company’s credit card program as of December 31, 2021, and December 31, 2020.

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:

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

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Furniture, machinery and equipment, computer equipment and software

Maintenance and repairs are charged to expense as incurred, while any

additions or improvements are capitalized.

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.

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, 2021, no such impairment charges have been recorded.

Research and Development

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Share-based Compensation

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.

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

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.

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 vesting period, which is generally the service 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).

The Company elected to use the Black-Scholes option-pricing model for the valuation of stock-based payment awards.

The determination of the fair value of stock-based payment awards is determined on the date of grant using the Black-Scholes option-pricing model which is affected by the market 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, or RSUs, is based on the number of shares granted and market price of the stock on the date of grant and is 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 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

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 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, as well as for operating losses and tax credit carry-forwards.

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.

A valuation allowance is recorded when it is more likely than not that some or all of the net deferred tax assets will not be realized.

Accordingly, the Company provides a valuation allowance, if necessary, to reduce net deferred tax assets to the amount that is expected to be realized.

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.

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.

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.

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 the 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 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.

adoption of this standard did not have a material impact on the Company’s disclosures.

Financial investments that potentially subject the Company to credit risk consist of cash.

The Company has all cash at accredited financial institutions.

Bank accounts in the United States are insured by the Federal Deposit Insurance Corporation (FDIC) up to $ 250,000 .

The Company does not believe that it is subject to unual credit risk beyond the normal credit risk associated with commercial banking relationships.

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 the 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, or SBIR, grant by the Eunice Kennedy National Institute of Child Health and Human Development, or NICHD, to support testing of the pediatric Biostage 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, 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, 2021 and 2020, the Company recognized approximately $ 165,000 and $ 447,000 of grant income, respectively, from Phase II of the SBIR grant.

The aggregate SBIR grant provided a total award of $ 1.8 million, of which, approximately $ 1.5 million has been recognized through December 31, 2021.

The Phase II portion of the award expired effective September 30, 2021.

Recently Issued Accounting Pronouncements Not Yet Adopted

From time to time, new accounting pronouncements are issued by the FASB or other standard setting bodies we adopt as of the specified effective date.

Unless otherwise discussed below, we do not believe that the adoption of recently issued standards have or may have a material impact on our consolidated financial statements.

In June 2016, the FASB issued ASU No.

2016-13, Financial Instruments

- Credit Losses (Topic 326):

2016-13, Financial Instruments - Credit Losses (Topic 326):

Measurement of Credit Losses on Financial Instruments (ASU 2016-12) .

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

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.

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 adopt this standard on January 1, 2023, and is evaluating the impact that the adoption of ASU 2016-13 will have on its consolidated financial statements.

In December 2019 the FASB issued Accounting Standards Update No.

2019-12, Income Taxes (Topic 740):

Simplifying the Accounting for Income Taxes.

This standard removes certain exceptions to the general principles in Topic 740 and simplifies certain other aspects of the accounting for income taxes.

This standard became effective on January1, 2021, and did not have a material impact on the Company’s consolidated financial statements and related disclosures.

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

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.

On May 4, 2020, the Company 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 the Company and accrued interest at a fixed interest rate of 1 % per annum from the funding date of May 4, 2020.

On December 18, 2020, the Company submitted the loan forgiveness application for the entire borrowings of approximately $ 0.4 million to the lender and was notified on January 7, 2021 that the application was submitted to the Small Business Administration, or SBA, for review.

On May 23, 2021, the Company was notified that the SBA determined that the application for loan forgiveness was approved, and that the SBA remitted the forgiven amount to the Lender.

Payments of principal and interest were deferred since the funding under the original terms of the promissory note and all such amounts were forgiven.

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)

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.

As such, the Notes Payable and applicable accrued interest have been recorded as forgiveness of the Notes Payable resulting in a gain of approximately $ 408,000 for the year ended December 31, 2021.

As of December 31, 2020, repayment amounts due within one year were recorded as current liabilities, and the remaining amounts due in more than one year as long-term liabilities.

Fair Value Measurements

Fair value is defined as the exchange price that would be received

for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in

an orderly transaction between market participants on the measurement date.

The Company utilizes a valuation hierarchy for disclosure of the inputs

to the valuations used to measure fair value.

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.

The Company utilizes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value.

This hierarchy prioritizes the inputs into three broad levels as follows.

Level 1 inputs

are quoted prices (unadjusted) in active markets for identical assets or liabilities.

Level 2 inputs are quoted prices for similar assets

and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market

corroboration, for substantially the full term of the financial instrument.

Level 3 inputs are unobservable inputs based on the Company’s

own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability’s classification within the

hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company had no assets or liabilities classified as Level 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:

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’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 8 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, 2021 and 2020:

Fair Value Measurement as of December 31, 2021

6 unchanged sentences

Warrant liability

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.

Prepaid Expenses and Other Current Assets

There were no transfers between Level 1, Level 2 and Level 3 in either of the years ended December 31, 2021 and December 31, 2020.

Prepaid Expenses and Other Current Asset

Prepaid expenses and other current assets consist of the following:

3 unchanged sentences

Total prepaid expenses and other current assets

Deposits consist of cash payments for retainers for legal representation in support of the Company’s ongoing litigation as more fully described in Note 9.

Property, Plant and Equipment, Net

7 unchanged sentences

Property, plant and equipment, net

Depreciation expense amounted to $184,000 and $214,000 for the years

ended December 31, 2020 and 2019, respectively.

Depreciation expense amounted to approximately $ 107,000 and $ 184,000 for the years ended December 31, 2021 and 2020, respectively.

Accrued and Other Current Liabilities

1 unchanged sentence

(in thousands)

Professional fees

Advisory costs

Total accrued and other current liabilities

Audit services

Total expenses

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.

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

During 2016 and 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 1,044,396 warrants were initially recorded at fair value and subsequently re-measured each reporting period.

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, the holders of 952,184 warrants agreed to a modification of the term which removed the cash put provision.

The remaining 92,212 warrants continue to be re-measured at each reporting period as long as they are outstanding and un-modified.

In February of 2022, the remaining 92,212 warrants expired unexercised.

The Company has re-measured the liability for the remaining outstanding warrants to their estimated fair value using the Black-Scholes option pricing model with the following weighted average assumptions:

Assumptions for Estimating Fair Value

6 unchanged sentences

Market value of common stock

Warrants to purchase shares of common stock

The following table presents a reconciliation of the Company’s

warrant liabilities for the years ended December 31, 2020 and 2019:

The following table presents a reconciliation of the Company’s warrant liabilities for the years ended December 31, 2021 and 2020:

Warrant Liability

6 unchanged sentences

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.

Company believes that such claim lacks merit, the Company is unable to predict the ultimate outcome of such litigation.

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.

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.

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.

following table summarizes the presentation of the Company’s operating leases in its consolidated balance sheets:

(in thousands)

On April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint with the Suffolk Superior Court, in the County of Suffolk, Massachusetts, or the “Court”, against the Company and other defendants, including Harvard Bioscience, our former parent entity prior to the spin-off of the Company in 2013, as well as another third party.

The complaint seeks payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly caused by products, including one synthetic trachea scaffold and two bioreactors, provided by certain of the named defendants and utilized in connection with surgeries performed by third parties in Europe in 2012 and 2013.

This 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 Biostage Esophageal Implant.

On October 1, 2019, the Court entered an order granting plaintiffs’ motion to compel the defendants to produce discovery.

Subsequently, the plaintiff filed a motion for sanctions against the Company on January 6, 2020 claiming failure to produce the required discovery.

The Company’s counsel at the time, which had been selected for the case by its liability insurance carrier, never notified the Company of plaintiffs’ motion and never responded to plaintiff’s motion.

As a result of the failure of the Company’s former counsel to respond, on January 29, 2020, the Court entered an order allowing plaintiffs’ sanctions against the Company and the other defendants, which established a sanction of admitted liability.

In June 2021, the Company was informed of these 2019 and 2020 court actions by new defense counsel appointed by its liability insurance carrier.

On June 9, 2021, the Company, together with the other defendants, filed a motion to vacate the Court’s order allowing plaintiff’s motion for sanctions, and following a hearing on such motion, on August 6, 2021 the Court issued a ruling in our favor, vacating the sanctions.

This case is now proceeding on the merits, which the Company will continue to oppose vigorously.

On September 15, 2021, one of the Company’s product liability insurance carriers which had been providing a defense to the Company and Harvard Bioscience, notified each party that it was denying coverage under the applicable policy for the lawsuit and would no longer be providing a defense to each such company with respect thereto, or covering related legal expenses incurred after September 30, 2021.

The insurance carrier also filed a corresponding complaint for declaratory judgment with the Court asking the Court to declare that said insurance carrier is not required to defend, indemnify or provide coverage to the Company and Harvard Bioscience with respect to the lawsuit described above.

The Company responded by filing claims against its insurance carrier for insurance coverage, and the Company also brought a motion seeking the Court to order Medmarc to continue paying for the Company’s reasonable defense costs in the underlying litigation while

the coverage dispute is pending.

During the fourth quarter of 2021, the Company incurred legal costs of approximately $ 1.4 million in support of these claims.

On January 25, 2022, the Court granted the Company’s motion for preliminary injunction and held that Medmarc breached its duty to defend the Company when it unilaterally stopped paying for the defense.

Although the coverage dispute remains pending between the parties, the Court ordered Medmarc to pay for the cost of the defense until the coverage dispute is resolved, and the Company’s attorneys’ fees incurred in connection with the preliminary injunction motion.

The Company submitted a request for immediate reimbursement of approximately $ 1.0 million of legal costs from Medmarc.

On March 3, 2022, the Company received a cash payment of approximately $ 0.1 million from Medmarc and is actively pursuing all amounts owed the Company under the Court’s order.

Additionally, plaintiffs in the wrongful death action filed suit in the Superior Court of Suffolk County, Massachusetts against the Company, Harvard Bioscience, and their insurance carriers on November 18, 2021 alleging violations of Massachusetts’ General Laws 175 §112C, 93A, and 176D §3.

That matter is at a preliminary stage and no schedule has been set in that case.

While there can be no assurance of prevailing in any of the matters described above, the Company intends to defend the claims against it vigorously, and to recover all available amounts under the Company’s insurance coverage.

The Company has retained new defense counsel for the wrongful death lawsuit and a trial date has been set for October 2022.

If the Company loses on the merits and a jury awards damages, the Company does not know the exact amount of compensatory and, potentially, punitive damages that could be awarded, but the amounts could be substantial.

The Company cannot determine such amount in relation to trial.

However, based on review of the circumstances surrounding the case, the Company has recorded an accrual for the contingency matter of approximately $ 3.3 million in general and administrative expenses during the year ended December 31, 2021.

The Company cannot provide any assurance that any further disposition of these matters would not result in a change in such estimate.

The Company is also evaluating possible malpractice claims as one source of recovery but have not asserted such a claim and cannot provide assurance that such a claim would provide a recovery.

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.

The Company leases laboratory and office space and certain equipment with remaining terms ranging from 1 year to 3 years .

The laboratory and office arrangement is under a sublease that was renewed in December of 2021 and currently extends through May 31, 2023.

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:

Balance Sheet Classification

(in thousands)

Operating lease assets

Right-of-use asset

Right-of-use asset, net

Current portion of operating lease liabilities

3 unchanged sentences

Total operating lease liabilities

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:

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, 2021, and 2020 amounted to approximately $ 121,000 , respectively.

The weighted average remaining lease terms and weighted average discount rates as of December 31, 2021 and 2020 were as follows:

Year ended December 31,

1 unchanged sentence

Discount rate

The following table summarizes the effect of lease costs in the Company’s

condensed consolidated statements of operations:

the Year Ended December 31

of Operations Classification

lease expense

and development

general and administrative

The minimum lease payments for the next five years and thereafter are

expected to be as follows:

The following table summarizes the effect of lease costs in the Company’s consolidated statements of operations:

For the Year Ended December 31,

(in thousands)

Operating lease expense

Research and development

General and administrative

The minimum lease payments for the next five years and thereafter are as follows:

December 31, 2021

(in thousands)

Total lease payments

1 unchanged sentence

Present value of operating lease liabilities

The Company’s net loss was generated entirely in the U.S.

2020 and 2019.

Income taxes for the years ended December 31, 2020 and 2019 differed from the amount computed by applying the U.S.

income tax rate of 21% for both 2020 and 2019 to pre-tax loss as a result of the following:

A reconciliation of taxes utilizing the expected federal tax rate of 21 % and the effective tax rate is as follows:

Years ended December 31,

(in thousands)

Computed “expected”

income tax benefit

Computed “expected” income tax benefit

State income tax benefit, net of federal income tax benefit

1 unchanged sentence

Stock-option cancellations

Adjustment of prior year income tax

Change in valuation allowance

Total income taxes

The components of the Company’s deferred tax asset are as follows:

Years ended December 31,

4 unchanged sentences

Stock-based compensation

Accrual for contingency matter

Lease liabilities

Excess book over tax depreciation

Accrued expenses

Total deferred tax assets

4 unchanged sentences

Total deferred tax liability

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

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

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

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

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;

The Company has recorded a valuation allowance against its deferred tax assets for the years ended December 31, 2021 and 2020, 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 $ 2.1 million and $ 1.0 million for the years ended December 31, 2021 and 2020, respectively, primarily as a result of operating losses generated with no corresponding financial statement benefit.

As of December 31, 2021, the Company had federal net operating loss carryforwards, or NOLs, of approximately $ 52.8 million to offset future federal taxable income and state NOLs of approximately $ 52.2 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, 2021, which amount to $ 26.3 million, can be carried forward indefinitely, however, are limited to be utilized to offset 80% of taxable income in each successive year.

As of December 31, 2021, the Company also has federal and state tax research and development credit carryforwards of approximately $ 1.5 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 net deferred tax assets due to the uncertainty regarding future taxable income for the foreseeable future.

For all years through December 31, 2021, 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.

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

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.

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 received 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.

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, 2021 and 2020.

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;

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, 2020;

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.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security, or 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.

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.

employees, which includes an employee savings plan established under Section 401(k) of the U.S.

Internal Revenue Code, or 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 $ 39,000 and $ 62,000 for the years ended December 31, 2021 and 2020, respectively.

Preferred Stock

There are no shares of any class of preferred stock outstanding as

of December 31, 2020 or December 31, 2019.

There are no shares of any class of preferred stock outstanding as of December 31, 2021 or December 31, 2020.

Authorized shares for each preferred stock class is as follows:

3 unchanged sentences

Series D Convertible Preferred 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:

The Company has 60,000,000 shares authorized as of December 31, 2021 and 44,405,107 shares of common stock available for issuance.

The following represent the Company’s common stock transactions during December 31, 2021 and 2020:

2021 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:

On November 26, 2021, the Company issued a total of 72,464 shares of its common stock at a purchase price of $ 3.45 per share and warrants to purchase 36,232 shares of common stock to its Interim Chief Executive Officer at a purchase price of $ 3.45 per unit.

Each unit consisted of one share of common stock and a warrant to purchase one half of one share of common stock.

The shares and warrants were sold for aggregate gross and net proceeds of approximately $ 0.3 million of which, $ 0.2 million and $ 0.1 million was allocated to the common stock and warrants, respectively.

During the year ended December 31, 2021, the Company issued a total of 1,300,000 shares of its common stock at a purchase price of $ 2.00 per share and warrants to purchase 650,000 shares of common stock to a group of existing investors at a purchase price of $ 2.00 per unit.

Each unit consisted of one share of common stock and a warrant to purchase one half of one share of common stock.

The shares and warrants were sold for aggregate gross and net proceeds of approximately $ 2.6 million, of which $ 1.8 million and $ 0.8 million was allocated to the common stock and warrants, respectively.

The Company classified the warrants in each of the aforementioned issuances on its consolidated balance sheets as equity, and valued the respective warrants issued in conjunction with common stock placements using the Black-Scholes model based on the following weighted average assumptions:

Risk-free interest rate

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Market value of common stock

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.

2020 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.

Warrant to purchase common stock activity for the year ended December

31, 2020 was as follows:

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 the respective warrants utilizing the Black-Scholes model based on the following weighted average assumptions:

Risk-free interest rate

Expected volatility

Expected term

Expected dividend yield

Exercise price

Market value of common stock

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.

Warrant to purchase common stock activity for the year ended December 31, 2021 was as follows:

Weighted-average

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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.

The Company maintains the 2013 Employee Stock Purchase Plan, or the ESPP Plan, whereas 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,

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, 2021.

There are 2,966 shares available for issuance as of December 31, 2021 and December 31, 2020.

There was no ESPP Plan activity in

2020 or 2019.

There was no ESPP Plan activity in 2021 or 2020.

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 Company maintains the Amended and Restated Equity Incentive Plan, or 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.

In June 2020, the Company’s shareholders approved the 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 2,744,710 shares available for issuance as of December 31, 2021.

Stock option activity under the Plan for the year ended December 31,

2020 was as follows:

Stock option activity under the Plan for the year ended December 31, 2021 was as follows:

Weighted-average

exercise price

Weighted-average

contractual life

Aggregate intrinsic

exercise price

contractual life (years)

value (in thousands)

Outstanding at December 31, 2020

Canceled / forfeited

Outstanding at December 31, 2021

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Options vested and expected to vest

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.

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:

The Company’s outstanding stock options include 510,742 performance-based awards that have vesting provisions subject to the achievement of certain business milestones.

Total unrecognized compensation expense for the remaining performance-based awards is approximately $ 1.3 million.

No expense has been recognized for these awards as of December 31, 2021 given that the milestone achievements for these awards have not yet been deemed probable for accounting purposes.

Aggregate intrinsic value for outstanding options and exercisable options for the year ended December 31, 2021, was approximately $ 294,000 based on the Company’s closing stock price of $ 2.30 per share as of December 31, 2021.

As of December 31, 2021, unrecognized compensation cost related to unvested non-performance-based awards amounted to $ 1.1 million, which will be recognized over a weighted-average period of 1.83 years.

The weighted average assumptions for valuing the Company’s stock options granted were as follows:

Year Ended December 31,

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Expected dividend yield

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 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

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:

Unvested at December 31, 2019

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.

Share-based compensation expense related to the Plan for the years

ended December 31, 2020 and 2019 was allocated as follows:

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 .

The weighted average estimated fair value of stock options granted using the Black-Scholes model was $ 1.84 per share for each of the years ended December 31, 2021 and 2020.

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.

Share-based compensation expense related to the Plan for the years ended December 31, 2021 and 2020 was allocated as follows:

Years Ended December 31,

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Total stock-based compensation

In February 2020, as part of the termination agreement 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 $ 153,000 , $ 70,000 , and $ 4,000 , respectively, of share-based compensation for the year ended December 31, 2020.

Net Loss per Share

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Years Ended December 31,

(in thousands, except per share data)

(in thousands, except shares and per share data)

Weighted-average shares outstanding

Net loss per share –

basic and diluted

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 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:

Net loss per share – basic and diluted

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, 2021 and 2020 because including them would have had an anti-dilutive effect:

Years Ended December 31,

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Options to purchase common stock

Unvested restricted common stock units

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.

The Company has performed an evaluation of subsequent events through the time of filing this Annual Report on Form 10-K with the Securities Exchange Commission.

In February and March of 2022, the Company received cash deposits in escrow of approximately $ 3.1 million from a group of prospective investors pertaining to a potential private placement transaction.

These funds remain the respective investor’s property and are being held in escrow by the Company in a separate account until the execution of a common stock purchase agreement.

During the period of January 1, 2022 through the date of this filing, the Company has incurred additional legal costs of approximately $ 0.6 million in support of its ongoing litigation as more fully described in Note 9.

Form 10-K Summary.

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.

April 13, 2021

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:

(principal executive officer)

April 13, 2021

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

April 13, 2021

/s/ Herman Sanchez

Herman Sancez

April 13, 2021

/s/ James Shmerling

James Shmerling

April 13, 2021

/s/ Wei Zhang

April 13, 2021

EXHIBIT INDEX

The following exhibits are filed as part of this Annual Report on Form

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.

2 unchanged sentences

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).

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).

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).

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).

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).

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).

Certificate of Amendment to Amended and Restated Certificate of Incorporation of Biostage, Inc.

10 unchanged sentences

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).

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).

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).

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).

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).

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).

(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).

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).

1 unchanged sentence

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).

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).

Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company’s Current Report on Form 8 K, filed on June 22, 2021, and incorporated by reference thereto).

Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company’s Current Report on Form 8 K, filed on September 8, 2021, and incorporated by reference thereto).

Form of Common Stock Purchase Warrant (previously filed as an exhibit to the Company’s Current Report on Form 8 K, filed on November 30, 2021, and incorporated by reference thereto).

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).

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).

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).

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).

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).

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).

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).

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).

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).

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).

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).

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&dagger;

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).

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).

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).

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).

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).

Patent Rights Assignment dated December 21, 2012 between Biostage, Inc.

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).

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).

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).

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).

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).

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).

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).

Offer Letter, dated June 4, 2018, between Biostage, Inc.

4 unchanged sentences

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).

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).

Employment Agreement, dated November 26, 2021, between Biostage, Inc.

and David Green (previously filed as an exhibit to the Company’s Current Report on Form 8-K, filed on November 30, 2021 and incorporated by reference thereto).

Subsidiaries of Biostage, Inc.

Consent of Wei, Wei & Co.

Consent of RSM US LLP.

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.

Certification of Interim Chief Executive Officer 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.

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.

Certification of President of Biostage, Inc., pursuant to 18 U.S.C.

Certification of Interim Chief Executive Officer of Biostage, Inc., pursuant to 18 U.S.C.

Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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XBRL Taxonomy Extension Presentation Linkbase Document.

Cover Page Interactive Data File (formatted in iXBRL and contained in Exhibit 101)

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.

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.

3 unchanged sentences

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.

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.

March 31, 2022

/s/ David Green

Interim Chief Executive Officer

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:

/s/ David Green

Interim Chief Executive Officer, Director, and Chairman

(principal executive officer)

March 31, 2022

Pellegrino Jr.

Interim Vice President of Finance

(principal financial officer and principal accounting officer)

March 31, 2022

/s/ Jason Jing Chen

Jason Jing Chen

Vice Chairman

March 31, 2022

/s/ Herman Sanchez

Herman Sanchez

March 31, 2022

/s/ James Shmerling

James Shmerling

March 31, 2022

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 9A. Controls and Procedures