Overview

Biostage (BSTG) is a biotechnology company developing bioengineered organ implants based on its novel CellframeTM technology. The company's Cellframe technology is comprised of a biocompatible scaffold that is seeded with the recipient’s own stem cells. This technology is being developed to treat life-threatening conditions of the esophagus, trachea or bronchus with the objective of dramatically improving the treatment paradigm for those patients.

The company believe that its Cellframe technology will provide surgeons with new ways to address damage to the esophagus, bronchus, and trachea due to congenital abnormalities, cancer, infection or trauma. Products being developed based on its Cellframe technology for those indications are called CellspanTM products.

The company announced favorable preliminary pre-clinical results of large-animal studies for the esophagus, trachea and bronchus in November 2015. Since then, the Cellspan esophageal implant product candidates have been its lead development product candidates. Biostage is pursuing two development programs that address conditions of the esophagus: esophageal atresia in pediatric patients and esophageal cancer in adult patients. The company's Cellspan esophageal product candidates are each intended to provide a surgical solution to stimulate regeneration of a segment of the esophagus missing due to a congenital abnormality or following surgical removal to establish or reestablish the organ’s continuity and integrity.

Approximately one in 2,500 babies in the U.S. is born with esophageal atresia, a congenital condition where the child’s esophagus is underdeveloped and does not extend completely from the mouth to the stomach. When a long segment of the esophagus is lacking, the current standard of care is a series of surgical procedures where surgical sutures are applied to both ends of the esophagus in an attempt to stretch them together so they can be connected at a later date. This process can take weeks and the procedure can result in serious complications and may carry high rates of failure. Such approach also requires, in time, at least two separate surgical interventions. Other options include the use of the child’s stomach that would be pulled up, or a piece of the patient’s intestine that would be moved to the gap, to allow a connection to the mouth. Biostage is working to develop a Cellspan esophageal implant product candidate to address newborns’ esophageal atresia, to provide a simpler, more effective and potentially organ-sparing solution.

A portion of all patients diagnosed with esophageal cancer are treated via a surgical procedure known as an esophagectomy. The current standard of care for an esophagectomy requires a complex surgical procedure that involves moving the patient’s stomach or a portion of their colon into the chest to replace the portion of esophagus resected by the removal of the tumor. These current procedures have high rates of complications, and can lead to a severely diminished quality of life and require costly ongoing care. The company's Cellspan esophageal implants aim to simplify the procedure, reduce complications, result in a better quality of life and reduce the overall cost of these patients to the healthcare system.

The company believe that, of its two current programs, the Cellspan Esophageal Implant program to treat pediatric esophageal atresia may provide a shorter time to a commercial product and the greater overall potential value. The company also believe that the pediatric esophageal atresia program needs to advance in the first position with the FDA to ensure eligibility for the pediatric rare disease accelerated review voucher program. Receipt of such a voucher, if achieved, could potentially provide significant value to the company in the future. As a result, the company elevated the pediatric program to its lead program. The company will continue to advance the Cellspan Esophageal Implant adult program, but have not filed an IND for that product candidate at this time. The company's current plan for that product candidate is to update the FDA on the progress and status of the its preclinical testing, including its GLP studies, for the adult esophagus program in the near future. Based on the FDA’s feedback, the the company may amend its preclinical testing plan and continue toward the filing of an IND.

The company's products are currently in development and have not yet received regulatory approval for sale anywhere in the world.

Following the failure to receive the funding with respect to a securities purchase agreement in August 2017, and in an effort to conserve cash, the company completed a reduction in headcount of 20 persons during October and November 2017. In addition, its officers agreed to a temporary reduction in their cash salaries by 50% effective November 2017. During Q1 2018, the salaries of its officers were increased to approximately 80% of their contracted rate. Biostage has accrued the difference between the officers contracted rate and amount paid for November 2017 through March 2018. Following the capital raises in December 2017 and January 2018 described below the company re-hired five of its former employees into key positions in January 2018. The company believe that its new staffing level after those hires is sufficient to pursue both of its esophageal programs and the company anticipate its 2018 cash burn needs to be significantly less than its 2017 burn.

Restoring Organ Function

Following extensive research and development, Biostage has evolved its technology to optimize the interaction of mesenchymal stem cells seeded on a biocompatible scaffold. Preclinical studies suggest that, once implanted, the scaffold seeded with the patient’s own cells signals the stem cell niche to guide the regeneration of a biological structure.

Cellframe technology may enable the first truly personalized approach to organ regeneration.

Cellframe technology employs a multistep process in which the patient’s own stem cells are taken from a simple adipose/fat tissue biopsy, expanded and banked, and then seeded onto a proprietary scaffold that mimics the natural dimensions of the organ being regenerated. After several days in a rotating bioreactor, the stem cell-containing scaffold is ready to be implanted. Cellframe technology is designed to deliver the necessary cues for triggering, guiding and modulating the regenerative process.

Cellframe technology is based on the concept of in situ tissue regeneration using the body’s own biologic resources and reparative capability in combination with tissue-specific biomaterials implanted at the sites of disease or injury.

Cellframe is a newly developed technology that harnesses the full potential of the in vivo microenvironment to achieve complete tissue regeneration.

Biostage is investigating its Cellframe technology to replace diseased sections of the esophagus, trachea and bronchus, possible life-threatening conditions that are underserved by current therapies

December 2017 Private Placements and Reverse Stock Split

Between December 27 and December 29, 2017, the company entered into Securities Purchase Agreements with new investors for the sale of its capital stock. Theses agreement and related transactions resulted in the following:

• On December 22, 2017, the company effected a reverse stock split of its shares of common stock at a ratio of 1-for-20. All share and per share amounts of common stock in the accompanying consolidated financial statements in this quarterly report on Form 10-Q have been retroactively adjusted to reflect the reverse stock split.
• The company's common stock commenced trading on the OTCQB Venture Market on a reverse stock split basis on December 22, 2017. The Company had delisted from The NASDAQ Capital Market in October 2017 and commenced trading on the OTCQB Venture Market at that time.
• On December 27, 2017, the company issued 518,000 shares of its common stock at $2.00 per share, 3,108 shares of its Series D Convertible Preferred Stock at $1,000 per share, and warrants to purchase 3,108,000 shares of common stock at an exercise price of $2.00 per share, in exchange for aggregate gross proceeds of approximately $4.1 million in a private placement transaction of unregistered shares with a new investor. The warrants were immediately exercisable and expire in December 2022.

On January 3, 2018, the company issued 50,000 shares of its Common stock at $2.00 per share and warrants to purchase 75,000 shares of common stock at an exercise price of $2.00 per share, in exchange for aggregate gross proceeds of $100,000 in a private placement transaction of unregistered shares with Connecticut Children’s Medical Center. The warrants were immediately exercisable and expire in January 2023.

Additionally, on February 20, 2018, the company completed a private placement of 302,115 shares of common stock at a purchase price of $3.31 per share for net proceeds of $1.0 million.

Small Business Innovation Research Grant

On March 28, 2018, the company were awarded a Fast-Track Small Business Innovation Research (SBIR) grant by the Eunice Kennedy National Institute of Child Health and Human Development. The award for Phase I, which is expected to be earned through the third quarter of 2018, provides for the reimbursement of up to $225,000 of qualified research and development costs or expenditures. The SBIR grant has the potential to provide a total award of $1.7 million. If Phase I is successful, and funding is available, a Phase II award of up to approximately $1.5 million would support pre-clinical testing of pediatric Cellspan Esophageal Implants planned to begin later in 2018. The Phase II funds, if awarded, would be spent over an estimated two years.

Operating Losses and Cash Requirements

Biostage has incurred substantial operating losses since its inception, and as of March 31, 2018 had an accumulated deficit of approximately $49.8 million, which will require it to seek additional financing to fund future operations. The company expect that its cash on hand at March 31, 2018 of $2.8 million will enable it to fund its operating expenses and capital expenditure requirements into the third quarter of 2018.

Biostage is currently investing significant resources in development of products for use by clinicians in the field of regenerative medicine. The company will need to raise additional funds in future periods to fund its operations. In the event that the company do not raise additional capital from outside sources in the near future, the company may be forced to further curtail or cease its operations. Cash requirements and cash resource needs will vary significantly depending upon the timing of clinical and animal studies and other resource needs that will be required to complete ongoing development and pre-clinical and clinical testing of products as well as regulatory efforts and collaborative arrangements necessary for its products that are currently under development. The company will seek to raise necessary funds through a combination of public or private equity offerings, debt financings, other financing mechanisms, or strategic collaborations and licensing arrangements. The company may not be able to obtain additional financing on terms favorable to it, if at all.

On May 1, 2018, the company entered into Securities Purchase Agreements (the “Purchase Agreements”) with Chu Bogang and Zhou Heping (each an “Investor” and together “Investors”) pursuant to which the Investors agreed to purchase in private placements (the “Private Placements”), and the company agreed to issue, 500,000 shares of its common stock, par value $0.01 per share (the “Common Stock”) at a purchase price of $3.60 per share to each of the Investors for a total combined issuance of 1,000,000 shares of its Common Stock. The Private Placements are expected to close later in May.

Financial Condition, Liquidity and Capital Resources

Sources of liquidity. Biostage has incurred operating losses since inception, and as of March 31, 2018 the company had an accumulated deficit of approximately $49.8 million. Biostage is currently investing significant resources in the development and commercialization of its products for use by clinicians and researchers in the field of regenerative medicine. As a result, the company expect to incur operating losses and negative operating cash flow for the foreseeable future.

Operating activities. Net cash used in operating activities of $2.0 million for the three months ended March 31, 2018 was primarily a result of its $1.5 million net loss, in addition to approximately $0.8 million of cash used for working capital, partially offset by $0.3 million add-back of non-cash expenses related to the change in the fair value of its warrant liability, stock-based compensation and depreciation. The cash used for working capital primarily represented the payment of accounts payable and accrued expenses.

Net cash used in operating activities of $3.1 million for the three months ended March 31, 2017 was primarily a result of its $3.8 million net loss and $0.3 million of cash used for working capital, partially offset by a $1.0 million add-back of non-cash expenses related to the change in the fair value of its warrant liability, including issuance costs, stock-based compensation and depreciation.

Investing activities. Net cash provided by investing activities during the three months ended March 31, 2018 was $46,000 reflecting $49,000 of cash received from the sale of property, plant and equipment, offset in part by $3,000 of property and equipment additions.

Cash used for investing activities for the three months ended March 31, 2017 reflected $0.1 million of additions to property and equipment.

Financing activities Net cash generated from financing activities during the three months ended March 31, 2018 of $0.8 million consisted of the net proceeds from the issuance of 302,115 shares of its common stock on February 20, 2018 at a purchase price of $3.31 per share and the issuance of 50,000 shares of its common stock on January 2, 2018 at a purchase price of $2.00 per share, partially offset by the repayment of a $0.3 million deposit to an investor related to the private placement transaction from December 2017.

Net cash generated from financing activities during the three months ended March 31, 2017 of $6.8 million consisted of the net proceeds from the issuance of 1,000,000 shares of its common stock at a purchase price of $8.00 per share, the issuance of warrants to purchase 1,000,000 shares of common stock at an exercise price of $8.00 per warrant and warrants issued to placement agents for the offering to purchase 50,000 shares of common stock at an exercise price of $10.00 per warrant.