UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

☒	Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended September 30, ~~2021~~2022

☐	Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from to

Commission file number 001-35853

BIOSTAGE, INC.

(Exact Name of Registrant as Specified in Its Charter)

Delaware	45-5210462
(State or Other Jurisdiction of	(IRS Employer
Incorporation or Organization)	Identification No.)


84 October Hill Road, Suite 11, Holliston, MA		01746
(Address of Principal Executive Offices)		(Zip Code)

(774) 233-7300

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Title of each class		Trading Symbol(s)		Name of each exchange on which registered
N/A		N/A		N/A

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ YES ☐ NO

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ⌧ YES ◻ NO

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☐	Accelerated filer ☐

Non-accelerated filer ⌧	Smaller reporting company ☒

	Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ◻ YES ☒ NO

As of November ~~15, 2021,~~7, 2022, there were ~~10,688,407~~11,643,751 shares of common stock, par value $0.01 per share, outstanding.

Table of Contents

Biostage Inc.

Form 10-Q

For the Quarter Ended September 30, ~~2021~~2022

INDEX

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements.

BIOSTAGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands, except ~~for~~share and par value ~~and share amounts)~~data)

September 30,

December 31,


2021

2020

(Unaudited)

ASSETS


Current assets:




Cash

$
1,995

$
1,026
Restricted cash

50

50
Grant receivable

0

77
Prepaid expenses and other current assets

277

524
Total current assets

2,322

1,677
Property, plant and equipment, net

130

217
Right-of-use assets

103

182
Total assets

$
2,555

$
2,076

LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities:

Accounts payable

$
112

$
31
Accrued and other current liabilities

272

317
Current portion of notes payable

0

284
Warrant liability

31

17
Current portion of operating lease liability

81

107
Total current liabilities

496

756
Notes payable, net of current portion

0

120
Operating lease liability, net of current portion

22

75
Total liabilities

518


951

Commitments and contingencies (Note 7)

Stockholders’ equity:

Preferred stock, $0.01 par value; 2,000,000 shares authorized as of September 30, 2021 and December 31, 2020, 0 shares issued and outstanding

0


0
Common stock, $0.01 par value; 60,000,000 shares authorized as of September 30, 2021 and December 31, 2020; 10,688,407 and 9,388,407 issued and outstanding at September 30, 2021 and December 31, 2020, respectively

107

94
Additional paid-in capital

72,995

69,991
Accumulated deficit

(71,065)

(68,960)
Total stockholders’ equity

2,037

1,125
Total liabilities and stockholders’ equity

$
2,555

$
2,076


	September 30,		December 31,
	2022		2021
ASSETS		(Unaudited)
Current assets:
Cash	$	2,971	$	1,242
Restricted cash		—		50
Prepaid expenses and other current assets		212		295
Total current assets		3,183		1,587
Property, plant and equipment, net		78		110
Right-of-use assets, net		88		169
Deferred financing costs		311		—
Total assets	$	3,660	$	1,866

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable	$	882	$	676
Accrued and other current liabilities		481		798
Accrual for contingency matter		—		3,250
Warrant liability		—		2
Operating lease liability, current		79		110
Total current liabilities		1,442		4,836
Operating lease liability, net of current portion		9		59
Total liabilities		1,451		4,895

Commitments and contingencies (Note 8)
Series E convertible preferred stock, $0.01 par value per share, 5,000 shares authorized, 4,000 shares issued and outstanding		4,095		—

Stockholders’ deficit:
Common stock, par value $0.01 per share, 60,000,000 shares authorized; 11,615,642 and 10,760,871 issued and outstanding at September 30, 2022 and December 31, 2021, respectively		116		108
Additional paid-in capital		79,514		73,801
Accumulated deficit		(81,516)		(76,938)
Total stockholders’ deficit		(1,886)		(3,029)
Total liabilities, convertible preferred stock, and stockholders’ deficit	$	3,660	$	1,866

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

BIOSTAGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

(In thousands, except share and per share ~~and share amounts)~~data)

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020
Revenues

$
0

$
0

$
0

$
0

Operating expenses:

Research and development

250

548

1,023

1,727
General and administrative

572

510

1,712

2,488
Total operating expenses

822

1,058

2,735

4,215

Operating loss

(822)

(1,058)

(2,735)

(4,215)

Other income (expense):

Forgiveness of notes payable

0

0

408

0
Grant income

0

370

165

370
Change in fair value of warrant liability

(27)

28

(14)

6
Other income (expense), net

0

0

71

(2)
Total other income (expense), net

(27)

398

630

374

Net loss

$
(849)

$
(660)

$
(2,105)

$
(3,841)

Basic and diluted net loss per share

$
(0.08)

$
(0.07)

$
(0.22)

$
(0.45)
Weighted-average common shares, basic and diluted

10,014,494

8,855,465

9,614,781

8,593,810


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Operating expenses:
Research and development	$	369	$	250	$	998	$	1,023
General and administrative		711		572		3,662		1,712
Total operating expenses		1,080		822		4,660		2,735

Operating loss		(1,080)		(822)		(4,660)		(2,735)

Other income (expense), net:
Forgiveness of notes payable		—		—		—		408
Sublease income		26		—		87		—
Grant income		—		—		—		165
Change in fair value of warrant liability		—		(27)		2		(14)
Other (expense) income, net		(2)		—		(7)		71
Total other income (expense), net		24		(27)		82		630

Net loss		(1,056)		(849)		(4,578)		(2,105)
Less: preferred stock dividends		(77)		—		(95)		—
Net loss attributable to common stockholders	$	(1,133)	$	(849)	$	(4,673)	$	(2,105)

Basic and diluted net loss per share	$	(0.10)	$	(0.08)	$	(0.42)	$	(0.22)
Weighted average common shares, basic and diluted		11,615,642		10,014,494		11,205,477		9,614,781

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

BIOSTAGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY

(Unaudited)

(In thousands, except ~~for~~ share ~~amounts~~data)

Three Months Ended September 30, 2021

Number of

Common

Additional

Total

Shares

Common

Paid-in

Accumulated

Stockholders’


Outstanding

Stock

Capital

Deficit

Equity
Balance at June 30, 2021

9,688,407

$
97

$
70,847

$
(70,216)

$
728
Net loss

0

0

0

(849)

(849)
Share-based compensation expense

0

0

160

0

160
Issuance of common stock and warrants

1,000,000

10

1,988

0

1,998
Balance at September 30, 2021

10,688,407

$
107

$
72,995

$
(71,065)

$
2,037

Three Months Ended September 30, 2020

Number of

Common

Additional

Total

Shares

Common

Paid-in

Accumulated

Stockholders’


Outstanding

Stock

Capital

Deficit

Equity
Balance at June 30, 2020

8,688,083

$
87

$
67,419

$
(67,276)

$
230
Net loss

0

0

0

(660)

(660)
Share-based compensation

0

0

151

0

151
Issuance of common stock and warrants to purchase common stock

125,000

1

498

0

499
Issuance of common stock from exercise of warrants

575,324

6

1,783

0

1,789
Balance at September 30, 2020

9,388,407

$
94

$
69,851

$
(67,936)

$
2,009

~~See accompanying notes to unaudited consolidated financial statements.~~

~~Table of Contents~~

~~BIOSTAGE, INC.~~

~~CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY~~

~~(Unaudited)~~

(~~In thousands, except for share amounts~~)

Nine Months Ended September 30, 2021

Number of

Common

Additional

Total


Shares

Common

Paid-in

Accumulated

Stockholders’


Outstanding

Stock

Capital

Deficit

Equity
Balance at December 31, 2020

9,388,407

$
94

$
69,991

$
(68,960)

$
1,125
Net loss

0

0

0

(2,105)

(2,105)
Share-based compensation expense

0

0

421

0

421
Issuance of common stock and warrants

1,300,000

13

2,583

0

2,596
Balance at September 30, 2021

10,688,407

$
107

$
72,995

$
(71,065)

$
2,037

Nine Months Ended September 30, 2020

Number of

Common

Additional

Total


Shares

Common

Paid-in

Accumulated

Stockholders’


Outstanding

Stock

Capital

Deficit

Equity
Balance at December 31, 2019

8,155,555

$
82

$
65,102

$
(64,095)

$
1,089
Net loss

0

0

0

(3,841)

(3,841)
Share-based compensation

37,974

0

1,004

0

1,004
Common stock withheld for taxes

(12,026)

0

(42)

0

(42)
Issuance of common stock and warrants to purchase common stock

276,027

2

1,056

0

1,058
Issuance of common stock from exercise of warrants

930,877

10

2,731

0

2,741
Balance at September 30, 2020

9,388,407

$
94

$
69,851

$
(67,936)

$
2,009



		Series E	Number of
		Convertible	Common			Additional				Total
		Preferred	Shares	Common		Paid-in		Accumulated		Stockholders’
		Stock	Outstanding	Stock		Capital		Deficit		Deficit
Balance at June 30, 2022	$	4,018	11,615,642	$	116	$	79,347	$	(80,460)	$	(997)
Preferred stock dividends		77	—		—		(77)		—		(77)
Share-based compensation expense		—	—		—		244		—		244
Net loss		—	—		—		—		(1,056)		(1,056)
Balance at September 30, 2022	$	4,095	11,615,642	$	116	$	79,514	$	(81,516)	$	(1,886)



		Series E	Number of
		Convertible	Common			Additional				Total
		Preferred	Shares	Common		Paid-in		Accumulated		Stockholders’
		Stock	Outstanding	Stock		Capital		Deficit		Equity
Balance at June 30, 2021	$	—	9,688,407	$	97	$	70,847	$	(70,216)	$	728
Issuance of common stock and warrants to purchase common stock		—	1,000,000		10		1,988		—		1,998
Share-based compensation expense		—	—		—		160		—		160
Net loss		—	—		—		—		(849)		(849)
Balance at September 30, 2021	$	—	10,688,407	$	107	$	72,995	$	(71,065)	$	2,037

See accompanying notes to unaudited condensed consolidated financial ~~statements.~~statements

Table of Contents

BIOSTAGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' (DEFICIT) EQUITY

(Unaudited)

(In thousands, except share data)



		Series E	Number of
		Convertible	Common			Additional				Total
		Preferred	Shares	Common		Paid-in		Accumulated		Stockholders’
		Stock	Outstanding	Stock		Capital		Deficit		Deficit
Balance at December 31, 2021	$	—	10,760,871	$	108	$	73,801	$	(76,938)	$	(3,029)
Issuance of Series E convertible preferred stock		4,000	—		—		—		—		—
Preferred stock dividends		95	—		—		(95)		—		(95)
Issuance of common stock and warrants to purchase common stock		—	854,771		8		5,052		—		5,060
Share-based compensation expense		—	—		—		756		—		756
Net loss		—	—		—		—		(4,578)		(4,578)
Balance at September 30, 2022	$	4,095	11,615,642	$	116	$	79,514	$	(81,516)	$	(1,886)



		Series E	Number of
		Convertible	Common			Additional				Total
		Preferred	Shares	Common		Paid-in		Accumulated		Stockholders’
		Stock	Outstanding	Stock		Capital		Deficit		Equity
Balance at December 31, 2020	$	—	9,388,407	$	94	$	69,991	$	(68,960)	$	1,125
Issuance of common stock and warrants to purchase common stock		—	1,300,000		13		2,583		—		2,596
Share-based compensation expense		—	—		—		421		—		421
Net loss		—	—		—		—		(2,105)		(2,105)
Balance at September 30, 2021	$	—	10,688,407	$	107	$	72,995	$	(71,065)	$	2,037

See accompanying notes to unaudited condensed consolidated financial statements

Table of Contents

BIOSTAGE, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(In thousands)

Nine Months Ended

September 30,


2021

2020
CASH FLOWS FROM OPERATING ACTIVITIES

Net loss

$
(2,105)

$
(3,841)
Adjustments to reconcile net loss to net cash used in operating activities:

Forgiveness of notes payable

(408)

0
Share-based compensation expense

421

1,004
Depreciation

87

139
Change in fair value of warrant liability

14

(6)
Changes in operating assets and liabilities:

Grant receivable

77

(370)
Prepaid expenses and other current assets

247

270
Accounts payable

81

(170)
Accrued and other current liabilities

(41)

(45)
Net cash used in operating activities

(1,627)

(3,019)

CASH FLOWS FROM INVESTING ACTIVITIES

Purchases of property, plant and equipment

0

(7)
Net cash used in investing activities

0

(7)

CASH FLOWS FROM FINANCING ACTIVITIES

Proceeds from issuance of common stock and warrants

2,596

1,058
Proceeds from exercise of warrants

0

2,741
Proceeds from notes payable

0

404
Acquisition of common stock for tax withholding obligations

0

(42)
Net cash provided by financing activities

2,596

4,161
Net increase in cash and restricted cash

969

1,135
Cash and restricted cash at beginning of period

1,076

963
Cash and restricted cash at end of period

$
2,045

$
2,098

Supplemental disclosure of non-cash investing and financing activities:

Issuance of vested stock

$
0

$
42


	Nine Months Ended
	September 30,
	2022		2021
OPERATING ACTIVITIES
Net loss	$	(4,578)	$	(2,105)
Adjustments to reconcile net loss to net cash used in operating activities:
Forgiveness of notes payable		—		(408)
Share-based compensation expense		756		421
Depreciation		40		87
Change in fair value of warrant liability		(2)		14
Changes in operating assets and liabilities:
Grant receivable		—		77
Prepaid expenses and other current assets		83		247
Deferred financing costs		(311)		—
Accounts payable		206		81
Accrued and other current liabilities		433		(41)
Net cash used in operating activities		(3,373)		(1,627)

INVESTING ACTIVITIES
Purchases of property, plant, and equipment		(8)		—
Net cash used in investing activities		(8)		—

FINANCING ACTIVITIES
Proceeds from issuance of common stock and warrants		5,060		2,596
Net cash provided by financing activities		5,060		2,596
Net increase in cash and restricted cash		1,679		969
Cash and restricted cash at the beginning of the year		1,292		1,076
Cash and restricted cash at the end of the period	$	2,971	$	2,045

Supplemental disclosure of non-cash activities:
Settlement of contingency matter	$	(3,250)	$	—
Settlement of due to Harvard Bioscience included in accrued and other current liabilities	$	(750)	$	—
Issuance of Series E convertible preferred stock	$	4,000	$	—
Preferred stock dividends	$	95	$	—

See accompanying notes to unaudited condensed consolidated financial statements.

Table of Contents

BIOSTAGE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Overview and Basis of Presentation

Overview

Biostage, Inc. (Biostage or the Company) is a clinical-stage biotechnology company ~~developing bioengineered organ implants based~~focused on the ~~Company’s novel Cellspan~~^TMdevelopment of regenerative medicine treatments for disorders of the gastro-intestinal system and ~~Cellframe~~^TM~~technology.~~the airway that result from cancer, trauma or birth defects. The Company’s technology is ~~comprised of~~based on our proprietary cell-therapy platform that uses a ~~proprietary biocompatible scaffold, which is the foundation of the Company’s Cellframe technology, that is seeded with the recipient’s~~patient’s own ~~mesenchymal stromal~~stem cells to ~~form the Company’s Cellspan~~ ~~implant.~~regenerate and restore function to damaged organs. The Company believes that ~~this~~its technology ~~may~~ ~~provide surgeons~~represents a ~~new paradigm~~next generation solution for restoring organ function because it allows the patient to ~~address life-threatening conditions~~regenerate their own organ, thus eliminating the need for human donor or animal transplants, the sacrificing of another of the ~~esophagus, bronchus, and trachea due to congenital abnormalities, diseases, infections and traumas~~.patient’s own organs or permanent artificial implants. Since inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and acquiring operating assets. The Company has 1one business segment and does not have significant costs or assets outside the United States.

On October 31, 2013, Harvard Bioscience, Inc. ~~(Harvard Bioscience)~~, or Harvard Bioscience, contributed its regenerative medicine business assets, plus $15 million of cash into Biostage, ~~(formerly “Harvard Apparatus Regenerative Technologies” at~~or the ~~time of spin-off.)~~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, ~~to stockholders of Harvard Bioscience (the “Distribution”).~~or the Distribution.

The Company’s common stock is currently traded on the OTCQB Venture Market under the symbol “BSTG”.

Going Concern

The Company has incurred substantial operating losses since its inception, and as of September 30, ~~2021 has~~2022 had an accumulated deficit of approximately ~~$71.1~~$81.5 million and will require additional financing to fund future operations.

The Company expects that its operating cash on-hand as of September 30, ~~2021~~2022 of approximately ~~$2.0~~$3.0 million ~~which includes cash proceeds of approximately $2.6 million received in May, June, and September of 2021 from existing investors,~~ will enable it to fund its operating expenses and capital expenditure requirements into the second quarter of ~~2022.~~2023. 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~~is unable to raise additional capital from outside sources ~~in the second quarter~~by June of ~~2022,~~2023, 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,~~product candidates, as well as regulatory efforts and collaborative arrangements necessary for the Company’s ~~products~~product candidates that are currently under development. The Company is currently seeking and will continue to seek ~~financings~~financing 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 ~~such circumstance~~ may materially affect the Company’s ability to continue as a going concern. The accompanying condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the condensed 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.

Table of Contents

2. Summary of Significant Accounting Policies and Recently Issued Accounting Pronouncements

Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited condensed consolidated financial statements are those set forth in Note 2 to the consolidated financial statements for the year ended December 31, ~~2020~~2021 included in the Company’s Annual Report on Form 10-K.

~~Table of Contents~~

Principles of Consolidation

The condensed consolidated financial statements include the accounts of Biostage and 3its three wholly-owned subsidiaries, Harvard Apparatus Regenerative Technology Limited (Hong Kong), Harvard Apparatus Regenerative Technology GmbH (Germany) and Biostage Limited (UK). ~~All intercompany balances and transactions have been eliminated in consolidation.~~ The functional currency for Biostage and these subsidiaries is the U.S dollar. All intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The condensed consolidated financial statements reflect the Company’s financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States, ~~(GAAP).~~or U.S. GAAP.

Use of Estimates

The ~~preparation~~process of ~~the Company’s~~preparing condensed consolidated financial statements in conformity with U.S. GAAP requires ~~the Company~~management to make estimates ~~judgments~~ and assumptions that ~~may~~ affect the amounts reported ~~amounts~~in the condensed consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, share-based compensation, valuation of ~~assets, liabilities, equity,~~warrant liability, accrued expenses and ~~related disclosures. On an ongoing basis~~ the Company evaluates its estimates, judgments and methodologies. The Company bases its estimates on historical experience and on various other assumptions that the Company believes are reasonable, the results of which form the basisvaluation allowance for ~~making judgments about the carrying values of assets, liabilities and equity and the amount of expenses.~~deferred income taxes. Actual results ~~may~~could differ from ~~these~~those estimates.

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 conversion of preferred stock, exercise of stock options, warrants, and the impact of unvested restricted stock.

The Company applies the two-class method to calculate basic and diluted net loss per share attributable to common stockholders as its warrants to purchase common stock are participating securities.

The two-class method is an earnings allocation formula that treats a participating security as having rights to earnings that otherwise would have been available to common stockholders. However, the two-class method does not impact the net loss per share of common stock as the Company has been in a net loss position and the warrant holders do not participate in losses.

Basic and diluted shares outstanding are the same for each period presented as all common stock equivalents would be antidilutive due to the net losses incurred.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated balance sheet as of September 30, ~~2021,~~2022, condensed consolidated interim statements of operations and stockholders’ (deficit) equity for the three and nine months ended September 30, 2022 and 2021, and ~~2020, and consolidated statements of~~ cash flows for the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 are unaudited. The interim unaudited condensed consolidated financial statements have been prepared in accordance with GAAP on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company’s financial position as of September 30, ~~2021,~~2022, its condensed consolidated results of operations and ~~consolidated~~ stockholders’ (deficit) equity for the three and nine months ended September 30, 2022 and 2021 and ~~2020 and consolidated statements of~~ cash flows for the nine months ended September 30, ~~2021~~2022 and ~~2020.~~2021. The financial data and other information disclosed in these notes related to the three and nine months ended September 30, ~~2021~~2022 and ~~2020 are unaudited. The results for the three and nine months ended September 30,~~ 2021 ~~are not necessarily indicative of results to be expected for the year ending December 31, 2021, any other interim periods or any future year or period.~~

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~~SBIR Award~~are unaudited. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of results to be expected for the year ending December 31, 2022, any other interim periods or any future year or period.

Forgiveness of notes payable

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 Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470, Debt. As such, the loan and applicable accrued interest have been recorded as forgiveness of the notes payable resulting in a gain of approximately $408,000 during the nine months ended September 30, 2021.

Grant income

Grant income is recognized when qualified research and development costs are incurred and recorded in other (expense) income, ~~(expense),~~ net in the condensed 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)~~FASB ASC 606, Revenue From Contracts With Customers. The Company concluded that the application of ASC 606 ~~did not apply~~had no impact 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 October 26, 2018,~~For the ~~Company was awarded the Phase II Fast-Track SBIR grant from the Eunice Kennedy NICHD grant aggregating approximately $1.1 million to support development, testing,~~three 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 approximately $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~~ nine months ended September 30, 2021, ~~and 2020,~~ the Company recognized approximately $0 and $165,000, ~~and $370,000~~respectively, of grant income ~~respectively,~~ from the SBIR Phase II ~~of the SBIR~~ grant. The ~~aggregate~~ SBIR ~~grant to date provided a total award of approximately $1.8 million, of which, approximately $1.5 million has been recognized through September 30, 2021. The~~ Phase II ~~portion of the award~~grant expired effective September 30, 2021.

Restricted Cash

A reconciliation of the cash and restricted cash reported within the balance sheets that sum to the total of the same amounts shown in the condensed consolidated statements of cash flows is as follows:


	September 30,		December 31,
	2022		2021

	(In thousands)
Cash	$	2,971	$	1,242
Restricted cash		—		50
Total cash and restricted cash as shown in the condensed consolidated statements of cash flows	$	2,971	$	1,292

Restricted cash consists of approximately $50,000 that was held as collateral for the Company’s credit card program as of December 31, 2021. Prior to September 30, ~~2021~~2022, we cancelled our corporate credit card and ~~December 31, 2020.~~liquidated our money market account that was held as collateral for our corporate credit card. The Company’s condensed consolidated statements of cash flows include restricted cash with cash when reconciling the beginning-of-period and end-of-period total amounts shown on such statements.

~~A reconciliation of the cash and restricted cash reported within the balance sheet that sum to the total of the same amounts shown in the consolidated statements of cash flows is as follows:~~

September 30,

December 31,


2021

2020

(In thousands)
Cash

$
1,995

$
1,026
Restricted cash

50

50
Total cash and restricted cash as shown in the consolidated statements of cash flows

$
2,045

$
1,076

Recently Adopted Accounting Pronouncements

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 condensed consolidated financial statements upon adoption.

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~~3. Capital Stock~~

On September 1, 2021, the Company issued a total of 1,000,000 shares of its common stock and warrants to purchase 500,000 shares of common stock with an exercise price of $2.00 per share, at 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 to a group of investors for aggregate gross and net proceeds of approximately $2.0 million, of which, $1.4 million and $0.6 million was allocated to the common stock and warrants, respectively. The Company classified these warrants on its consolidated balance sheets as equity as the warrants do not have any redemption features nor a right to put for cash that is outside the control of the Company, and valued using the Black-Scholes model based on the following weighted average assumptions:

Risk-free interest rate

0.78
%
Expected volatility

121.43
%
Expected term

5
years
Expected dividend yield

0

Exercise price

$
2.00

Market value of common stock

$
3.00

On June 17, 2021, the Company issued a total of 300,000 shares of its common stock and warrants to purchase 150,000 shares of common stock with an exercise price of $2.00 per share, 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 to a group of investors for aggregate gross and net proceeds of approximately $0.6 million, of which, $0.4 million and $0.2 million was allocated to the common stock and warrants, respectively. The Company classified these warrants on its consolidated balance sheets as equity as the warrants do not have any redemption features nor a right to put for cash that is outside the control of the Company, and valued using the Black-Scholes model based on the following weighted average assumptions:

Risk-free interest rate

0.87
%
Expected volatility

118.01
%
Expected term

5
years
Expected dividend yield

0

Exercise price

$
2.00

Market value of common stock

$
1.21

During the nine months ended September 30, 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. The fair value of the warrants at issuance was $0.1 million. The Company classified these warrants on its consolidated balance sheets as equity, and valued using the Black-Scholes model based on the following weighted average assumptions:

Risk-free interest rate

0.88
%
Expected volatility

106.7
%
Expected term

2
months
Expected dividend yield

0

Exercise price

$
3.70

Market value of common stock

$
3.11

During the nine months ended September 30, 2020, the Company issued 516,877 shares of its 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.

In separate transaction during the same period, the Company issued 414,000 shares of its 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.

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During the nine months ended September 30, 2020, the Company issued a total of 25,948 shares of its common stock to employees due to the vesting of restricted stock units and issuance of a common stock award.

~~Warrant to purchase common stock activity for the nine months ended September 30, 2021 was as follows:~~

Weighted-average

Amount

exercise price
Outstanding at December 31, 2020

1,893,201

$
6.44
Issued

650,000

2.00
Exercised

0

0
Outstanding at September 30, 2021

2,543,201

$
5.30

~~4. Notes Payable~~

On May 4, 2020, the Company obtained a loan (Loan) from the Bank of America (Lender) in the aggregate amount of approximately $0.4 million, pursuant to the Paycheck Protection Plan (PPP), established as part of the CARES Act. The Loan is evidenced by a promissory note dated May 4, 2020 issued by the Company and will accrue interest at a fixed interest rate of 1% per annum from the funding date of May 4, 2020. Payments of principal and interest have been deferred since the funding under the original terms of the promissory note. However, the Loan and accrued interest may be forgivable at the conclusion of this period.

Under the terms of the PPP, certain amounts of the Loan may be forgiven if they are used for qualifying expenses as described in the CARES Act. The terms of the promissory note, including eligibility and forgiveness, may be subject to additional requirements adopted by the SBA. Any unforgiven portion of the PPP loan, including principal and interest, will mature on May 4, 2022 and will be required to be payable monthly. The Note may be prepaid by the Company at any time prior to maturity with no prepayment penalties.

~~The Company has accounted for the loan under FASB ASC 470,~~ ~~Debt~~. 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. 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 (SBA) for review. On May 23, 2021, the Company was notified that the SBA determined that the application for PPP loan forgiveness was approved, and that the SBA remitted the forgiven amount to the Lender.

~~In accordance with~~ ~~FASB ASC 470, Debt~~~~, the Notes Payable and applicable accrued interest have been recorded as forgiveness of notes payable resulting in a gain of approximately $408,000 for the nine months ended September 30, 2021.~~

5.3. Fair Value Measurements

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

The Company utilizes a valuation hierarchy for disclosure of the inputs to the valuations used to measure fair value that prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The Company had 0no assets or liabilities classified as Level 2 or Level 3 as of September 30, 2022 and no assets or liabilities classified as Level 2 as of ~~September 30, 2021 and~~ December 31, ~~2020.~~2021. The Company’s restricted cash consisted of a $50,000 cash deposit that ~~serves~~served 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~~As of December 31, 2021, the Company ~~classifies~~classified warrants to purchase common stock that ~~are~~were accounted for as liabilities as Level 3 liabilities, as more fully discussed below.

The following fair value hierarchy tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:

Fair Value Measurement as of September 30, 2022

(in thousands)

Level 1

Level 2

Level 3

Total

Assets:

Restricted cash

—

Total

—

Liabilities:

Warrant liability

—

Total

—


	Fair Value Measurement as of December 31, 2021
	(in thousands)
	Level 1		Level 2		Level 3		Total
Assets:
Restricted cash	$	50	$	—	$	—	$	50
Total	$	50	$	—	$	—	$	50

Liabilities:
Warrant liability	$	—	$	—	$	2	$	2
Total	$	—	$	—	$	2	$	2

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 was 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 condensed 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 were re-measured at each reporting period as long as they are outstanding and un-modified. In February of

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2022, the remaining 92,212 warrants expired unexercised resulting in a $2,000 gain on extinguishment recorded in other (expense) income, net for the nine months ended September 30, 2022.

The following table presents a reconciliation of the Company’s liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30, 2022:


	Warrant liability
	(In thousands)
Balance at December 31, 2021	$	2
Change in fair value upon extinguishment		(2)
Balance at September 30, 2022	$	—

Warrants to purchase common stock activity for the nine months ended September 30, 2022 was as follows:


		Weighted-average
	Amount	exercise price
Outstanding at December 31, 2021	2,501,419	$	4.35
Issued	427,390		8.88
Expired	(1,040,187)		7.59
Outstanding at September 30, 2022	1,888,622		3.58

The Company had re-measured the warrant liability to estimated fair value at inception, prior to modification and at December 31, 2021 using the Black-Scholes option pricing model with the following weighted average assumptions:


	December 31,
	2021
Risk-free interest rate		0.05	%
Expected volatility		174.54	%
Expected term (in years)		0.1	years
Expected dividend yield		—
Exercise price	$	8.00
Market value of common stock	$	2.30

4. Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following:


	September 30,		December 31,
	2022		2021

	(in thousands)
Advisory costs	$	262	$	151
Due to Harvard Bioscience		64		—
Legal costs		35		577
Audit services		68		59
Other liabilities		52		13
Total accrued and other current liabilities	$	481	$	800

5. Capital Stock

Private Placement

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On May 12, 2022, the Company entered into Securities Purchase Agreements, each a Purchase Agreement, with new and existing investors, the Investors, pursuant to which the Investors agreed to purchase in a private placement an aggregate of 854,771 shares of common stock and warrants to purchase 427,390 shares of common stock, subject to adjustment as provided in the warrant agreement, the Warrants, for the aggregate purchase price of approximately $5.1 million with a purchase price per unit of $5.92, the Private Placement. Each unit consisted of one share of common stock and a warrant to purchase one half of one share of common stock, subject to adjustment, as provided in the Warrants. The Company received an aggregate of $5.1 million net proceeds from the Private Placement by May 16, 2022.

The proceeds were allocated to the common stock and warrants based on their relative fair values resulting in $3.6 million and $1.5 million to the common stock and warrants respectively. The Company classified these warrants on its condensed consolidated balance sheets as equity because the warrants do not have any redemption features nor a right to put for cash that is outside the control of the Company The warrants were valued using the Black-Scholes model based on the following weighted average assumptions:


Risk-free interest rate		2.81	%
Expected volatility		127.36	%
Expected term		5	years
Expected dividend yield		—
Exercise price	$	8.88
Market value of common stock	$	5.50

If the Company fails for any reason to deliver to the warrant holders, subject to a notice of exercise by the warrant share delivery date, the Company shall pay to the holder, in cash, as liquidated damages and not as a penalty, for each $1,000 of warrant Shares subject to such exercise (based on the volume weighted average price of the common stock on the date of the applicable Notice of Exercise), $5 per Trading Day (increasing to $10 per Trading Day on the fifth Trading Day after such liquidated damages begin to accrue) for each Trading Day after such Warrant Share Delivery Date until such Warrant Shares are delivered or Holder rescinds such exercise.

During the nine months ended September 30, 2021, the Company issued a total of 1,300,000 shares of its common stock and warrants to purchase 650,000 shares of common stock with an exercise price of $2.00 per share, 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 to a group of investors for aggregate net proceeds of approximately $2.6 million, of which $1.8 million and $0.8 million were allocated to the common stock and warrants, respectively. The Company classified these warrants on its condensed consolidated balance sheets as equity because the warrants do not have any redemption features nor a right to put for cash that is outside the control of the Company, and valued using the Black-Scholes model based on the following weighted average assumptions:


Risk-free interest rate		0.82	%
Expected volatility		121.2	%
Expected term		5	years
Expected dividend yield		—
Exercise price	$	2.08
Market value of common stock	$	2.58

6. Series E Convertible Preferred Stock

On April 28, 2022, the Company entered into a Preferred Issuance Agreement, or PIA, with Harvard Bioscience, Inc., or HBIO, dated as of April 27, 2022. Pursuant to the PIA, the Company and HBIO agreed that once HBIO has paid at least $4.0 million in certain settlement and related legal expenses, to satisfy the Company’s indemnification obligations with respect thereto, in lieu of paying cash, the Company would issue senior convertible preferred stock to HBIO that will contain terms as described in the PIA.

On June 10, 2022, following the execution of a subscription agreement and HBIO providing evidence of payment of the requisite $4.0 million amount, the Company issued HBIO 4,000 shares of Series E Convertible Preferred Stock, or Series E Preferred, at a price of $1,000 per share to satisfy the Company’s related indemnification obligations pertaining to the $4.0 million, in lieu of paying cash. As of September 30, 2022, there were 4,000 shares of Series E Preferred outstanding and approximately $95,000 accrued as dividends payable as shares of Series E Preferred.

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The rights, preferences, and privileges of the Series E Preferred stock were as follows as of September 30, 2022:

Dividends: Payable quarterly in additional shares of Series E Preferred stock at a rate of 8% per annum, accrued daily and compounded quarterly.

Voting Rights: The holders of Series E Preferred stock shall have no voting rights except as required by applicable law.

Consent Rights: As long as any shares of Series E Preferred stock are outstanding, the holder of the Series E Preferred stock has certain consent rights with respect to the Company (a) incurring any indebtedness for borrowed money or any guaranty therefor in excess of $500,000 individually or in the aggregate, (b) entering into certain new material related party transactions, and (c) authorizing or issuing any securities unless the same ranks junior to the Series E Preferred.

Liquidation Rights: The Series E Preferred stock shall, with respect to dividends and distributions upon any voluntary or involuntary liquidation, dissolution or winding up of the Company or a deemed liquidation event or otherwise, rank prior to all classes of Common Stock of the Company and, except for any Preferred Stock that may be pari passu or senior to the Series E Preferred Stock, in each case, if consented to by the holder of the Series E Preferred, all other classes or series of Preferred Stock of the Company, whether currently existing or hereafter created.

Mandatory Conversion: Each share of Series E Preferred stock will automatically convert into shares of Common Stock of the Company upon the earlier to occur of the Company’s offering that includes common stock (whether private placement or public offering) that coincides with its uplisting onto NASDAQ, its initial public offering pursuant to a Registration Statement on Form S-1 that includes common stock following the issuance of the Series E Preferred, or its initial private placement that includes common stock following the issuance of the Series E Preferred in the event the gross proceeds of such private placement are at least $4,000,000. In such instance, each share of Series E Preferred will convert into that number of shares of Common Stock determined by dividing (i) the stated value plus all accrued and unpaid dividends, by (ii) the lowest price per share of common stock purchased in the applicable offering by the Company which triggered the mandatory conversion, or if such price cannot be reliably determined, a reasonably calculated price per common share determined by the Company and the holder.

Optional Conversion: Each share of Series E Preferred stock will also be subject to optional conversion by the holder thereof into that number of shares of Common Stock determined by dividing (i) the stated value plus all accrued and unpaid dividends, by (ii) a price per share equal to the average of the volume weighted average trading prices of the Common Stock for the most recently completed sixty (60) consecutive trading days prior to the date of determination.

The conversion options require settlement through a variable number of shares. Based on the mechanic of the conversion options, it is not possible to determine if the Company would be able to satisfy the settlement of the conversion option. Shareholder approval would be required to increase the number of authorized common shares. This action would be outside of the control of the Company. Accordingly, it is presumed that cash settlement would be required. Management has determined that based upon this analysis, temporary equity classification would be appropriate.

Other than Series E Preferred shares, there were no other shares of any of the other classes of preferred stock outstanding as of September 30, 2022. Authorized shares for each preferred stock class are as follows:


		Authorized
Undesignated preferred stock		984,000
Series B convertible preferred stock		1,000,000
Series C convertible preferred stock		4,000
Series D convertible preferred stock		12,000
Series E convertible preferred stock		5,000

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The Company's notes payable carrying value as of December 31, 2020 approximates fair value due to the relatively small amount of principal and the short duration of the note payable. The Company had 0 notes payable at September 30, 2021. See Note 4.

~~The following fair value hierarchy tables present information about the Company’s financial assets and liabilities measured at fair value on a recurring basis:~~

Fair value measurement as of September 30, 2021

(In thousands)


Level 1

Level 2

Level 3

Total
Assets:











Restricted cash

$
50

$
—

$
—

$
50
Total

$
50

$
—

$
—

$
50

Liabilities:












Warrant liability

$
—

$
—

$
31

$
31
Total

$
—

$
—

$
31

$
31

Fair value measurement as of December 31, 2020

(In thousands)


Level 1

Level 2

Level 3

Total
Assets:








Restricted cash

$
50

$
—

$
—

$
50
Total

$
50

$
—

$
—

$
50

Liabilities:








Warrant liability

$
—

$
—

$
17

$
17
Total

$
—

$
—

$
17

$
17

Warrant liability

(In thousands)
Balance at December 31, 2020

$
17
Change in fair value upon re-measurement

14
Balance at September 30, 2021

$
31

The Company has re-measured the warrant liability to estimated fair value at inception, prior to modification and at each reporting date using the Black-Scholes option pricing model with the following weighted average assumptions:

September 30,

December 31,


2021

2020

Risk-free interest rate

0.05
%

0.12
%
Expected volatility

154.68
%

137.89
%
Expected term (in years)

0.4


1.1

Expected dividend yield

0


0

Exercise price

$
8.00

$
8.00

Market value of common stock

$
3.00

$
1.25

Warrants to purchase shares of common stock

92,212


92,212

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6.. 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 vesting of the 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 Plan, to among other things, increase of the number of shares of the Company’s common stock available for issuance pursuant to the 2013 Equity Incentive Plan by 3,000,000 shares, which increased the total shares authorized to be issued under the Plan to 5,098,000. There were ~~3,574,042~~2,568,823 shares available for issuance as of September 30, ~~2021.~~2022.

The Company has granted options to purchase common stock under the Plan. Stock option activity during the nine months ended September 30, ~~2021~~2022 was as follows:


				Weighted-average	Aggregate			Weighted-average		Weighted-average	Aggregate intrinsic
	Number of	Weighted –		remaining	intrinsic		Amount	exercise price		contractual life (years)	value (in thousands)
	Options	average		contractual	value (in
	Outstanding	exercise price		term (years)	thousands)
Outstanding at December 31, 2020	1,599,720	$	6.33	5.77	$	0
Outstanding at December 31, 2021							2,332,603	$	3.93	8.30	$	294
Granted	301,674	$	1.49				325,984		4.81
Canceled	(398,212)	$	9.20
Outstanding at September 30, 2021	1,503,182	$	4.63	7.41	$	876
Vested at September 30, 2021	895,850	$	6.21	6.97	$	376
Canceled / forfeited							(150,097)		3.39
Outstanding at September 30, 2022							2,508,490		3.95	7.92		10,861
Options exercisable							1,395,359		4.76	7.43		6,221
Options vested and expected to vest							2,508,490		4.05

The Company’s outstanding stock options include ~~243,532~~510,742 performance-based awards that have vesting provisions subject to the achievement of certain business milestones. ~~As of September 30, 2021, 0~~Total unrecognized compensation expense for the remaining performance-based awards is approximately $1.3 million. No expense has been recognized for these ~~unvested~~ awards as of September 30, 2022 given that the milestone achievements for these awards have not yet been deemed probable for accounting purposes. ~~Total unrecognized compensation expense~~

Aggregate intrinsic value for outstanding options and exercisable options as of September 30, 2022, was approximately $10.9 million and $6.2 million, respectively, based on the ~~remaining 243,532 performance-based awards is approximately $0.8 million.~~

Company’s closing stock price of $7.10 per share as of September 30, 2022. As of September 30, ~~2021,~~2022, unrecognized compensation cost related to unvested non-performance-based awards amounted to ~~$0.4~~$1.4 million, which will be recognized over a weighted-average period of ~~0.7~~1.09 years.

The Company uses the Black-Scholes option pricing model to value its stock options. The weighted average assumptions for valuing options granted during the nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 were as follows:


	September 30,				Nine Months Ended September 30,
	2021		2020		2022		2021
Risk-free interest rate	0.89	%	0.71	%	2.71	%	0.89	%
Expected volatility	116.86	%	109.66	%	123.53	%	116.86	%
Expected term (years)	5.28		4.2
Expected term (in years)					5.8	years	5.3	years
Expected dividend yield	0		0		—	%	—	%

1415

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The Company recorded share-based compensation expense in the following expense categories of its condensed consolidated statements of operations:


	Three months ended				Nine months ended				Three months ended				Nine months ended
	September 30,				September 30,				September 30,				September 30,
	2021		2020		2021		2020		2022		2021		2022		2021

	(In thousands)				(In thousands)				(In thousands)				(In thousands)
Research and development	$	96	$	73	$	213	$	234	$	72	$	96	$	220	$	213
General and administrative		64		78		208		770		172		64		536		208
Total share-based compensation	$	160	$	151	$	421	$	1,004
Total stock-based compensation									$	244	$	160	$	756	$	421

During the nine months ended September 30, 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.

In March 2020, the Company issued 35,000 common stock awards to an employee to be earned upon the achievement of certain milestones. Such milestones were achieved during the nine months ended September 30, 2020 and the Company issued 23,793 fully vested shares of common stock to the employee with 11,207 common shares withheld to cover taxes. The Company recognized share-based compensation of $140,000 for the nine months ended September 30, 2020.

8. Commitments and Contingencies

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, ~~(the “Court”),~~ against the Company and other defendants, including Harvard Bioscience, Inc. ~~(“Harvard Bioscience”)~~, ~~our~~or HBIO, the former parent ~~entity prior to~~of the ~~spin-off of~~Company that spun off the Company in 2013, as well as another third party. The complaint ~~seeks~~sought payment for an unspecified amount of damages and ~~alleges~~alleged 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~~related 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 Cellspan~~Biostage Esophageal ~~Implant product candidate.~~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’ 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 againstApril 27, 2022, the Company and HBIO executed a settlement with the ~~other defendants,~~plaintiffs (the “Settlement”), which ~~establishes a sanction~~resolves all claims relating to the litigation. The Settlement resulted in the dismissal with prejudice of ~~admitted liability. In June 2021,~~the wrongful death claim, and neither the Company ~~was informed of these 2019 and 2020 court actions by new defense counsel appointed by its~~nor HBIO admit any fault or liability ~~insurance carrier. On June 9, 2021, the Company, together~~in connection with the ~~other defendants, filed a motion to vacate~~claim. The Settlement also resolved any and all claims by and between the ~~Court’s order allowing plaintiff’s motion for sanctions,~~parties and following a hearing on such motion, on August 6, 2021 the Court issued a ruling in our favor, vacating the sanctions. This case will now proceed 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~~resulted in the dismissal with prejudice of all claims asserted by or against those carriers, the Company and ~~Harvard Bioscience, notified each party~~HBIO. However, based on review of the circumstances surrounding the Settlement, the Company recorded an accrual for this matter of $3.3 million in general and administrative expenses during the year ended December 31, 2021.

In relation to the litigation, the Company had incurred approximately $5.9 million of aggregate costs of which approximately $0.3 million remain unpaid as of September 30, 2022. This aggregate amount included the cost of both the accrual for this contingency matter of approximately $3.3 million and approximately $2.6 million of legal and related costs incurred by the Company, which consisted of attorneys’ fees and advisor and specialist costs as part of its defense in this matter. For the nine months ended September 30, 2022, the Company incurred legal and related costs of approximately $1.3 million recorded in general and administrative expenses. On March 3, 2022, the Company received a cash payment of approximately $0.1 million from Medmarc, the Company’s insurance carrier. This amount represented a reimbursement of previously incurred legal costs and was recorded as a reduction to general and administrative expenses during the nine months ended September 30, 2022.

With respect to such $5.9 million of costs described above, the Company was required to either pay such costs directly or indemnify HBIO as to such amounts it incurs. Of such amounts, the Company anticipated that ~~it was denying coverage under~~HBIO would pay an aggregate amount of $4.0 million by the ~~applicable policy for~~end of the ~~lawsuit~~second quarter of 2022. With respect to the indemnification obligation of the Company to HBIO pertaining to such costs, the Company and ~~would no longer be providing~~HBIO entered into a ~~defense~~Preferred Issuance Agreement dated as of April 27, 2022, or the “PIA”. In connection with the PIA, the Company and HBIO agreed that once HBIO had paid at least $4.0 million in such costs, to ~~each such company~~satisfy the Company’s indemnification obligations 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 believes the insurance carrier’s grounds for denying coverage are without merit and intends to vigorously defend against this complaint for declaratory judgment and the insurance carrier’s denialin lieu of ~~the claim and related matters.~~

There can be no assurance that the Company and the other defendants will prevail in the insurance coverage litigation. As such, it is unclear at this point if our product liability insurance coverage will reimburse the Company for all or any portion of any defense costs or damages if the Company were to lose the underlying case on the merits.

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While there can be no assurance that the Company and other defendants will prevail in the underlying case, the Company continues to believe that the plaintiff’s claims made in the lawsuit are without merit and will continue to vigorously defend against such claims. If the Company faces a trial on damages and lose on the merits, it does not know the exact amount of compensatory and, potentially, punitive damages that could be awarded, but the amounts could be substantial. Considering these factors, an estimate of potential liability cannot be made at this time. However, any potential loss on the merits, especially if not covered by the Company’s product liability insurance, would be likely to adversely impact its financial condition and may cause the Company to have to curtail or cease its operations. The Company is evaluating possible malpractice claims as one source of recovery but has not asserted such a claim and cannot provide assurance that such a claim would provide a recovery. Further, in accordance with a separation and distribution agreement between Harvard Bioscience and the Company relating to the spin-off,paying cash, the Company would ~~be required~~issue senior 8% convertible preferred stock to ~~indemnify Harvard Bioscience against losses~~HBIO that ~~Harvard Bioscience may suffer~~will contain terms as described in the PIA, including the term sheet attached thereto. On June 10, 2022, following the execution of a ~~result~~subscription agreement and HBIO providing evidence of ~~this litigation.~~payment of the requisite $4.0 million amount, the Company issued HBIO 4,000 shares of Series E 8% Convertible Preferred Stock at a price of $1,000 per share to satisfy the Company’s related indemnification obligations aggregating $4.0 million, which included the accrual for contingency of $3.3 million and approximately $0.8 million of legal and related costs paid on behalf of the Company by HBIO previously included in accrued expenses.

From time to time, the Company may be involved in various claims and legal proceedings arising in the ordinary course of business. Other than the above matter, there are no such matters pending that the Company expects to be material in relation to its business, financial condition, results of operations, or cash flows.

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8.9. Leases

The Company leases laboratory and office space and certain equipment with remaining terms ranging ~~approximately~~ from 0.7 to ~~3.0~~2.1 years.

The laboratory and office space arrangement is under a sublease that was renewed in December of ~~2020~~2021 and currently extends through May 31, ~~2022.~~2023. This lease automatically renews annually for a one-year ~~period~~periods unless the Company or the counterparty provides a notice of termination within one hundred and eighty days prior to May 31^st of each year.

On January 5, 2022, the Company executed a four-month sublease agreement for certain laboratory and office space at its Holliston, Massachusetts facility. The Company further extended the sublease agreement on a month-to-month basis until August 31, 2022 when the other party vacated the premises. For the three and nine months ended September 30, 2022, the Company recorded sublease income of approximately $26,000 and $87,000, respectively, relating to this agreement.

All of the Company’s leases qualify as operating leases. The following table summarizes the presentation of the Company’s operating leases in its condensed consolidated balance sheets:


		September 30,		December 31,			September 30,		December 31,
(In thousands)	Balance sheet classification	2021		2020
						Balance Sheet Classification	2022		2021

Assets:
Operating lease assets	Right-of-use asset	$	103	$	182	Right-of-use asset, net	$	88	$	169
Liabilities:
Current operating lease liabilities	Current portion of operating lease liabilities		81		107
Non-current operating lease liabilities	Operating lease liabilities, net of current portion		22		75
Current portion of operating lease liabilities						Current portion of operating lease liabilities		79		110
Operating lease liabilities, net of current portion						Operating lease liabilities, net of current portion		9		59
Total operating lease liabilities		$	103	$	182		$	88	$	169

The Company recorded operating lease expense in the following categories in its condensed consolidated statements of operations:


	Three months ended September 30,				Nine months ended September 30,				Three months ended September 30,				Nine months ended September 30,
	2021		2020		2021		2020		2022		2021		2022		2021

	(In thousands)				(In thousands)				(In thousands)				(In thousands)
Research and development	$	19	$	19	$	58	$	58	$	19	$	19	$	58	$	38
General and administrative		11		11		33		33		11		11		33		22
Total operating lease expense	$	30	$	30	$	91	$	91
Total									$	30	$	30	$	91	$	60

Cash paid included in the computation of the operating lease assets and lease ~~liability~~liabilities during the three and nine months ended September 30, 2022 amounted to approximately $30,000 and $91,000, respectively. Cash paid in the computation of the operating lease assets and lease liabilities during the three and nine months ended September 30, 2021 ~~and 2020~~ amounted to approximately ~~$91,000~~$30,000 and ~~$91,000,~~$60,000, respectively.

The weighted average remaining lease term and weighted average discount rate of the Company’s operating leases are as follows:


	As of September 30,				As of September 30,
	2021		2020		2022		2021
Remaining lease term (in years)	1.38		1.99		0.94		1.38
Discount rate	10.54	%	13.12	%	9.35	%	10.54	%

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The minimum lease payments for the next five years are expected to be as follows:


	As of		As of
(In thousands)	September 30,
2021	$	31
			September 30, 2022
			(in thousands)
2022		62	$	30
2023		12		55
2024		7		7
2025		—		—
Total lease payments		112		92
Less: imputed interest		9		4
Present value of operating lease liabilities	$	103	$	88

9.10. Net Loss Per Share


	Three months ended September 30,				Nine months ended September 30,
	2022		2021		2022		2021

	(in thousands, except shares and per share data)				(in thousands, except shares and per share data)
Net loss	$	(1,056)	$	(849)	$	(4,578)	$	(2,105)
Preferred stock dividends		(77)		—		(95)		—
Net loss attributable to common stockholders	$	(1,133)	$	(849)	$	(4,673)	$	(2,105)

Basic and diluted weighted average common shares outstanding		11,615,642		10,014,494		11,205,477		9,614,781

Basic and diluted net loss per share attributable to common stockholders	$	(0.10)	$	(0.08)	$	(0.42)	$	(0.22)

The following potential common shares were excluded from the calculation of diluted net loss per share attributable to common stockholders for the ~~six~~nine months ended September 30, ~~2020~~2022 and ~~2019~~2021 because including them would have had an anti-dilutive effect:


	Nine months ended September 30,		Nine months ended September 30,
	2021	2020	2022	2021
Options to purchase common stock			2,508,490	1,503,182
Warrants to purchase common stock	2,543,201	1,893,201	1,888,622	2,543,201
Options to purchase common stock	1,503,182	1,641,674
Series E convertible preferred stock			653,128	—
Total	4,046,383	3,534,875	5,050,240	4,046,383

~~10.~~11. Income Taxes

The Company did not record a federal or state income tax provision or benefit for the three and nine months ended September 30, ~~2021~~2022 and ~~2020,~~2021, respectively, due to the expected loss before income taxes to be incurred for the years ended December 31, ~~2021~~2022 and ~~2020,~~2021, as well as the Company’s continued maintenance of a full valuation allowance against its net deferred tax assets.

The Company maintains the Harvard Apparatus Regenerative Technology GmbH (Germany) subsidiary whereas in fiscal years 2013, 2014 and 2015 certain withholding taxes were paid to the German tax authorities. In June of 2021, the Company received a refund payment of approximately $71,000 for certain withholding taxes paid during those fiscal years. This amount has been recorded in other (expense) income, ~~(expense),~~ net, for the three and nine months ended September 30, ~~2021~~2021.

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12. Subsequent Events

The Company performed a review of events subsequent to the balance sheet through the date the financial statements were issued and determined that there were no such events requiring recognition or disclosure in the financial statements except as disclosed below.

~~11. Subsequent Events~~

~~The Company has performed an evaluation~~On October 17, 2022, we issued 28,109 shares of ~~subsequent events through the time~~common stock in connection with a cashless exercise of ~~filing this Quarterly Report on Form 10-Q with the Securities Exchange Commission and has determined that there are no such events to report.~~39,000 warrants.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the “Exchange Act”). The forward-looking statements are principally, but not exclusively, contained in “Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Forward-looking statements include, but are not limited to, statements about management’s confidence or expectations and our plans, objectives, expectations and intentions that are not historical facts and the potential impact of COVID-19 on our business and operations. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “should,” “could,” “would,” “expects,” “plans,” “anticipates,” “believes,” “goals,” “sees,” “estimates,” “projects,” “predicts,” “intends,” “think,” “potential,” “objectives,” “optimistic,” “strategy,” and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause our actual results to differ materially from those in the forward-looking statements include our ability to access debt and equity markets and raise additional funds when needed; the success of our collaborations, clinical trials and pre-clinical development efforts and programs, which success may not be achieved on a timely basis or at all; our ability to obtain and maintain regulatory approval for our implant products, bioreactors, scaffolds and other devices we pursue, including for the esophagus or airway, which approvals may not be obtained on a timely basis or at all; the number of patients who can be treated with our products; the amount and timing of costs associated with our development of implant products, bioreactors, scaffolds and other devices; our failure to comply with regulations and any changes in regulations; unpredictable difficulties or delays in the development of new technology; our collaborators or other third parties we contract with, including with respect to conducting any clinical trial or pre-clinical development efforts, not devoting sufficient time and resources to successfully carry out their duties or meet expected deadlines; our ability to attract and retain qualified personnel and key employees and retain senior management; potential liability exposure with respect to our products; the availability and price of acceptable raw materials and components from third-party suppliers; difficulties in obtaining or retaining the management and other human resource competencies that we need to achieve our business objectives; increased competition in the field of regenerative medicine and bioengineering, and the financial resources of our competitors; our ability to obtain and maintain intellectual property protection for our device and product candidates; our inability to implement our growth strategy; the control our principal stockholders can exert based on holding a majority of voting power; plus factors described under the heading “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2020~~2021 filed with the Securities and Exchange Commission (the “SEC”) on ~~April 13, 2021~~March 31, 2022 or described in our other public filings. Our results may also be affected by factors of which we are not currently aware. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information.

Biostage, Inc. is referred to herein as “we,” “our,” ~~“us,”~~“us”, and “the Company”.

Business Overview

We are a clinical-stage biotechnology company ~~developing bioengineered organ implants~~focused on the development of regenerative medicine treatments for disorders of the gastro-intestinal system and the airway that result from cancer, trauma or birth defects. Our technology is based on our ~~novel technology. Our technology is comprised of~~proprietary cell-therapy platform that uses a ~~proprietary biocompatible scaffold, which is the foundation of our Cellframe ™ technology, that is seeded with the recipient’s~~patient’s own ~~mesenchymal stromal~~stem cells to ~~form~~regenerate and restore function to damaged organs. We believe that our ~~Cellspan ™ implant, combining~~technology represents a next generation solution for restoring organ function because it allows the ~~clinically proven principles~~patient to regenerate their own organ, thus eliminating the need for human donor or animal transplants, the sacrificing of ~~tissue engineering, cell biology and materials science. This technology is being developed to treat life-threatening conditions~~another of the patient’s own organs or permanent artificial implants.

We conducted the world’s first successful regeneration of the esophagus ~~trachea~~in a cancer patient in August 2017. This surgery was performed by Dr. Denis Wigle, Chair of Thoracic Surgery at the Mayo Clinic in a patient with esophageal cancer. The results were published in the Journal of Thoracic Oncology Clinical and ~~bronchus with~~Research Reports in August 2021. The procedure demonstrated that using the ~~objective~~Biostage technology, we were able to successfully regenerate esophageal tissue, including the mucosal lining, to restore the integrity, continuity and functionality of ~~dramatically improving~~ the ~~treatment paradigm for those patients.~~esophageal tube. This successful first-in-human experience, plus the research we have performed on 45 pigs, led the FDA to approve our 10-patient combined phase 1 and phase 2 clinical trial. This combination trial will measure both safety and efficacy in the patient population.

We believe our technology will provide surgeons with new ways to address damage to the esophagus, bronchus, and trachea due to congenital abnormalities, diseases, infections and traumas. Products being developed based on our technology for those indications are called Cellspan products. We are pursuing our Cellspan Esophageal Implant (CEI) technology as our first product candidate to address both esophageal disease and pediatric esophageal atresia, and we are also developing our technology’s applications to address conditions of the bronchus and trachea.

In collaboration with world-class institutions, such as The Mayo Clinic and Connecticut Children’s Medical Center, we are advancing our technology. Our product development program is based on the greatest medical unmet needs, analysis of existing surgical options and physician validation.

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~~In October 2019, we filed an Investigational New Drug (IND) application with the U.S. Food~~We were incorporated and ~~Drug Administration (FDA) to treat patients with esophageal disease, absent of cancer, in adults that would require~~commenced operations on November 1, 2013 as a short segment esophageal implant following clinically indicated short segment resection of the thoracic esophagus with our CEI product candidate. In November 2019, we received notice from the FDA placing our IND on clinical hold and providing a preliminary list of clinical hold and non-clinical hold questions. In December 2019, we received the formal letter with clinical hold and non-clinical hold questions and submitted our response to the clinical hold questions on February 18, 2020. On March 19, 2020, the FDA notified us that the IND for our CEI product candidate has been removed from clinical hold and that we can proceed with our study. This FDA approval enables us to start our transition to a clinical-stage biotechnology company, and start clinical planning, engaging with a clinical research organization and site readiness in advance of starting the clinical trial for our CEI product candidate. On May 7, 2020, we submitted responses to certain non-clinical hold questions and finalized a majority of remaining non-clinical hold responses in the third quarter of 2020, and submitted the remaining responses in the fourth quarter of 2020, except for responses to our clinical trial details that we will submit once a clinical research organization is selected. The COVID-19 pandemic could adversely impact our business, including planned clinical trials, as discussed elsewhere in this document.

We believe that receiving regulatory approval to treat pediatric esophageal atresia with our CEI may provide a shorter time to a commercial product and the greater overall potential value in the U.S. market. In addition to providing a novel solution for a great medical need, approval of our pediatric esophageal atresia product candidate may result ~~in receipt~~ of a ~~priority review voucher, which if achieved, could potentially provide significant value and non-dilutive funding~~spin-off from Harvard Bioscience, Inc., or Harvard Bioscience. On that date, we became an independent company that operates the regenerative medicine business previously owned by Harvard Bioscience. The spin-off was completed through the distribution of all the shares of common stock of Biostage to Biostage in the future. We have continued to advance our CEI pediatric esophagus program and plan to file a protocol amendment with the FDA to update our CEI esophageal disease clinical program after the initial adult patients are treated in the esophageal disease trial, subject to FDA approval.Harvard Bioscience stockholders.

We have also formed a subsidiary in Hong Kong, Harvard Apparatus Regenerative Technology Limited, as we continue to assess the market and regulatory approval pathway in China as to our implant products. We are not certain at this time as to which market, including U.S. or China for example, may provide the most viable initial pathway for regulatory approval to a commercial product. This will depend on a number of factors, including the approval and development processes, related costs, ability to raise capital and the terms and conditions thereof, as well as the ongoing impact of the COVID-19 pandemic, among other factors. Any development and capital raising efforts in China may include a joint venture in relation to our Hong Kong subsidiary, and would also involve a number of commercial variables, including rights and obligations pertaining to licensing, development, and financing, among others. Our failure to receive or obtain such clearances or approvals on a timely basis or at all, whether that be in the U.S., China or otherwise, would have an adverse effect on our results of operations.

Since our incorporation, we have devoted substantially all of our resources to developing our programs, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations with proceeds from the sales of common stock and preferred stock. In December 2017, we sold the inventory and rights to manufacture and sell research-only versions of our bioreactors to Harvard Bioscience. We did not recognize any revenues during the quarters ended September 30, 2022 and 2021.

Our ~~products~~product candidates are currently in development and have not yet received regulatory approval for sale anywhere in the world.

Financial Condition and Need for Additional Funds

We expect to continue to incur operating losses and negative cash flows from operations for ~~2021~~2022 and in future years.

Operating Losses and Cash Requirements

We have incurred substantial operating losses since our inception, and as of September 30, ~~2021~~2022 had an accumulated deficit of approximately ~~$71.1~~$81.5 million and will require additional financing to fund future operations. We expect that our operating cash on-hand as of September 30, ~~2021~~2022 of approximately ~~$2.0~~$3.0 million ~~which includes cash proceeds of approximately $2.0 million received in September of 2021 from existing investors,~~ will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of ~~2022.~~2023. We expect to continue to incur operating losses and negative cash flows from operations for ~~2021~~2022 and in future years. Therefore, as disclosed in Note 1 to our ~~consolidated financial statements,~~Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q, these conditions raise substantial doubt about our ability to continue as a going concern.

We will need to raise additional funds to fund our operations. In the event we do not raise additional capital from outside sources inprior to the ~~second quarter~~end of ~~2022,~~June of 2023, we may be forced to curtail or cease ~~its~~our operations.

Cash requirements and cash resource needs will vary significantly depending upon the timing of the financial and other resource needs that will be required to ~~continue~~complete ongoing development, pre-clinical and clinical testing of ~~products,~~product candidates, as well as regulatory efforts and collaborative arrangements necessary for our ~~products~~product candidates that are currently under development. We are currently seeking and will continue to seek financings from other existing and/or new investors to raise necessary funds through a combination of public or private equity offerings. We may also pursue debt financings, other financing mechanisms, research grants, or strategic collaborations and licensing arrangements. We may not be able to obtain additional financing on favorable terms, if at all.

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Our operations will be adversely affected if we are unable to raise or obtain needed funding and may materially affect our ability to continue as a going concern. Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern and therefore, the condensed 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.

~~Capital Transactions~~

~~During 2021 we had the following financing transactions:~~

●

On May 4, 2020, we obtained a loan (Loan) from Bank of America (Lender) in the aggregate amount of approximately $0.4 million, pursuant to the Paycheck Protection Plan (PPP), established as part of the CARES Act. The Loan was evidenced by a promissory note dated May 4, 2020 issued by us whereas certain amounts of the Loan where eligible for forgiveness if used for qualifying expenses. On December 18, 2020, we submitted the loan forgiveness application for the entire borrowings of approximately $0.4 million to the Lender and were notified on January 7, 2021 that the application was submitted to the Small Business Administration (SBA) for review. On May 23, 2021, we were notified by Bank of America that the Small Business Administration determined that the application for PPP loan forgiveness was approved, and the SBA remitted the forgiven amount to the Lender. We have accounted for this loan forgiveness as an extinguishment (See Note 4 in the Consolidated Financial Statements included in Part I “Financial Information”, Item 1 of this report for further discussion).

●

On June 17, 2021, we issued a total of 300,000 shares of our common stock and warrants to purchase 150,000 shares of common stock with an exercise price of $2.00 per share, 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 to a group of investors for aggregate gross and net proceeds of approximately $0.6 million.

●

On September 1, 2021, we issued a total of 1,000,000 shares of our common stock and warrants to purchase 500,000 shares of common stock with an exercise price of $2.00 per share, 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 to a group of investors for aggregate gross and net proceeds of approximately $2.0 million.

~~During 2020 we had the following financing transactions:~~

●

During the nine months ended September 30, 2020, we issued a total of 151,027 and 125,000 shares, respectively, of our common stock at a purchase price of $3.70 and $4.00 per share, respectively, and warrants to purchase 151,027 shares of common stock at an exercise price of $3.70 per share to a group of investors for aggregate gross and net proceeds of approximately $1.1 million.

●

During the nine months ended September 30, 2020, we issued 414,000 shares of our common stock to a group of investors in connection with the exercise of 414,000 previously issued warrants at $2.00 per share for aggregate gross and net proceeds of approximately $0.8 million.

●

During the nine months ended September 30, 2020, we issued 516,877 shares of our common stock to a group of investors in connection with the exercise of 516,877 previously issued warrants at $3.70 per share for aggregate gross and net proceeds of approximately $1.9 million.

●

On May 4, 2020, we were granted a loan from the Bank of America in the aggregate amount of $0.4 million, pursuant to the Paycheck Protection Program (PPP), established as part of the CARES Act (See Note 4 in the Consolidated Financial Statements included in Part I “Financial Information”, Item 1 of this report for further discussion).

●

During the nine months ended September 30, 2020, we 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.

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Small Business Innovation Research Grant

On March 28, 2018, we were awarded a Fast-Track Small Business Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health and Human Development (NICHD) to support testing of pediatric ~~Cellspan™~~Biostage Esophageal ~~Implants (CEIs). The award for Phase I provided for~~Implants. For the ~~reimbursement~~three and nine-month periods ended September 30, 2021, the Company recognized approximately $0 and $165,000, respectively, of ~~approximately $0.2 million of qualified research and development costs which was received and recognized as~~ grant income ~~during 2018.~~

~~On October 26, 2018, we were awarded~~from the ~~Phase II Fast-Track~~SBIR grant. The SBIR grant from the Eunice Kennedy NICHD grant aggregating approximately $1.1 million to support development, testing, and translation to the clinic through September 2019 and represented years one and two of the Phase II portion of the award. On August 3, 2020, we were awarded a third year of the Phase II grant totaling approximately $0.5 million for support of development, testing, and translation to the clinic covering qualified expenses incurred from October 1, 2019 through September 30, 2020. In September of 2020, we filed and were granted a one year, no-cost extension for the Phase II grant period extending throughexpired effective September 30, 2021.

For the nine months ended September 30, 2021, we recognized approximately $165,000 and $370,000 of grant income, respectively, from Phase II of the SBIR grant. The aggregate SBIR grant to date provides a total award of approximately $1.8 million, of which, approximately $1.5 million has been recognized through September 30, 2021. The Phase II portion of the award expired effective September 30, 2021.

Components of Operating Loss

Research and development expense. Research and development expense consists of salaries and related expenses, including share-based compensation, for personnel and contracted consultants and various materials and other costs to develop our new products, primarily: synthetic scaffolds, including investigation and development of materials and investigation and optimization of cellularization, autoseeders, and 3D bioreactors, as well as studies of cells and cell behavior. Other research and development expenses include the costs of outside service providers and material costs for prototype and test units and outside laboratories and testing facilities performing cell growth and materials experiments, as well as the costs of all other preclinical research and testing including animal studies and expenses related to potential patents. We expense research and development costs as incurred.

General and administrative expense. General and administrative expense consists primarily of salaries and other related expenses, including share-based compensation, for personnel in executive, accounting, information technology and human resources roles. Other costs include professional fees for legal and accounting services, insurance, investor relations and facility costs.

Forgiveness of notes payable.On May 23, 2021, we were notified by ~~the Lender~~our lender that provided our ~~PPP~~related Loan that the ~~Small Business Administration~~SBA determined that our application for ~~PPP~~ loan forgiveness was approved, and the SBA remitted the ~~forgiven~~forgiveness amount to ~~the Lender.~~our lender. We have accounted for this loan forgiveness as an ~~extinguishment.~~extinguishment during the nine months ended September 30, 2021.

Sublease income. On January 5, 2022, the Company executed a four-month sublease agreement for certain laboratory and office space at its Holliston, Massachusetts facility. The Company further extended the sublease agreement to a month-to-month basis until August 31, 2022 when the other party vacated the premises.. For the three and nine months ended September 30, 2022, the Company recorded sublease income of approximately $26,000 and $87,000, respectively, relating to this agreement.

Grant income. Grant income reflects income earned under the SBIR grant. Grant income iswas recognized based on timing of when qualified research and development costs are incurred.

~~Changes~~Other (expense) income, net. Other (expense) income, net, consists primarily of the changes in fair value of ~~warrant liability.~~ ~~Changes in fair value of~~our warrant liability ~~represent~~from the change in the fair value of common stock warrants classified as liability awards during the three and nine months ended September 30, ~~2021 and 2020.~~2021. We ~~use~~previously used the Black-Scholes pricing model to value the related warrant liability. ~~The costs associated with~~In February of 2022, the ~~issuance of the~~underlying common stock warrants ~~have been recorded as an expense upon issuance.~~expired unexercised.

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Critical Accounting Policies and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with accounting principles generally accepted in the United States, or. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions.

While our significant accounting policies are discussed in more detail in Note 2 to our ~~financial statements~~Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations.

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Share-based Compensation

We account for our share-based compensation in accordance with the fair value recognition provisions of current authoritative guidance. Share-based awards, including stock options, are measured at fair value as of the grant date and recognized as expense over the requisite service period (generally the vesting period), which we have elected to amortize on a straight-line basis. Expense on share-based awards for which vesting is performance or milestone based is recognized on a straight-line basis from the date when we determine the achievement of the milestone is probable to the vesting/milestone achievement date. Since share-based compensation expense is based on awards ultimately expected to vest, it has been reduced by an estimate for future forfeitures. We estimate forfeitures at the time of grant and revise our estimate, if necessary, in subsequent periods. We estimate the fair value of options granted using the Black-Scholes option valuation model. Significant judgment is required in determining the proper assumptions used in ~~these models.~~this model. The assumptions used include the risk-free interest rate, expected term, expected volatility, and expected dividend yield. We base our assumptions on historical data when available or, when not available, on a peer group of companies. However, these assumptions consist of estimates of future market conditions, which are inherently uncertain and subject to our judgment, and therefore any changes in assumptions could significantly impact the future grant date fair value of share-based awards.

Warrant Liability

Most of the warrants to purchase shares of our common stock have been classified on our condensed consolidated balance sheets as equity. We classify warrants as a liability in our condensed consolidated balance sheets if the warrant is a free-standing financial instrument that may require us to transfer cash consideration upon exercise and that cash transfer event would be out of our control. Such a “liability warrant” is initially recorded at fair value on the date of grant using the Black-Scholes model, net of issuance costs, and it is subsequently re-measured to fair value at each subsequent balance sheet date. Changes in fair value of the ~~warrant are~~warrants is recognized as a component of other income (expense) in the condensed consolidated statements of operations. ~~We will continue to adjust~~The warrants classified as a liability expired unexercised during the nine months ended September 30, 2022 and the remaining liability ~~for changes in fair value until~~on the ~~earlier~~expiration date of ~~the exercise or expiration of the warrant.~~approximately $2,000 was recognized as other income.

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Results of Operations

The following table summarizes the results of our operations for the three and ~~nine months~~nine-months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in thousands):


	Three months ended September 30,				Change 2021 vs. 2020				Nine months ended September 30,				Change 2021 vs. 2020				Three months ended September 30,				Change 2022 vs. 2021				For the Nine Months Ended September 30,				Change 2022 vs. 2021
	2021		2020		Change		%		2021		2020		Change		%		2022		2021		Change		%		2022		2021		Change		%
Operating expenses
Research and development	$	250	$	548	$	(298)	(54)	%	$	1,023	$	1,727	$	(704)	(41)	%	$	369	$	250	$	119	48	%	$	998	$	1,023	$	(25)	(2)	%
General and administrative		572		510		62	12	%		1,712		2,488		(776)	(31)	%		711		572		139	24	%		3,662		1,712		1,950	114	%
Total operating expenses		822		1,058		(236)	(22)	%		2,735		4,215		(1,480)	(35)	%		1,080		822		258	31	%		4,660		2,735		1,925	70	%

Other income (expense)
Forgiveness of notes payable		—		—		—	nm			408		—		408	nm			—		—		—	nm	%		—		408		(408)	(100)	%
Sublease income																		26		—		26	nm	%		87		—		87	100	%
Grant income		—		370		(370)	nm			165		370		(205)	(55)	%		—		—		—	nm	%		—		165		(165)	(100)	%
Change in fair value of warrant liability		(27)		28		(55)	(196)	%		(14)		6		(20)	(333)	%
Other expense, net		—		—		—	nm	%		71		(2)		73	(3,650)	%
Other (expense) income, net																		(2)		(27)		25	(93)	%		(5)		57		(62)	(109)	%
Total other income (expense), net		(27)		398		(425)	(107)	%		630		374		256	68	%		24		(27)		51	(189)	%		82		630		(548)	(87)	%
Net loss	$	(849)	$	(660)	$	(189)	29	%	$	(2,105)	$	(3,841)	$	1,736	(45)	%	$	(1,056)	$	(849)	$	(207)	24	%	$	(4,578)	$	(2,105)	$	(2,473)	117	%

nm = not meaningful

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Comparison of the three months ended September 30, ~~2021 compared to the three months ended~~2022 and September 30, ~~2020~~2021

Research and Development Expense

Research and development expense ~~decreased~~increased approximately ~~$0.3~~$0.1 million, or ~~54%~~48%, to approximately $0.4 million for the three months ended September 30, 2022 as compared to approximately $0.3 million for the three months ended September 30, ~~2021 as compared~~2021. This increase was primarily due to ~~approximately $0.5 million~~legal costs incurred for ~~the three months ended September 30, 2020. This decrease was due primarily to an approximately $0.2 million decrease for lower employee~~a patent application and ~~share-based compensation expenses and an approximately $0.1 million of lower outsourced study costs and lab operating supplies.~~consulting fees.

General and Administrative Expense

General and administrative expense increased approximately $0.1 million, or ~~12%~~24%, to approximately $0.7 million for the three months ended September 30, 2022 as compared to approximately $0.6 million for the three months ended September 30, ~~2021 compared~~2021. This increase was primarily due to higher share-based compensation expense and increased headcount related costs of approximately ~~$0.5~~$0.1 million and an increase of approximately $0.1 million for outside consulting fees for supporting our ongoing public company requirements and special meeting of stockholders offset by the reduced legal and related costs of approximately $0.1 million relating to the completion of litigation for a wrongful death complaint and related matters more fully described in Note 8 to our condensed consolidated financial statements.

Sublease income

On January 5, 2022, we executed a four-month sublease agreement for certain laboratory and office space at our Holliston, Massachusetts facility. The Company further extended the sublease agreement on a month-to-month basis which is ongoing as of September 30, 2022. For the three months ended September 30, ~~2020. This slight increase was due~~2022, we recorded sublease income of approximately $26,000 relating to ~~higher insurance expenses and public company costs.~~this agreement.

Grant income

For the three months ended September 30, 2022 and 2021, we recorded no grant income of approximately $0 in both periods for qualified expenditures under our SBIR grant ~~as the Phase II portion of the award~~which expired effective September 30, 2021. ~~There was approximately $0.4 million of grant~~

Other (expense) income, ~~for qualified expenditures from the SBIR grant for the three months ended September 30, 2020.~~

~~Change in fair value of warrant liability~~net

During the three months ended September 30, 2021, the change in fair value of our warrant liability resulted in other expense of approximately $27,000 due primarily to an increase in the stock price of the underlying common shares. ~~This compared to approximately $28,000 of other income for~~

During the three months ended September 30, ~~2020 due to a decrease in the stock price~~2022, we recorded interest expense of ~~the underlying common shares.~~approximately $2,000 for on insurance installment payments.

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Comparison of the nine months ended September 30, 2022 and 2021 ~~to the nine months ended September 30, 2020~~

Research and Development ~~Expense~~Expense.

Research and development expense decreased approximately ~~$0.7 million,~~$25,000, or ~~41%~~2%, to ~~approximately $1.0~~$1 million for the nine months ended September 30, ~~2021~~2022 as compared to approximately $1 million for the nine months ended September 30, 2021. This decrease was primarily due to approximately $0.1 million decrease in outsourced study costs offset by an increase of $0.1 million relating to laboratory operations.

General and Administrative Expense. General and administrative expense increased approximately $2 million, or 114%, to approximately $3.7 million for the nine months ended September 30, 2022 compared to approximately $1.7 million for the nine months ended September 30, ~~2020.~~2021. This ~~decrease~~increase was due to ~~lower headcount resulting~~primarily to an increase in ~~$0.5~~legal and related costs of approximately $1.4 million relating to the contingency matter for our litigation that has been settled for a wrongful death compliant and related matters more fully described in ~~lower salary and share-based~~Note 8 to our condensed consolidated financial statements, an increase of approximately $0.4 million for higher stock-based compensation expenses and increased headcount related costs and an increase of approximately $0.2 million ~~of lower outsourced study costs, lab operating supplies and facility costs.~~for outside consulting fees for supporting our ongoing public company requirements.

~~General and Administrative Expense~~

General and administrative expense decreased approximately $0.8 million, or 31%, to approximately $1.7 million for the nine months ended September 30, 2021 compared to approximately $2.5 million for the nine months ended September 30, 2020. This decrease was due to approximately $0.3 million lower salary and related expenses and approximately $0.5 million in lower share-based compensation costs due to the separation of our former chief executive officer and chief financial officer in 2020.

Forgiveness of notes payable

. On May 23, 2021, we were notified by the Lender that provided our PPP Loan that the Small Business Administration determined that our application for PPP loan forgiveness was approved, and the SBA remitted the forgiven amount to

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the Lender. As a result, we recorded a gain from forgiveness of our notes payable of approximately $0.4 million for the nine months ended September 30, 2021.

Sublease income. On January 5, 2022, we executed a four-month sublease agreement for certain laboratory space at our Holliston, Massachusetts facility. For the nine months ended September 30, 2022, we recorded sublease income of approximately $0.1 million relating to this agreement.

Grant income

For the nine months ended September 30, 2022 and 2021, we recorded grant income of approximately $0 and $0.2 million, respectively, for qualified expenditures under our SBIR grant ~~as the Phase II portion of the award~~which expired effective September 30, 2021. ~~There was approximately $0.4 million of grant~~

Other (expense) income, ~~for qualified expenditures from the SBIR grant for~~net

The warrants classified as a liability expired unexercised during the nine months ended September 30, ~~2020.~~

~~Change in fair value~~2022 and the remaining liability on the expiration date of ~~warrant liability~~

approximately $2,000 was recognized as other income. During the nine months ended September 30, 2021, the change in fair value of our warrant liability resulted in other ~~income~~expense of approximately $14,000 due primarily to ~~an increase in the~~a higher stock price of the underlying common shares. ~~This compared to approximately $6,000 of other income for~~

During the nine months ended September 30, ~~2020, which was due to a decrease in~~2022, we recorded interest expense of approximately $7,000 for on insurance installment payments. During the ~~stock price of the underlying common shares.~~

~~Other income (expense), net~~

~~In June of~~nine months ended September 30, 2021, we received a refund payment of approximately ~~$71,000~~$0.1 million for certain withholding taxes paid in previous years to the German tax authorities which were remitted on to us on behalf of Harvard Apparatus Regenerative Technology GmbH, our German subsidiary.

Liquidity and Capital Resources

Sources of liquidity. We have incurred operating losses since inception, and as of September 30, ~~2021~~2022, we had an accumulated deficit of approximately ~~$71.1~~$81.5 million. We are currently investing significant resources in the development and commercialization of our ~~products~~product candidates for use by clinicians and researchers in the fields of regenerative medicine and bioengineering. As a result, we expect to incur operating losses and negative operating cash flows for the foreseeable future.

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The following table sets forth the primary uses of cash for the ~~six~~nine months ended September 30, ~~2021~~2022 and ~~2020~~2021 (in thousands):


	Nine Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2022		2021
Net cash used in operating activities	$	(1,627)	$	(3,019)	$	(3,373)	$	(1,627)
Net cash used by investing activities	$	—	$	(7)	$	(8)	$	—
Net cash provided by financing activities	$	2,596	$	4,161	$	5,060	$	2,596

Comparison of Nine ~~Months~~months Ended September 30, ~~2021~~2022 and ~~2020~~2021

Operating activities.Net cash used in operating activities of approximately $3.4 million for the nine months ended September 30, 2022 was due primarily to our net loss of approximately $4.6 million and an increase of $0.3 million for financing costs offset by adjustments for non-cash items of approximately $0.8 million due to non-cash expenses for share-based compensation and depreciation, and an approximately $.7 million increase to cash from changes in working capital due to the timing of payments for accounts payable, accrued expenses and prepaid expenses.

Net cash used in operating activities of approximately $1.6 million for the nine months ended September 30, 2021 was due primarily to our net loss of approximately $2.1 million and adjustments for non-cash items of approximately $0.1 million due to the add-back for a gain from forgiveness of our notes payable, offset, in part, by non-cash expenses including share-based compensation, depreciation and the change in fair value of our warrant liability. These cash outflows were offset, in part, by an approximately $0.4 million increase to cash from changes in working capital due to the timing of payments for prepaid expenses and accounts ~~payable and the collection of grants receivable during the nine months ended September 30, 2021.~~

Net cash used in operating activities of $3.0 million for the nine months ended September 30, 2020 was due primarily to our net loss of $3.8 million, partially offset by $1.2 million add-back for non-cash expenses including share-based compensation, depreciation, and change in fair value of warrant liability. The cash impact of working capital due to the timing of payments for prepaid expenses and accounts payable was negligible during the period.payable.

Investing activities. ~~There were no~~Net cashed used in investing activities for the nine months ended September 30, ~~2021. There were $7,000~~2022 and 2021 totaled approximately $8,000 and zero, respectively, and represented purchases of ~~investing~~property, plant and equipment.

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Financing activities. Net cash generated from financing activities ~~for~~during the nine months ended September 30, ~~2020 for~~2022 of approximately $5.1million consisted of net proceeds received from a private placement transaction that resulted in the issuance of 854,771 shares of our common stock at a purchase price of $5.92 per share and warrants to purchase 427,390 shares of common stock at an ~~equipment purchase.~~exercise price of $8.88 per share to a group of investors.

~~Financing activities.~~Net cash generated from financing activities during the nine months ended September 30, 2021 of approximately $2.6million consisted of ~~gross and~~ net proceeds received from private placement transactions that resulted in the issuance of 1,300,000 shares of our common stock at a purchase price of $2.00 per share and warrants to purchase ~~650,000~~150,000 shares of common stock at an exercise price of $2.00 per share to a group of ~~existing~~ investors.

Net cash generated from financing activities during the nine months ended September 30, 2020 of $4.2 million consisted of $1.1 million of net proceeds received from private placement transactions that resulted in the issuance of 276,027 shares of our common stock and warrants to purchase 151,027 and 125,000 shares of common stock to a group of investors at exercise prices of $3.70 and $4.00 per share, respectively, $2.7 million received from the issuance of 930,877 shares of our common stock to a group of investors in connection with the exercise of previously issued warrants, and $0.4 million from a loan granted to us in May 2020 pursuant to the PPP established as part of the CARES Act. These proceeds were offset slightly by $46,000 of payments for employee tax withholdings for common shares repurchased for vested stock awards.

Off-Balance Sheet Arrangements

We do not have any material off-balance sheet arrangements as of September 30, ~~2021.~~2022.

Other Information

~~JOBS Act~~

~~Effective December 31, 2020, we are no longer considered an “emerging growth company” under the Jumpstart Our Business Startups Act of 2012.~~None.

Item 3.

Quantitative and Qualitative Disclosures About Market Risk.

The Company is a smaller reporting company and is not required to provide this information pursuant to Item 305(e), Regulation S-K.

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Item 4.

Controls and Procedures.

This Report includes the certifications of our ~~President (who is our~~ principal executive ~~officer)~~officer and ~~our Interim Vice President of Finance (who is~~ our principal financial and accounting ~~officer)~~officer required by Rule 13a-14 of the Exchange Act. See Exhibits 31.1 and 31.2. This Item 4 includes information concerning the controls and control evaluations referred to in those certifications.

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 SEC rules and forms and that such information is accumulated and communicated to management, including the ~~President~~Interim Chief Executive Officer, Director, and ~~Interim Vice President of Finance,~~Chairman, who is our principal executive officer, and our Chief Financial Officer, who is our principal financial and accounting officer, to allow timely decisions regarding required disclosures.

In connection with the preparation of this Quarterly Report on Form 10-Q, our management, under the supervision and with the participation of our ~~President~~principal executive officer and ~~Interim Vice President of Finance,~~our principal financial and accounting officer, conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of ~~June~~September 30, ~~2021.~~2022. Based upon the evaluation described above, our ~~President~~principal executive officer and ~~Interim Vice President of Finance~~our principal financial and accounting officer have concluded that they believe our disclosure controls and procedures were ~~not~~ effective as of the end of the period covered by this ~~Quarterly Report on Form 10-Q due~~report, in providing reasonable assurance that information required to be disclosed by us in the ~~material weakness identified as of December 31, 2020~~reports that ~~has not yet been remediated.~~we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and our principal financial and accounting 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.

Changes in Internal Control over Financial Reporting

Our management, with the participation of ~~the President~~our principal executive officer and ~~Interim Vice President of Finance,~~our principal financial and accounting officer, has evaluated whether any change in our internal control over financial accounting and reporting occurred during the quarter ended September 30, ~~2021.~~2022. During the period covered by this report, we have concluded that there were no changes during the fiscal quarter in our internal control over financial reporting, as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act, which have materially affected, or are reasonably likely to materially affect, our internal control over financial accounting and reporting.

~~Remediation Plan~~

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2020 filed with the SEC on April 13, 2021, our management concluded that a material weakness in internal control over financial reporting existed as of December 31, 2020 and continues to exist as of September 30, 2021, being that we did not design or maintain effective internal controls over the timely identification and recording of financial statement adjustments. Specifically, we did not identify, analyze, record, and disclose certain non-routine accounting matters, such as a lease extension and a grant contract, timely and accurately. We are committed to remediating such 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.

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PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

From time to time, we may be involved in various claims and legal proceedings arising in the ordinary course of business. Other than the ~~ongoing~~ civil lawsuit described in Item 3 of Part I of our Annual Report on Form 10-K filed with the SEC on March ~~27, 2020,~~31, 2022 and in our Form 8-K filed with the SEC on ~~June 24, 2021, our Form 8-K filed with the SEC on September 24, 2021,~~April 27, 2022, there are no such matters pending that we expect to be material in relation to our business, financial condition, and results of operations or cash flows.

As previously disclosed, including in the Form 8-K ~~filings~~filing referenced above, on April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint ~~on April 14, 2017~~ with the Suffolk Superior Court, in the County of Suffolk, Massachusetts, ~~(the “Court”),~~ against us and other defendants, including Harvard Bioscience, Inc. ~~(“Harvard Bioscience”)~~, ~~our~~or HBIO, the former parent ~~entity prior to~~of the ~~spin-off of~~Company that spun off the Company in 2013, as well as another third party. The complaint ~~seeks~~sought payment for an unspecified amount of damages and ~~alleges~~alleged 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 our first-generation trachea scaffold technology for which we discontinued development in 2014, and not to our current ~~Cellframe technology nor to our lead development Cellspan~~Biostage Esophageal ~~Implant product candidate.~~Implant.

On ~~October 1, 2019,~~April 27, 2022, the ~~Court entered an order granting plaintiffs’ motion~~Company and HBIO executed a settlement with the plaintiffs (the “Settlement”), which resolves all claims relating to ~~compel~~ the ~~defendants to produce discovery. Subsequently,~~litigation. The Settlement resulted in the plaintiff filed a motion for sanctions against us on January 6, 2020 claiming failure to produce the discovery. Our counsel at the time, which had been selected for the case by our liability insurance carrier, never notified us of plaintiffs’ motion and never responded to plaintiff’ motion. As a resultdismissal with prejudice of the ~~failure of our former counsel to respond, on January 29, 2020, the Court entered an order allowing plaintiffs’ sanctions against us~~wrongful death claim, and ~~the other defendants, which establishes a sanction of~~neither we nor HBIO admitted ~~liability. In June 2021, we were informed of these 2019 and 2020 court actions by new defense counsel appointed by our~~any fault or liability ~~insurance carrier. On June 9, 2021, we, together~~in connection with the ~~other defendants, filed a motion to vacate~~claim. The Settlement also resolves any and all claims by and between the ~~Court’s order allowing plaintiff’s motion for sanctions,~~parties and ~~following a hearing on such motion, on August 6, 2021 the Court issued a ruling in~~ our ~~favor, vacating the sanctions. This case will now proceed on the merits, which we will continue to oppose vigorously.~~

~~On September 15, 2021, one of our product~~products liability insurance carriers, which resulted in the dismissal with prejudice of all claims asserted by or against those carriers, the Company and HBIO. However, based on review of the circumstances surrounding the Settlement, we recorded an accrual for this matter of approximately $3.3 million in general and administrative expenses during the year ended December 31, 2021.

In relation to the litigation, we have incurred approximately $5.9 million of aggregate costs, of which approximately $0.3 million remain unpaid as of September 30, 2022. This aggregate amount includes the cost of both the accrual for contingency matter of approximately $3.3 million and approximately $2.6 million of legal and related costs incurred by us which consist of attorney’s fees and advisor and specialist costs as part of our defense in this matter. For the nine months ended September 30, 2022, we incurred legal and related costs of approximately $1.3 million recorded in general and administrative expenses. On March 3, 2022, we received a cash payment of approximately $0.1 million from Medmarc, our insurance carrier. This amount represented a reimbursement of previously incurred legal costs and was recorded as a reduction to general and administrative expenses during the nine months ended September 30, 2022.

With respect to such $5.9 million of costs described above, we were required to either pay such costs directly or indemnify HBIO as to such amounts it incurs. Of such amounts, we anticipated that HBIO would pay an aggregate amount of $4.0 million by the end of the second quarter of 2022. With respect to the indemnification obligation of the Company to HBIO pertaining to such costs, we and HBIO entered into a Preferred Issuance Agreement dated as of April 27, 2022, or the “PIA”. In connection with the PIA, we and HBIO agreed that once HBIO had ~~been providing a defense~~paid at least $4.0 million in such costs, to ~~us 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~~satisfy our indemnification obligations with respect thereto, ~~or covering related legal expenses incurred after September 30, 2021. The insurance carrier also filed~~in lieu of paying cash, we would issue senior convertible preferred stock to HBIO that will contain terms as described in the PIA, including the term sheet attached thereto. On June 10, 2022, following the execution of 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 us~~subscription agreement and Harvard Bioscience with respect to the lawsuit described above. We believe the insurance carrier’s grounds for denying coverage are without merit and intend to vigorously defend against this complaint for declaratory judgment and the insurance carrier’s denialHBIO providing evidence of payment of the ~~claim~~requisite $4.0 million amount, we issued HBIO 4,000 shares of Series E Preferred Stock at a price of $1,000 per share to satisfy our related indemnification obligations aggregating $4.0 million, which included the accrual for contingency of approximately $3.3 million and approximately $0.8 million of legal and related ~~matters.~~costs paid on behalf of the Company by HBIO.

~~There can~~From time to time, we may be involved in various claims and legal proceedings arising in the ordinary course of business. Other than the above matter, there are no ~~assurance~~such matters pending that we ~~and the other defendants will prevail~~expect to be material in ~~the insurance coverage litigation. As such, it is unclear at this point if~~relation to our ~~product liability insurance coverage will reimburse us for all or any portion of any defense costs or damages if we were to lose the underlying case on the merits.~~

While there can be no assurance that we and other defendants will prevail in the underlying case, we continue to believe that the plaintiff’s claims made in the lawsuit are without merit and will continue to vigorously defend against such claims. If we face a trial on damages and lose on the merits, we do not know the exact amount of compensatory and, potentially, punitive damages that could be awarded, but the amounts could be substantial. Considering these factors, an estimate of potential liability cannot be made at this time. However, any potential loss on the merits, especially if not covered by our product liability insurance, would be likely to adversely impact ourbusiness, financial condition, ~~and may cause us to have to curtail~~results of operations, or cease our operations. We are 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. Further, in accordance with a separation and distribution agreement between us and Harvard Bioscience relating to the spin-off, we would be required to indemnify Harvard Bioscience against losses that Harvard Bioscience may suffer as a result of this litigation.cash flows.

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Item 1A.Risk Factors

To our knowledge and except to the extent additional factual information disclosed in this Quarterly Report on Form 10-Q relates to such risk factors, and the additional risk factors noted below, there have been no material changes in the risk factors described in Item 1A. Risk Factors in our Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, which was filed with the SEC on ~~April 13, 2021.~~March 31, 2022.

Our audited financial statements for the year ended December 31, 2020 contain a going concern qualification. Our financial status creates doubt whether we will continue as a going concern. We will need additional funds in the near future and our operations will be adversely affected if we are unableRegulatory approval delays due to ~~obtain needed funding.~~COVID-19

~~We ended September 30, 2021 with approximately $2.0 million~~COVID-19 may impede clinical trials and slow down regulatory actions. It could adversely affect the entire clinical trial spectrum from enrollment to data analysis. Assuming patients enroll, clinical trials may face disruptions to protocol schedules for treatment and follow-up visits. Reports from Europe have noted overwhelmed facilities where all non-critical visits have been postponed or canceled. Many U.S. hospitals have followed suit to limit exposure and allow for care of ~~operating cash on-hand, which included cash proceeds of approximately $2.6 million received in May, June, and September of 2021~~COVID-19 patients. Deviations from existing investors. This will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2022. We will need to raise additional capital during the second quarter of 2022 and beyond to fund operations, including clinical development as well as expenses in relation to our ongoing litigation. If we do not raise sufficient additional capital from outside sources in such timeframe, we will be forced to further curtail or cease our operations. Based on these circumstances, our ability to continue as a going concern is at risk and our independent registered public accounting firm included a “going concern” qualification as to our ability to continue as a going concern in their audit report dated April 13, 2021, included in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on April 13, 2021. Our cash requirements and cash resources will vary significantly depending upon the timing, and the financial and other resources that will be required to complete ongoing development and pre-clinical and clinical testing of our products as well as regulatory efforts and collaborative arrangements necessary for our products that are currently under development. In addition to development and other costs, we expect to incur ongoing costs in relation to our ongoing litigation, and capital expenditures fromtrial protocols could present challenges when it comes time to time. These capital expenditures will be influenced by our regulatory compliance efforts, our success, if any, at developing collaborative arrangements with strategic partners, our needs for additional facilities and capital equipment andanalyze the growth, if any, of our business in general. We will require additional funding to continue our anticipated operations and support our capital and operating needs. We are currently seeking and will continue to seek financings from other existing and/or new investors to raise necessary funds through a combination of public or private equity offerings. Werelated data set. Some clinics may ~~also pursue debt financings, other financing mechanisms, strategic collaborations and licensing arrangements. We may not be able to obtain additional financing~~stop allowing clinical trial monitors on ~~terms favorable to us, if at all. In addition, general market conditions, including~~site. Without reconciling the effect of the COVID-19 pandemic on financial markets, as well as the effects of laws and regulations on foreign investment in the United States under the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), and other agencies and related regulations, including the Foreign Investment Risk Review Modernization Act (FIRRMA), adopted in August 2018, may make it difficult for us to seek financing from the capital markets.

Any additional equity financings could result in significant dilution to our stockholders and possible restrictions on subsequent financings. Debt financing, if available, could result in agreements that include covenants limiting or restricting our ability to take certain actions, such as incurring additional debt, making capital expenditures or paying dividends. Other financing mechanisms may involve selling intellectual property rights, payment of royalties or participation in our revenue or cash flow. In addition, in order to raise additional funds through strategic collaborations or licensing arrangements,data, we may be ~~required~~unable to ~~relinquish certain rights~~"lock" the trial database, an essential step that precedes the analysis of the data.

We rely on regular interaction and guidance from the FDA and other regional/country regulatory authorities/agencies to ~~some or all of our technologies or products. If we cannot raise funds or engage strategic partners on acceptable terms when needed, we may not be able to continue our~~plan research and development activities ~~develop~~across all stages. Due to the COVID-19 pandemic, the FDA and worldwide regulatory authorities have a great deal of resources dedicated to COVID-19 related matters, resulting in disruption in their ability to fully support the regulatory clearance/approval processes. As resources continue to be diverted, regulatory clearances/approvals may continue to be delayed, until the pandemic is under control. Therefore, delays with approvals, clearances, inspections, and meetings that are currently being experienced may continue for the foreseeable future. Postponement of these interactions could delay us from bringing our product candidates to market.

Impact of COVID-19, Supply Chain Disruptions and Other Matters

The impact of the COVID-19 outbreak has subsided substantially in the U.S. but continues to result in reduced activity levels outside of the U.S., such as continued restrictions on travel and business operations and advising or ~~enhance~~requiring individuals to limit or forego their time outside of their homes or places of business. In response to the global supply chain instability and inflationary cost increases, we have taken action to minimize, as much as possible, any potential adverse impacts by working with our ~~products, take advantage~~suppliers to monitor the availability of ~~future opportunities, grow~~raw material components (e.g., polymers and organic solvents), lead times, and freight carrier availability. We expect global supply chain instability will continue to have an impact on our business, ~~respond~~but to ~~competitive pressures~~date that has not been material to our financial performance or ~~unanticipated requirements, or at worst may be forced~~the development of our products. The consequences of the pandemic, global supply chain instability and inflationary cost increases and their adverse impact to ~~curtail or cease~~the global economy, continue to evolve. Accordingly, the significance of the future impact to our ~~operations.~~business, financial condition and results of operations remains subject to significant uncertainty.

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Item 6.

Exhibits


Exhibit Index
10.1		Employment Agreement between Biostage, Inc. and Joseph L. Damasio, Jr. (previously filed as an exhibit to Form 8-K, filed on August 10, 2022, and incorporated herein by reference)

~~4.1~~10.2		~~Form of Warrant (previously filed as an exhibit to Form 8-k, filed on September 8, 2021, and incorporated herein by reference)~~

~~10.1~~		Form of Securities Purchase Agreement ~~dated as of September 1, 2021 (previously~~(previously filed as an exhibit to Form ~~8-k,~~8-K, filed on ~~September 8, 2021,~~May 13, 2022, and incorporated herein by reference)

31.1+		Certification of Interim ~~Vice President of Finance~~Chief Executive Officer, Director, and Chairman of Biostage, Inc., pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2+		Certification of ~~President~~Chief Financial Officer of Biostage, Inc., pursuant to Rules 13a-14(a) and 15d-14(a) of the Securities Exchange Act, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1*		Certification of Interim ~~Vice President of Finance~~Chief Executive Officer, Director, and Chairman of Biostage, Inc., pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2*		Certification of ~~President~~Chief Financial 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.

101.INS		XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

101.SCH		XBRL Taxonomy Extension Schema Document

101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF		XBRL Taxonomy Extension Definition Linkbase Document

101.LAB		XBRL Taxonomy Extension Labels Linkbase Document

101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document

Exhibit 104		Cover Page Interactive Data File - the cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document.

+Filed herewith.

This certification shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, or otherwise subject to the liability of that section, nor shall it be deemed to be incorporated by reference into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by undersigned thereunto duly authorized.

Date: November ~~15, 2021~~14, 2022

	BIOSTAGE, INC.

	By:	/s/ ~~Hong Yu~~David Green
		Name: ~~Hong Yu~~David Green
		Title: ~~President~~Interim Chief Executive Officer, Director, and Chairman (principal executive officer)

	By:	/s/ ~~Peter A. Pellegrino~~Joseph L.Damasio Jr.
		Name: ~~Peter A. Pellegrino~~Joseph L. Damasio Jr.
		Title: ~~Interim Vice President of Finance~~Chief Financial Officer (principal financial officer)


		Page
PART I-FINANCIAL INFORMATION		3

Item 1.	Condensed Consolidated Financial Statements ~~(unaudited)~~	3

	Condensed Consolidated Balance Sheets	3

	Condensed Consolidated Statements of Operations (Unaudited)	4

	Condensed Consolidated Statements of Convertible Preferred Stock and Stockholders’ (Deficit) Equity (Unaudited)	5

	Condensed Consolidated Statements of Cash Flows (Unaudited)	7

	Notes to Unaudited Condensed Consolidated Financial Statements	8

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	1820

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	2526

Item 4.	Controls and Procedures	26

PART II-OTHER INFORMATION		27

Item 1.	Legal Proceedings	27

Item 1A.	Risk Factors	28

Item 6.	Exhibits	29

SIGNATURES		30


Risk-free interest rate		0.78	%
Expected volatility		121.43	%
Expected term		5	years
Expected dividend yield		0
Exercise price	$	2.00
Market value of common stock	$	3.00


Risk-free interest rate		0.87	%
Expected volatility		118.01	%
Expected term		5	years
Expected dividend yield		0
Exercise price	$	2.00
Market value of common stock	$	1.21


Risk-free interest rate		0.88	%
Expected volatility		106.7	%
Expected term		2	months
Expected dividend yield		0
Exercise price	$	3.70
Market value of common stock	$	3.11


	Warrant liability
	(In thousands)
Balance at December 31, 2020	$	17
Change in fair value upon re-measurement		14
Balance at September 30, 2021	$	31