BUSINESS
We are a biotechnology company developing bioengineered organ implants
based on our novel Cellframe
TM
technology. Our Cellframe technology is comprised
of a biocompatible scaffold that is seeded with the patient’s own stem cells. Our platform technology is being developed
to treat life-threatening conditions of the esophagus, bronchus and trachea. By focusing on these underserved patients, we hope
to dramatically improve the treatment paradigm for these patients. Our unique Cellframe technology combines the clinically proven
principles of tissue engineering, cell biology and materials science.
We believe that our Cellframe technology may provide surgeons a
new paradigm to address life-threatening conditions of the esophagus, bronchus, and trachea due to cancer, infection, trauma or
congenital abnormalities. Our novel technology harnesses the body’s response and modulates it toward the healing process
to regenerate tissue and restore the continuity and integrity of the organ. We are pursuing our Cellspan
TM
Esophageal Implant (CEI) technology as our first two product candidates, to address pediatric esophageal atresia and to address
esophageal disease, 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 Mayo Clinic
and Connecticut Children’s Medical Center, we are advancing our technology toward filing an Investigational New Drug (IND)
application with the U.S. Food and Drug Administration (FDA) for our two CEI product candidates. We are focusing our product development
program based on the greatest medical need, analysis of existing surgical options and physician validation.
We believe that, of our two current programs, the CEI program to
treat pediatric esophageal atresia 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 to Biostage in the future. We have continued to advance the CEI adult program and we will be in a position to file an
IND application for that product first, as the data set for that application will be completed first. We plan to file an IND for
the adult esophageal disease product candidate mid-year 2019. We are now completing the remaining preclinical
studies for the esophageal atresia product candidate and expect to file an IND for that product candidate in early 2020.
Our Cellframe Technology Platform: How It
Works
Our Cellframe process begins with the collection of an adipose (fat)
tissue biopsy from the patient followed by the use of standard tissue culture techniques to isolate and expand the patient’s
own (autologous) mesenchymal (multipotent) stem cells, or MSC. The cells are seeded onto a proprietary biocompatible, synthetic
scaffold, produced to mimic the dimensions of the organ to be regenerated, and incubated in a proprietary organ bioreactor. The
scaffold is electrospun from polyurethane (PU) to form a non-woven, hollow tube. The specific microstructures of the Cellspan implants
are designed to allow the cultured cells to attach to and cover the scaffold fibers.
We have conducted large-animal studies to investigate the use of
the Cellspan implants for the reconstitution of the continuity and integrity of tubular shape organs, such as the esophagus and
the large airways, following a full circumferential resection of a clinically relevant segment, just as would occur in a clinical
setting. We announced favorable preliminary preclinical results of large-animal studies for the esophagus, bronchus and trachea
in November 2015. Based on the results of those studies, we chose the esophagus to be the initial focus for our organ regeneration
technology.
Illustration of intersection of Cellspan
esophageal implant and native
esophagus
at time of implant and proposed mechanism of action
In May 2016, we reported an update of results from additional, confirmatory
pre-clinical large-animal studies. We disclosed that the studies had demonstrated in a predictive large-animal model the ability
of our Cellspan organ implant to successfully stimulate the regeneration of a section of esophagus that had been surgically removed.
CEIs, consisting of a proprietary biocompatible synthetic scaffold seeded with the recipient animal’s own stem cells, were
surgically implanted in place of the esophagus section that had been removed. After the surgical full circumferential resection
of a portion of the thoracic esophagus, the Cellspan implant stimulated the reconstitution of full esophageal structural integrity
and continuity.
Illustration
of esophageal reconstitution over Cellspan esophageal
implant
following time of implant and proposed mechanism of action
Study animals were returned to a solid diet three weeks after the
implantation surgery. The scaffold portions of the Cellspan implants, which are intended to be in place only temporarily, were
retrieved approximately three weeks post-surgery via the animal’s mouth in a non-surgical endoscopic procedure. Within 2.5
to 3 months, a complete inner epithelium layer and other specialized esophagus tissue layers were regenerated. Two animals in the
study were kept in life for almost two years to evaluate the long-term viability of the newly regenerated tubular conduit and were
then sacrificed for histological data. Prior to their sacrifice, these animals demonstrated normal weight gain, appeared healthy
and free of any significant side effects and received no specialized care.
Platform Technology in Life-threatening Orphan Indications
In November 2016, we were granted Orphan Drug Designation for
our CEI by the FDA to restore the structure and function of the esophagus subsequent to esophageal damage due to cancer,
injury or congenital abnormalities. Orphan Drug Designation provides a seven-year marketing exclusivity period against
competition in the U.S. from the date of a product’s approval for marketing. This exclusivity would be in addition to
any exclusivity we may obtain from our patents. Additionally, orphan designation provides certain incentives, including tax
credits and a waiver of the Biologics License Application (BLA) fee. We also plan to apply for Orphan Drug Designation for
our CEI in Europe. Orphan Drug Designation in Europe provides market exclusivity in Europe for ten years from the date of the
product’s approval for marketing.
We have advanced the development of our Cellframe technology, specifically
a CEI, in a series of preclinical studies, including large-animal studies with collaborators. In order to seek approval for the
initiation of clinical trials for our CEIs in humans, Good Laboratory Practice (GLP) studies to support the safety of the CEI are
required to submit an IND application with the FDA. We have now performed the GLP studies to demonstrate that our technology, personnel,
systems and practices are sufficient for advancing into human clinical trials. We have conducted a number of IND-enabling GLP studies
demonstrating safety and feasibility of the Cellspan implant. These studies were done primarily in pursuit of our adult esophageal
cancer program. During 2018 we also performed additional non-GLP studies for the pediatric esophageal atresia program to optimize
that product candidate.
First-In-Human Use of Esophageal Implant
Product Candidate
On August 7, 2017, we announced the use of our CEI product candidate
in a patient at a major U.S. hospital via an FDA-approved single-use expanded access application. The surgery took place at Mayo
Clinic, but we were not allowed to identify the institution publicly at that time. The patient was a 75-year-old male with a life-threatening
cancerous mass in his chest that spanned his heart, a lung and his esophagus. The surgery was performed in May 2017 to remove the
tumor, repair the heart, part of one lung, and a section of the esophagus. The CEI was interpositioned into the gap in the esophagus
created by the removal of the tumor. The patient’s surgeon informed us at that time that the surgery was a success and the
patient was later discharged from the hospital. In February 2018 the surgeon informed us that the patient had died after living
approximately eight months after surgery. The surgeon stated that the cause of death was a stroke, and that the stroke was unrelated
to the esophageal implant. The surgeon also informed us that a preliminary autopsy had shown that the esophageal implant resulted
in a regenerated esophageal tube in the patient, except for a very small (approximately 5mm) hole outside the implant zone on the
lateral wall that was right up against a synthetic graft inserted as part of the patient’s heart repair on the vena cava
in that same surgery. The synthetic graft on the pericardium was not related to our esophageal implant product and may have acted
as an irritant to esophageal tissue where it contacted the esophageal implant. The surgeon also informed us that the esophageal
regeneration in this patient was consistent with the regeneration previously observed in our large-animal studies. In January 2019,
the surgeon presented the case study publicly at a major U.S. medical conference, including histological data supporting his earlier
statements regarding successful regeneration. Mayo Clinic expects to publish an article in a peer-reviewed journal and we expect
to be in a position to release additional information on this landmark case at that time.
Our product candidates are currently in development and have not
yet received regulatory approval for sale anywhere in the world.
Changing the Surgical Treatment of Esophageal
Cancer
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Illustration of esophageal cancer site
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Illustration of potential human application of Cellspan esophageal implant at site of esophageal cancer (depicting implant prior to esophageal tissue reconstitution over implant)
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According to the World Health Organization’s International
Agency for Research on Cancer, there are approximately 572,000 new cases of esophageal cancer worldwide each year. 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. Our CEIs
aim to provide a simpler surgical procedure, with reduced complications, that may result in a better quality of life after the
operation and reduce the overall cost of these patients to the healthcare system.
Focus on Pediatric Esophageal Atresia: a
Congenital Abnormality in Need of a Better Solution
Each year, several thousand children worldwide are born with a congenital
abnormality known as esophageal atresia, a condition where the baby is born with an esophagus that 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 and pull them together
so they can be connected at a later date. This process can take weeks and the procedure is plagued by 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 or intestine that would be pulled up into the chest to allow a connection to the mouth.
We are working to develop a CEI solution to address the complications of esophageal atresia, that could potentially be life-changing,
organ-sparing, or both.
Our Mission and Our Strategy
Our mission is to revolutionize regenerative medicine by bioengineering
patient-specific Cellspan implants that use the patient’s own cells to stimulate organ regeneration and restore an organ’s
structure and continuity. Our business strategy to accomplish this mission includes:
Targeting life-threatening medical conditions.
We are
focused on creating products to help physicians treat life-threatening conditions like esophageal cancer, central lung cancer and
damage to the trachea caused by cancer, trauma or infection. We are also developing products for the treatment of congenital abnormalities
of the esophagus and airways. We are not targeting less severe conditions that have reasonable existing treatment options. Solutions
for life-threatening medical conditions present a favorable therapeutic index, or risk/benefit relationship, by providing the opportunity
of a significant medical benefit for patients who have poor or no treatment alternatives. We believe that product candidates targeting
life-threatening medical conditions may be eligible for review and approval by regulatory authorities under established expedited
review programs, which may result in savings of time in the regulatory approval process. Also, we believe that products targeting
life-threatening medical conditions may be more likely to receive favorable reimbursement compared with treatments for less critical
medical conditions.
Developing products that have a relatively short time to market.
Since the number of patients diagnosed with esophageal cancer in the U.S. each year is relatively small, we expect the number
of patients that we would likely need to enroll in a clinical trial will also be relatively small. A small number of patients implies
a relatively fast enrollment time and a less expensive clinical development program. Therefore, we expect to be able to conduct
a clinical trial in a relatively short period of time compared to clinical trials in indications with larger patient populations.
We intend to work closely with regulatory agencies and clinical experts to design and size the clinical studies appropriately based
on the specific conditions our products are intended to treat.
Using our Cellframe technology as a platform to address multiple
organs.
We believe that pre-clinical data we have produced to date may suggest that our Cellframe technology is a novel
and innovative approach to restoring organ function that may provide an ability to develop products that would address life-threatening
conditions impacting organs like the esophagus, bronchus and trachea, and perhaps lower portions of the gastrointestinal (GI) tract.
We believe that our Cellframe technology may allow physicians to treat certain life-threatening conditions in ways not currently
possible, and in some combination, to save patients’ lives, avoid or reduce complications experienced in the current standard
of care, and improve the patients’ quality of life, while at the same time reducing the overall cost of patient care to the
healthcare system.
Supplying the finished organ implant to the surgeon.
Our
technology includes our proprietary organ bioreactor, as well as our proprietary biocompatible scaffold that is seeded with the
patient’s own cells. We believe there is considerable value in supplying the final cell-seeded scaffold implant to the surgeon
so that the hospital and surgeon may focus solely on performing the implantation.
Collaborating with leading medical and research institutions.
We have and will continue to collaborate with leading medical and research institutions. We have a co-development initiative
with Mayo Clinic for regenerative medicine organ implant products for the esophagus and airways based on our Cellframe technology.
We are also collaborating with Connecticut Children’s Medical Center on a co-development project to translate our Cellframe
technology for pediatric esophageal atresia from pre-clinical studies to clinical trials. We believe the use of our product candidates
by leading surgeons and institutions will increase the likelihood that other surgeons and institutions will use our products.
Our Technology
Our Cellframe technology is comprised of our proprietary bioengineered
organ scaffold seeded with the patient’s own stem cells in our proprietary organ bioreactor prior to implantation. We believe
that our Cellframe technology combines a highly-engineered, biocompatible scaffold and a robust population of cells that, by tapping
into the stem cell niche of the surrounding native tissue after implantation, will stimulate a tubular organ to remodel or regenerate
tissue to close the gap created by a surgical resection of a portion of that organ. This unique combination of technologies, developed
through our extensive testing performed during the last few years, may potentially provide solutions to life-threatening conditions
for patients with unmet medical needs.
We believe that our technology is unique, in that its mode of action
appears to be different from other tissue engineering organ scaffold products developed previously, of which we are aware. Prior
to our development of the Cellframe technology, our approach attempted to implant an organ scaffold that would be incorporated
into the patient’s body by the surrounding native tissue growing into the scaffold. To our knowledge, all previous research
and development efforts by other investigators were based on that same concept. Our Cellframe technology appears to work very differently.
We believe that the unique combination of our highly-engineered organ scaffold with a population of the patient’s own mesenchymal
stem cells enables an organ to develop new native tissue around our scaffold, but not into it, so the scaffold acts as a type of
frame or staging for the new tissue. As a result, our scaffold is not incorporated into the body. Instead, it is retrieved from
the body via an endoscopic procedure, not surgically, after sufficient tissue remodeling and regeneration has occurred to restore
the organ’s integrity and function.
A Cellframe technology-based organ implant includes two key components:
a biocompatible synthetic scaffold and the patient’s own stem cells.
Biocompatible Scaffold Component
Our proprietary biocompatible scaffold component of the CEI is constructed
primarily of PU. This material was chosen based on extensive testing of various materials. The scaffold is made using a manufacturing
process known as electrospinning. The combination of the electrospinning process, which provides control over the desired microstructure
of the scaffold fabric, with the PU results in a scaffold that we believe has favorable biocompatibility characteristics.
The Patient’s Cells
Based on current pre-clinical development efforts, the cells we
seed onto the scaffold are obtained from the patient’s adipose tissue (abdominal fat). This fat tissue is obtained from a
standard biopsy before the implant surgery. Mesenchymal stem cells are extracted and isolated from the adipose tissue biopsy. The
isolated cells are then expanded, or grown, for a short period prior to surgery in order to derive a sufficient cell population
to be seeded on the scaffold. The cells are then seeded on the scaffold in our proprietary organ bioreactor and incubated there
before the implant surgery.
We believe the CEI has the potential to provide a major advance
over the current therapeutic options for treating esophageal cancer, damage from infection or trauma and congenital abnormalities.
We believe our Cellframe technology has the potential to overcome the major challenges in restoring organ function for a damaged
esophagus. With our CEI we are developing a surgical procedure that has the objective of reconstituting the continuity of the patient’s
esophagus without having to relocate another organ in its place. In addition, by reducing or eliminating complications that occur
in the current standard of care, we expect to reduce the costs of addressing and treating those additional complications. Because
these substantial costs can be reduced or even eliminated with our technology, we believe our products, if successfully developed,
can help save lives, improve the quality of life for patients and reduce overall healthcare costs.
Unmet Patient Needs and Cellspan Implant Solutions
Esophageal Disease
There are approximately 572,000 new diagnoses of esophageal
cancer globally each year, according to the World Health Organization’s International Agency for Research on Cancer.
According to the American Cancer Society, there are approximately 20,000 new diagnoses of esophageal cancer in the U.S. each
year, and there are more than 16,000 deaths from esophageal cancer each year. Esophageal cancer is very deadly – the
five-year survival rate for people with esophageal cancer is 18% in the U.S. Approximately 5,000 esophagectomy surgeries
occur in the U.S. annually to treat esophageal cancer, and approximately 10,000 esophagectomies occur in Europe annually. We
believe that approximately one half of the world’s esophageal cancer cases occur in China, which would represent the
largest potential patient population for our adult esophageal product candidate. We believe that our CEI, if approved, has
the potential to provide a major advance over the current esophagectomy procedures for addressing esophageal cancer, which
have high complication and morbidity rates.
The current standard of care for the esophagectomy requires either
(A) a gastric pull-up, where the stomach is cut and sutured into a tubular shape, then pulled up through the diaphragm to replace
a portion of the esophagus resected by the removal of the cancerous tumor; or (B) a colon interposition, where a portion of the
colon is resected and used to replace the portion of the esophagus resected by the removal of the cancerous tumor. Esophagectomies
have 90-day mortality rates of up to 19%. Serious complications, such as leakage at the anastomoses, which can lead to infections
and sepsis, and pulmonary complications, such as impaired pulmonary function or pneumonia, occur in up to 30% of esophagectomy
cases. Other complications from esophagectomies, such as a narrowing of the esophagus post-surgery, gastroesophageal reflux and
dumping syndrome (repetitive nausea, dizziness and vomiting) can also pose significant quality of life issues for patients.
We believe that the CEI has the potential to provide physicians
a new, simpler procedure to restore organ function while significantly reducing complication and morbidity rates compared with
the current standard of care, and without creating significant quality of life issues for patients.
Pediatric Esophageal Atresia
Esophageal Atresia (EA) is a rare congenital abnormality in which
a baby is born without part of the esophagus. About 1 in 4,000 babies in the U.S. is born with EA. In some cases, the two sections
can be connected surgically. However, in cases where the gap is too great for a simple surgical reconnection, the current standard
of care is a gastric pull-up, a colon interposition, or a procedure known as the Foker process. In the Foker process, traction
devices are surgically attached to the two ends of the esophagus. Traction is then applied, usually for several weeks during which
time the baby remains in an Intensive Care Unit, to stimulate the ends of the esophagus to grow and narrow the gap. If the Foker
process is successful in narrowing the gap sufficiently, a second surgery is necessary to connect the two ends of the esophagus.
In addition to the Foker process being complex, it is also a very expensive procedure because the baby will normally be in the
hospital for several months during the process.
We believe that a pediatric CEI may provide pediatric surgeons with
a better procedure to treat EA that would result in a connected esophagus with higher success rates, lower complications and lower
overall costs to the healthcare system.
Central Lung Cancer
Lung cancer is the most common form of cancer and the most common
cause of death from cancer worldwide. There are more than 450,000 new lung cancer diagnoses annually in the U.S. and Europe. In
approximately 25% of all lung cancer cases, the cancerous tumor resides only in a bronchus and not in the lobes of the lungs, and
is known as central lung cancer. Approximately 33,000 central lung cancer cases diagnosed in the U.S. and Europe are Stage I and
II and are considered eligible for surgical resection, often with adjuvant chemotherapy and radiation. Approximately 5,000 of those
patients are treated via pneumonectomy, a surgical procedure involving the resection of the cancer tumor, the whole bronchus below
the tumor and the entire lung to which it is connected. It is a complex surgery and, due to the removal of a lung, results in a
50% reduction in the patient’s respiratory capacity. The procedure has reported rates of post-surgical (in hospital) mortality
of 8% to 15%. Complication rates associated with pneumonectomy are reported as high as 50%, and include post-operative pneumonia,
supraventricular arrhythmias and anastomotic leakage, placing patients at significant mortality risk post-discharge.
We believe that a Cellspan bronchial implant, once developed and
approved for marketing, has the potential to provide physicians a treatment alternative superior to the sleeve pneumonectomy to
address central lung cancer, a simpler procedure to restore organ function of the bronchus without sacrificing one of the patient’s
lungs, resulting in fewer post-surgery complications, improved mortality rates and improved quality of life for the patient.
Life-threatening conditions of the Trachea
There are approximately 8,000 patients per year in the U.S. and
Europe who suffer from a condition of the trachea that put the patient at high risk of death. These conditions can be due to tracheal
trauma, tracheal stenosis or trachea cancer. There are approximately 40,000 tracheal trauma patients diagnosed each year in the
U.S. Of those, approximately 1,000 are severe enough to need surgical resection procedures. Tracheal stenosis is a rare complication
from tracheostomies, but may have a devastating impact on respiratory function for patients. Approximately 2,000 patients are diagnosed
with stenosis from tracheostomy in the U.S. each year. Trachea cancer is a very rare but extremely deadly cancer. Trachea cancer
patients in the U.S. have a median survival of 10 months from diagnosis and a 5-year survival of only 27%. There were approximately
200 cases of primary trachea cancer diagnosed in the U.S. in 2013. Based on these facts, we estimate that there are approximately
8,000 patients in the U.S. and Europe with conditions of the trachea that put them at high risk of death, but for whom there is
currently no clinically effective tracheal implant or replacement method currently available.
We believe that a Cellspan tracheal implant may potentially provide
physicians a treatment to re-establish the structural integrity and function of a damaged or diseased trachea to address life-threatening
conditions due to tracheal trauma, stenosis or cancer.
Our History
We were incorporated under the laws of the State of Delaware on
May 3, 2012 by Harvard Bioscience, Inc. (Harvard Bioscience) to provide a means for separating its regenerative medicine business
from its other businesses. Harvard Bioscience decided to separate its regenerative medicine business into our company, a separate
corporate entity (the Separation), and it spun off its interest in our business to its stockholders in November 2013. Since the
Separation we have been a separately-traded public company and Harvard Bioscience has not been a stockholder of our common stock
or controlled our operations. Following the Separation, we continued to innovate our bioreactors based on our physiology expertise,
we developed our materials science capabilities and we investigated and developed a synthetic tracheal scaffold. By that time,
we had built and staffed cell biology laboratories at our Holliston facility, to give ourselves the ability to perform and control
our scientific investigation and developments internally. At that point, we began the second phase of our company’s development.
In mid-2014, we increased the pace of our scientifically-based internal
analysis and development of our first-generation tracheal implant product, the HART-Trachea. From large-animal studies conducted
thereafter we found that the product elicited an unfavorable inflammatory response after implantation, which required additional
development and testing. These requirements extended our expectations regarding our regulatory milestones and we announced the
additional testing and extended milestone expectations in January 2015. During 2015 we isolated and tested all major variables
of the organ scaffold and the cell source and protocols, examining the effects of alternatives against the then-existing product
approach. Through extensive
in vitro
preclinical studies, and small-animal and large-animal studies, we made dramatic improvements,
and discovered that the mechanism of action of this new approach was very different from our hypothesis regarding that of the first-generation
product. We call this new implant approach our Cellframe technology. Our Cellframe technology uses a different scaffold material
and microstructure, a different source and concentration of the patient’s cells and several other changes from our earlier
trachea initiative. We believe that our Cellframe technology, although built on learnings from our earlier-generation product initiative,
represents a new technology platform resulting from our rigorous science and development. We see the development of our Cellframe
technology platform as the beginning of a third phase in our company’s progression.
We discontinued development of our earlier initiative in 2014; that
first-generation product approach was significantly different from our new Cellframe technology and Cellspan product candidates
currently in development. We have focused our development efforts on our Cellframe technology and Cellspan product candidates,
which we have and will continue to develop internally, and with our collaborators, via a rigorous scientific development process.
Clinical Trials
Our CEI has been designated by the FDA as a combination product
biologic. We believe that this is a favorable designation as it allows for orphan designation and a more participatory path to
approval. To date, we have conducted numerous pre-clinical studies in our esophageal implant programs and continue to see consistent
regeneration. Additionally, our CEI product candidate was used in an FDA-approved first-in-human compassionate use successfully
in 2017. We plan to file an IND application at the end of the second quarter of 2019 with the FDA seeking its approval to conduct
a Phase I human clinical trial. We are pursuing two indications in the esophagus. The two indications we are pursuing are pediatric
esophageal atresia and esophageal disease. In order to market our product candidates, we will need to successfully complete clinical
trials. The initial indication for which we intend to seek FDA approval will be to restore the function of the esophagus subsequent
to esophageal damage or stenosis due to cancer, injury or infection.
We believe that we have excellent pre-clinical and clinical support
of the pediatric atresia program through our collaboration with Connecticut Children’s Medical Center and our primary investigator
Dr. Christine Finck, who is also a member of our Scientific Advisory Board. Essentially, we liken the pediatric atresia market
to a rare disease market. Accordingly, the clinical trial population should reflect the ultra-orphan nature of the disease state.
Because esophageal cancer affects only approximately 20,000 patients
per year in the U.S. we anticipate that clinical trials for our adult esophageal implant product candidate will involve relatively
few patients. Therefore, once commenced, we expect to be able to conduct a clinical trial in a relatively short period of time
compared to clinical trials in indications with larger patient populations. We intend to work closely with regulatory agencies
and clinical experts to design and size the clinical studies appropriately based on the specific conditions our products are intended
to treat. We also intend to request expedited review from the FDA for the CEI product. Receipt of expedited review would reduce
the overall time through the regulatory approval process. These expedited requests are submitted during the IND process.
We believe that, of our two current programs, the esophageal
implant program to treat pediatric esophageal atresia 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 to our company in the future. We have continued to advance the esophageal
implant adult program for esophageal disease and we will be in a position to file an IND application for that product first,
as the data set for that application will be completed first. We plan to file an IND for the adult esophageal disease product
candidate mid-year 2019. We are now completing the remaining preclinical studies for
the esophageal atresia product candidate and expect to file an IND for that product candidate in early 2020.
We intend to pursue regulatory approval for the CEI product candidates
in the U.S., initially. Following clinical trials in other foreign markets, we expect to pursue regulatory approval for the CEI
in those foreign markets, as well. We believe that approximately one half of the world’s esophageal cancer cases occur in
China, which would represent the largest potential patient population for our adult esophageal implant product candidate, and we
are consequently preparing to address that market.
Research and Development
Our primary research and development activities are focused in three
areas: materials science, cell biology and engineering. In materials science, we focus on designing and testing biocompatible organ
scaffolds, testing the structural integrity and the cellularization capacities of the scaffolds. In cell biology, we focus on developing
and testing isolation and expansion protocols, cell characterization and fate studies, investigating the effects of various cell
types and concentrations, evaluating the biocompatibility of scaffolds, experimenting with different cell seeding methodologies,
and developing protocols for implantation experiments. Our engineering group supports the materials science and cell biology groups
across an array of their activities, i.e. designing, engineering and making our proprietary organ bioreactors. All three of our
R&D groups combine to plan and execute our
in vitro
studies. A fundamental part of our R&D effort in developing
the Cellframe technology has been dedicated to the discovery and development of small and large-animal model studies. The large-animal
model employs the use of Yucatan mini-pigs. Our Cellspan scaffolds were implanted in the cervical portion as well as the thoracic
portion of the esophagus and the airways in studies to date.
Following the failure to receive the funding with respect to a Securities
Purchase Agreement in August 2017, and in an effort to conserve cash, we completed a reduction in headcount of 20 persons during
October and November 2017, of whom 18 were directly involved in research and development activities. As a result, we had one research
and development employee as of December 31, 2017. Following our raising of additional capital in December 2017 and January 2018,
we re-hired four of our former research and development employees into key scientific and engineering positions, and retained two
others as consultants, in January 2018. Since then several other former employees have rejoined our Company and we have made additional
hires such that we ended 2018 with 16 employees. We believe that our new staffing level after those hires, combined with our consultant
and co-development collaborator resources, is sufficient to pursue both of our esophageal programs.
In addition to our in-house engineering and scientific development
team, we collaborate with leaders in the field of regenerative medicine who are performing the fundamental research and surgeries
in this field to develop and test new products that will advance and improve the procedures being performed. We will work with
our collaborators to further enhance our products to make them more efficient and easier to use by surgeons. In the U.S., our principal
collaborations have been with Mayo Clinic and Connecticut Children’s Medical Center. Collaboration typically involves us
developing new technologies specifically to address issues these researchers and clinicians face, and then working together to
translate our technology from pre-clinical studies to clinical trials. In certain instances, we have entered into agreements that
govern the ownership of the technologies developed in connection with these collaborations.
We incurred approximately $3.9 million and $7.6 million of research
and development expenses in 2018 and 2017, respectively. As we have not yet applied for or received regulatory approval to market
any clinical products, no significant amount of these research and development costs have been passed on to our customers.
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 to support testing of pediatric
CEI. The award for Phase I, which was earned over the nine months ended September 30, 2018, provided for the reimbursement of approximately
$0.2 million of qualified research and development costs.
On October 26, 2018, we were awarded Phase II of the SBIR grant
for $1.1 million to support development, testing, and translation to the clinic through September 2019. The Phase II grant includes
an additional $0.5 million for future period support through September 2020, subject to availability of funding and satisfactory
progress on the project.
Based on the above, we have the opportunity to receive up to $1.8
million under the SBIR grant.
Manufacturing
Biostage has developed a comprehensive manufacturing process for
our product candidates, including: cell biology, scaffold production, cell isolation and expansion, seeding of cells on the scaffold,
incubation and expansion processes in the bioreactor and product transportation. We currently perform certain manufacturing steps
in-house and subcontract certain processes and activities, primarily those related to cell expansion, seeding and incubation, to
experienced partners.
For our scaffolds we use a process called electrospinning to create
the fabric part of the scaffold. Electrospinning is a well-known fabrication process. It is useful for cell culture applications
as it can create extremely thin fibers (much thinner than a human hair) that can make a fabric with pores approximately the same
size as a cell. The electrospinning process parameters can be tuned to create a structure that is very similar to the natural structure
of the collagen fibers in human extracellular matrix. Our process and end product have been developed over many years and involve
many trade secrets and proprietary know-how. Our Cellspan scaffolds are made from PU, an inert polymer that is not bioresorbable.
However, we also perform studies on the use of scaffolds made from bioresorbable materials. While we do not manufacture the cells,
as they will come from the patient’s adipose tissue, for regulatory purposes we are responsible for the quality control of
the cells and the seeding of the cells onto the scaffold in the bioreactor. For this we have, in collaboration with our partners,
developed standard operating procedures for the seeding of cells on the scaffold. For U.S. clinical trials we anticipate that the
seeding will be performed in an automated version of our bioreactor at a pre-qualified third-party contract manufacturer using
current Good Manufacturing Practices (cGMP) using our proprietary protocol and under the supervision of our staff.
For our scaffolds, our primary materials are medical-grade plastic
resins and solvents used to liquefy the resins in our manufacturing process. These materials are readily available from a variety
of suppliers and do not currently represent a large proportion of our total costs. For our bioreactors, we perform final assembly
and testing of components that we buy from third parties like machine shops, parts distributors, molding facilities and printed
circuit board manufacturers. These operations are performed primarily at our Holliston, MA headquarters.
Sales and Marketing
We expect that most surgeries using the CEI product will be performed
at a relatively small number of major hospitals in the U.S., Canada, China and European countries that will establish themselves
as specialized centers of excellence. We believe that a relatively small number of centers of excellence in each country would
be able to treat a large percentage of that country’s patients annually, given the expected number of patients to be treated
each year. So, we expect our markets to be served by a concentrated number of treatment centers. Further, our Cellspan programs
are for the esophagus, the bronchi and the trachea, three organs all treated by thoracic surgeons. Therefore, all of those product
candidates, once approved, would be marketed primarily to physicians practicing in a single surgical specialty, so we expect that
the total number of physicians using our products will be a much smaller population than if our products were to be used by physicians
in multiple areas of surgical specialties. Due to our expectation of a population of physicians in one surgical specialty being
the primary users of our products in a concentrated number of centers of excellence in each national market, we expect to be able
to support our markets with a fairly small field sales force.
We expect to price the product commensurate with the medical value
created for the patient and the costs avoided with the use of our product. We further expect to be paid by the hospital that buys
the product from us. Finally, we expect that the hospital would seek reimbursement from payers for the entire transplant procedure,
including the use of our products.
Harvard Bioscience is the exclusive distributor for the research
versions of our organ bioreactors. Harvard Bioscience can only sell those products to the research markets in accordance with the
terms of our distribution agreement. We retain all rights to manufacture and sell all our products for clinical use.
Intellectual Property and Related Agreements
We actively seek to protect our products and proprietary information
by means of U.S. and foreign patents, trademarks and contractual arrangements. Our success will depend in part on our ability to
obtain and enforce patents on our products, processes and technologies to preserve our trade secrets and other proprietary information
and to avoid infringing on the patents or proprietary rights of others.
We anticipate that we will sell products in various markets in the
U.S. and various jurisdictions under brand name, logo and product design trademarks and service marks and that these marks will
attain material importance in the future.
We also own select U.S. Patents as well as certain patents in Germany.
These patents cover aspects of device and processes currently under development by our company. Patents for various processes and
devices extend for varying periods according to the date of patent filing or grant and the legal term of patents in the country
or countries in which the patent was obtained. The actual protection afforded by a patent can vary from country to country and
depends on factors such as the type of patent, scope of protection and available legal remedies.
In addition to issued patents, we have several pending patent applications
in the U.S. and key target jurisdictions. We believe that one or more of these pending patent applications may be of importance
to material position depending upon factors such as the relevant patent jurisdiction, type of patent granted, and scope of patent
claims ultimately allowed in a given jurisdiction. Depending upon factors such as the type of grant and the date on which the patent
application was filed, we anticipate that the term of certain pending patents may extend to 2036.
We also rely on unpatented proprietary technologies in the development
and commercialization of our products, and we depend upon the skills, knowledge and experience of our scientific and technical
personnel, and those of our advisors, consultants and other contractors. To help protect our proprietary know-how that may not
be patentable, and our inventions for which patents may be difficult to enforce, we rely on trade secret protection and confidentiality
agreements to protect our interests. To this end, we require employees, consultants and advisors to enter into agreements that
prohibit the disclosure of confidential information and, where applicable, require disclosure and assignment to us of the ideas,
developments, discoveries and inventions that arise from their activities for us. Additionally, these confidentiality agreements
require that our employees, consultants and advisors do not bring to us, or use without proper authorization, any third party’s
proprietary technology.
Exclusive License Agreement and Sponsored Research Agreement - InBreath
Bioreactor
We entered into a sponsored research agreement with Sara
Mantero, Maria Adelaide Asnaghi, and the Department of Bioengineering of the Politecnico Di Milano (PDM). Under the terms of
this agreement, PDM was required to use its facilities and best efforts to conduct a research program relating to the
development of bioreactors, clinical applications, and automated seeding processes. We were required to provide engineering
support to PDM with respect to bioreactor designs. Intellectual property developed by PDM or its employees, including Dr.
Mantero or Ms. Asnaghi, under this sponsored research agreement will be owned by Dr. Mantero or Ms. Asnaghi and covered by
our exclusive license agreement described above. In addition, we have an option to an exclusive license for intellectual
property relating to new technology that may not be covered by the exclusive license agreement. We will own any inventions
and discoveries that we solely develop in connection with the research program and any inventions and discoveries that are
jointly developed in connection with the research program will be owned jointly by the parties. We terminated the sponsored
research agreement in 2017.
Sublicense Agreement with Harvard Bioscience
We have entered into a sublicense agreement with Harvard Bioscience
pursuant to which Harvard Bioscience has granted us a perpetual, worldwide, royalty-free, exclusive, except as to Harvard Bioscience
and its subsidiaries, license to use the mark “Harvard Apparatus” in the name Harvard Apparatus Regenerative Technology.
The mark “Harvard Apparatus” is used under a license agreement between Harvard Bioscience and Harvard University, and
we have agreed to be bound by such license agreement in accordance with our sublicense agreement. We currently have no affiliation
with Harvard University.
Separation Agreements with Harvard Bioscience
On November 1, 2013, to effect the Separation, Harvard Bioscience
distributed all of the shares of our common stock to the Harvard Bioscience stockholders (the Distribution). Prior to the Distribution,
Harvard Bioscience contributed the assets of its regenerative medicine business, and approximately $15 million in cash, to our
company to fund our operations following the Distribution.
In connection with the Separation and immediately prior to the Distribution,
we entered into a Separation and Distribution Agreement, Intellectual Property Matters Agreement, Product Distribution Agreement,
Tax Sharing Agreement, Transition Services Agreement, and Sublicense Agreement with Harvard Bioscience to effect the Separation
and Distribution and provide a framework for our relationship with Harvard Bioscience after the Separation. These agreements govern
the current relationships among us and Harvard Bioscience and provided for the allocation among us and Harvard Bioscience of Harvard
Bioscience’s assets, liabilities and obligations (including employee benefits and tax-related assets and liabilities) attributable
to periods prior to the Separation.
Government Regulation
Any product that we may develop based on our Cellframe
technology, and any other clinical products that we may develop, will be subject to considerable regulation by governments.
We were in the past informed by the FDA that our previous-generation tracheal product candidate would be regulated under the
BLA pathway in the U.S. and we were informed by the European Medicines Agency (EMA) that the previous generation tracheal
product would be regulated under the Advanced Therapy Medicinal Products (ATMP), pathway in the European Union (E.U.). On
October 18, 2016, we also received written confirmation from FDA’s Center for Biologics Evaluation and Research (CBER),
that the FDA intends to regulate our CEI as a combination product under the primary jurisdiction of CBER. We further
understand that CBER may choose to consult or collaborate with the FDA’s Center for Devices and Radiological Health
(CDRH), with respect to the characteristics of the synthetic scaffold component of our product based on
CBER’s determination of need for such assistance. Although our Cellframe technology differs in design and performance
from the first-generation product candidate, we expect that Cellframe-based products will be regulated by the FDA and EMA
under the same pathways as the first-generation tracheal product candidate. This expectation is based on the fact that the
Cellframe technology is centered on the delivery of the patient’s own cells seeded on an implanted synthetic scaffold
in order to restore organ function and our belief that the cells provide the primary mode of action. Of course, it is
possible that some of our current and future products may use alternative regulatory pathways.
Regulatory Strategy
Domestic Regulation of Our Products and
Business
The testing, manufacturing, and potential labeling, advertising,
promotion, distribution, importing and marketing of our products are subject to extensive regulation by governmental authorities
in the U.S. and in other countries. In the U.S., the FDA, under the Public Health Service Act, the Federal Food, Drug and Cosmetic
Act, and its implementing regulations, regulates biologics and medical device products.
The labeling, advertising, promotion, marketing and distribution
of biopharmaceuticals, or biologics and medical devices also must be in compliance with the FDA and U.S. Federal Trade Commission
(FTC), requirements which include, among others, standards and regulations for off-label promotion, industry sponsored scientific
and educational activities, promotional activities involving the internet, and direct-to-consumer advertising. The FDA and FTC
have very broad enforcement authority, and failure to abide by these regulations can result in penalties, including the issuance
of a warning letter directing us to correct deviations from regulatory standards and enforcement actions that can include seizures,
injunctions and criminal prosecution. Further, we are required to meet regulatory requirements in countries outside the U.S., which
can change rapidly with relatively short notice.
We have been informed by the FDA that our CEI product candidates
are combination biologic/device products. Biological products must satisfy the requirements of the Public Health Services Act and
the Food, Drug and Cosmetics Act and their implementing regulations. In order for a biologic product to be legally marketed in
the U.S., the product must have a BLA approved by the FDA.
The BLA Approval Process
The steps for obtaining FDA approval of a BLA to market a biopharmaceutical,
or biologic product in the U.S. include:
•
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completion of pre-clinical laboratory tests, animal studies and formulation studies under the FDA’s GLP regulations;
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submission to the FDA of an IND application, for human clinical testing, which must become effective before human clinical trials may begin and which must include Institutional Review Board (IRB), approval at each clinical site before the trials may be initiated;
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performance of adequate and well-controlled clinical trials in accordance with Good Clinical Practices (GCP), to establish the safety and efficacy of the product for each indication;
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submission to the FDA of a BLA, which contains detailed information about the chemistry, manufacturing and controls for the product, extensive pre-clinical information, reports of the outcomes of the clinical trials, and proposed labeling and packaging for the product;
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the FDA’s acceptance of the BLA for filing;
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satisfactory review of the contents of the BLA by the FDA, including the satisfactory resolution of any questions raised during the review or by the advisory committee, if applicable;
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satisfactory completion of an FDA inspection of the manufacturing facility or facilities at which the product is produced to assess compliance with cGMP regulations, to assure that the facilities, methods and controls are adequate to ensure the product’s identity, strength, quality and purity; and
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FDA approval of the BLA.
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Based on preliminary discussions with the FDA, we expect the clinical
trials for our esophageal implant product candidates to be conducted in two sequential phases:
•
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A Phase 1, or Pilot Trial, where our product would be tested
on a small number, perhaps five or six, of patients to demonstrate the product’s safety. If successful, that study would
be followed by,
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•
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A Phase II Registration, or Pivotal Trial, to test the product’s efficacy. We believe that the nature of our esophageal products and the sizes of their targeted patient populations would lead to a small number of patients in this trial, relative to most biotechnology clinical trials.
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Clinical testing may not be completed successfully within any specified
time period, if at all. The FDA closely monitors the progress of each of the phases of clinical trials that are conducted under
an IND and may, at its discretion, reevaluate, alter, suspend, or terminate the testing based upon the data accumulated to that
point and the FDA’s assessment of the risk/benefit ratio to the patient. The FDA or the sponsor may suspend or terminate
clinical trials at any time for various reasons, including a finding that the subjects or patients are being exposed to an unacceptable
health risk. The FDA can also request that additional pre-clinical studies or clinical trials be conducted as a condition to product
approval.
Companies also may seek Fast Track or Breakthrough Therapy designation
for their products. Fast Track or Breakthrough Therapy products are those that are intended for the treatment of a serious or life-threatening
condition and that demonstrate the potential to address unmet medical needs for such a condition. If awarded, the Fast Track or
Breakthrough Therapy designation applies to the product only for the indication for which the designation was received.
If the FDA determines after review of preliminary clinical data
submitted by the sponsor that a Fast Track or Breakthrough Therapy product may be effective, it may begin review of portions of
a BLA before the sponsor submits the complete BLA (rolling review), thereby accelerating the date on which review of a portion
of the BLA can begin. There can be no assurance that any of our products will be granted Fast Track or Breakthrough Therapy designation.
And even if they are designated as Fast Track or Breakthrough Therapy products, we cannot ensure our products will be reviewed
or approved more expeditiously for their Fast Track or Breakthrough Therapy indications than would otherwise have been the case
or will be approved promptly, or at all. Furthermore, the FDA can revoke Fast Track or Breakthrough Therapy designation at any
time.
In addition, products studied for their safety and effectiveness
in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefit over existing treatments may
receive Accelerated Approval and may be approved on the basis of adequate and well-controlled clinical trials establishing that
the product has an effect on a surrogate endpoint that is reasonably likely to predict clinical benefit or on the basis of an effect
on a clinical endpoint other than survival or irreversible morbidity. As a condition of approval, the FDA may require that a sponsor
of a product receiving Accelerated Approval perform adequate and well-controlled post-approval clinical trials to verify and further
define the product’s clinical benefit and safety profile. There can be no assurance that any of our products will receive
Accelerated Approval. Even if Accelerated Approval is granted, the FDA may withdraw such approval if the sponsor fails to conduct
the required post-approval clinical trials, or if the post-approval clinical trials fail to confirm the early benefits seen during
the Accelerated Approval process.
Priority Review Voucher
Fast Track or Breakthrough Therapy designation and Accelerated Approval
should be distinguished from Priority Review designation although products awarded Fast Track or Breakthrough Therapy designation
may also be eligible for Priority Review designation.
Products regulated by the CBER may receive Priority Review designation
if they provide significant improvement in the safety or effectiveness of the treatment, diagnosis, or prevention of a serious
or life-threatening disease. The agency has agreed to the performance goal of reviewing products awarded Priority Review designation
within six months, whereas products under standard review receive a ten-month target. The review process, however, can be significantly
extended by FDA requests for additional information or clarification regarding information already provided in the submission.
Priority Review designation is requested at the time the BLA is submitted, and the FDA makes a decision as part of the agency’s
review of the application for filing.
Separately, but somewhat related, is a product’s ability
to qualify its sponsor to receive a Priority Review Voucher (PRV). For a product aimed at prevention or treatment of a
“rare pediatric disease” as defined by Food, Drug and Cosmetics Act at 21 USC 360ff, and that also meets certain
other qualifying attributes, the product’s sponsor may qualify, apply for and receive a PRV, from the FDA. A PRV
entitles its holder to Priority Review for a drug application, and the PRV is transferable. Some companies who have received
PRV’s have sold their PRV’s to other companies who have then used the PRV to receive Priority Review for a drug
application with the FDA. Recent transfers of PRV’s from one company to another have occurred at prices in the $80
– 125 million range. We intend to apply for rare pediatric disease designation for our pediatric esophageal implant
product candidate as a first step in pursuit of a PRV. A PRV is earned only upon marketing approval of the product. There is
no certainty that our pediatric esophageal product will achieve marketing approval from the FDA, or that if it does, that FDA
would award us a PRV. Further, if received, there is no certainty that the value of a PRV at that future date will compare
favorably with the values reflected in recent transfers of PRVs.
Orphan Drug Designations
The Orphan Drug Act provides incentives to manufacturers to develop
and market drugs and biologics for rare diseases and conditions affecting fewer than 200,000 persons in the U.S. at the time of
application for Orphan Drug Designation. In September 2014 the FDA granted orphan designation to our HART-Trachea product in the
U.S. In November 2016, we were granted Orphan Drug Designation for our CEI by the FDA to restore the structure and function of
the esophagus subsequent to esophageal damage due to cancer, injury or congenital abnormalities. The first developer to receive
FDA marketing approval for an orphan biologic is entitled to a seven-year exclusive marketing period in the U.S. for that product.
The marketing exclusivity prevents FDA approval of another application for the same product for the same indication for a period
of seven years. Orphan status also entitles the product’s sponsor to certain other benefits, such as a waiver of the BLA
user fee, which is currently a $2 million value. Orphan product designation does not convey any advantage in or shorten the duration
of the regulatory review and approval process.
International
We plan to seek required regulatory approvals and comply with extensive
regulations governing product safety, quality, manufacturing and reimbursement processes in order to market our products in other
major foreign markets. The regulation of our products in the Asian and European markets, and in other foreign markets varies significantly
from one jurisdiction to another. The classification of the particular products and related approval or CE marking procedures can
involve additional product testing and additional administrative review periods. The time required to obtain these foreign approvals
or to CE mark our products may be longer or shorter than that required in the U.S., and requirements for approval may differ from
the FDA requirements. Regulatory approval in one country does not ensure regulatory approval in another, but a failure or delay
in obtaining regulatory approval in one country may negatively impact the regulatory process in others.
Legislation similar to the Orphan Drug Act has been enacted in other
jurisdictions, including the E.U. The orphan legislation in the E.U. is available for therapies addressing conditions that affect
five or fewer out of 10,000 persons. The marketing exclusivity period is for ten years, although that period can be reduced to
six years if, at the end of the fifth year, available evidence establishes that the product is sufficiently profitable not to justify
maintenance of market exclusivity.
Employees
At December 31, 2018, we had 16 employees working in our business,
of whom 15 were full-time and one was part-time. At that date, all of our employees were based in the U.S. None of our employees
are unionized. In general, we consider our relations with our employees to be good.
Competition
We are not aware of any companies whose products are directly competitive
with our cell-seeded biocompatible synthetic scaffold system. However, in our key markets we may in the future compete with multiple
pharmaceutical, biotechnology, and medical device companies, including, among others, Aldagen, Asterias Biotherapeutics, Athersys,
BioTime, Caladrius Biosciences, Celgene, Cytori Therapeutics, E. I. du Pont de Nemours and Company, InVivo Therapeutics, Mesoblast,
Miramatrix Medical, Nanofiber Solutions, Neuralstem, Orgagen, Organovo, Osiris Therapeutics, Pluristem, Smiths Medical, Tissue
Genesis, Inc., Tissue Growth Technologies, United Therapeutics, Vericel Corporation and W.L. Gore and Associates. In addition,
there are many academic and clinical centers that are developing regenerative technologies that may one day become competitors
of ours.
Many of our potential competitors have substantially greater financial,
technological, research and development, marketing, and personnel resources than we do. We cannot forecast if or when these or
other companies may develop competitive products.
We expect that other products will compete with our products and
potential products based on efficacy, safety, cost, and intellectual property positions. While we believe that these will be the
primary competitive factors, other factors include, in certain instances, obtaining marketing exclusivity under the Orphan Drug
Act, availability of supply, manufacturing, marketing and sales expertise and capability, and reimbursement coverage.
Executive Officers of the Registrant
The following table shows information about our executive officers
as of December 31, 2018:
Name
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Age
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Position(s)
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James McGorry
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62
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Chief Executive Officer and Member of the Board of Directors
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Hong Yu
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46
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President
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Thomas McNaughton
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58
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Chief Financial Officer
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Dr. William Fodor
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60
|
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Chief Scientific Officer
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James McGorry - Chief Executive Officer and Director
Mr. McGorry has served as our Chief Executive Officer (CEO) since
July 6, 2015. He has served as a member of our Board of Directors since February 2013. Mr. McGorry has more than 30 years of experience
as a life science business leader in biologics, personalized medicine and medical devices, including multiple product launches.
Prior to becoming CEO at Biostage, Mr. McGorry most recently served as Executive Vice President and General Manager,
Translational Oncology Solutions for Champions Oncology and previously was Executive Vice President of Commercial Operations at
Accellent. During a 12-year tenure at Genzyme, he held leadership positions across several therapeutic areas, including Bio Surgery,
Cardiac Surgery, Oncology and Transplant. Mr. McGorry was also President of Clineffect Systems, an electronic medical records company.
He began his life sciences career with Baxter Healthcare Corporation, where he spent 11 years in positions of increasing responsibility.
Mr. McGorry also served as an officer in the United States Army for six years, including commanding a special operations Green
Beret SCUBA detachment. Mr. McGorry has an MBA with a concentration in healthcare from Duke University, Fuqua School of Business,
and a B.S. in engineering from the United States Military Academy at West Point where he was the president of his class. We believe
Mr. McGorry’s qualifications to sit on our Board of Directors include his extensive executive leadership positions at several
biotechnology and healthcare companies over the past 25 years.
Hong Yu – President
Mr. Yu has served as our President since May 31, 2018. Mr. Yu is
a seasoned executive with extensive knowledge in strategic analytics, wealth management, and investment research. Prior to Biostage,
Mr. Yu was most recently a Senior Vice President responsible for strategic analytics at Bank of America, where he was employed
for nearly 20 years. During his career, Mr. Yu has built strong business connections in various industries, including biotech/healthcare,
financial services, and robotics/artificial intelligence. He developed an expertise in matching emerging companies with cross-border
investors, often providing U.S. companies with market access to the vast capital supply in China. Mr. Yu graduated from Huanggang
High School (Hubei, China) in 1990 and obtained a B.S. in biophysics from Peking University (Beijing, China), and M.S. in biostatistics
from School of Public Health, University of Illinois (Chicago, IL). Mr. Yu is a charterholder of Chartered Financial Analyst (CFA).
Thomas McNaughton - Chief Financial Officer
Mr. McNaughton has served as our Chief Financial Officer since May
3, 2012. Mr. McNaughton joined Harvard Bioscience as its Chief Financial Officer in September 2008, and served in that role until
the spin-off of our company from Harvard Bioscience on November 1, 2013. During 2008 and prior to joining Harvard Bioscience, Mr.
McNaughton was a consultant providing services primarily to an angel-investing group and a silicon manufacturing start-up. From
2005 to 2007, he served as Vice President of Finance and Chief Financial Officer for Tivoli Audio, LLC, a venture capital-backed
global manufacturer of premium audio systems. From 1990 to 2005, Mr. McNaughton served in various managerial positions in the areas
of financial reporting, treasury, investor relations, and acquisitions within Cabot Corporation, a global manufacturer of fine
particulate products, and served from 2002 to 2005 as Finance Director, Chief Financial Officer of Cabot Supermetals, a $350 million
Cabot division that provided high purity tantalum and niobium products to the electronics and semiconductor industries. Mr. McNaughton
practiced from 1982 to 1990 as a Certified Public Accountant in the audit services group of Deloitte & Touche, LLP. He holds
a B.S. in accounting and finance with distinction from Babson College.
Dr. William Fodor - Chief Scientific Officer
Dr. William Fodor has served as our Chief Scientific Officer since
July 2017. On July 2, 2018, Dr. Fodor became an employee of Biostage after serving via a consulting arrangement. Dr. Fodor was
a founding scientist at Alexion Pharmaceuticals, where he served as an executive management team member and Senior Director of
the Cell/Tissue Engineering, Transgenic Animal and Transplant Programs. He has also served as an Associate Professor at the University
of Connecticut Department of Molecular Cell Biology and the Center for Regenerative Biology, extending research areas into stem
cells and stem cell engineering. Dr. Fodor was Senior Director of Product Development at ViaCell Inc., leading programs in hematopoietic
stem cell process development and manufacturing, mesenchymal stem cell basic research and manufacturing for cardiac repair and
pancreatic stem cell research. He was a consultant for the biotechnology industry, serving clients in stem cell research, gene
therapy, stem cell manufacturing and stem cell genome engineering. Dr. Fodor has expertise in programs targeting transplant immunology,
hematopoiesis, cardiac repair, stem cell potency, gene therapy for liver diseases, tissue engineering, design and oversight of
pre-clinical non-GLP and GLP animal models and IND Applications (Pre-clinical and CMC Modules). Dr. Fodor earned a PhD. in genetics
from Ohio State University. He completed post-doctoral work at Yale University School of Medicine in the department of immunobiology,
investigating the regulation of MHC class I and MHC class II genes in the histocompatibility complex.
Available Information and Website
Our website address is
www.biostage.com
. Our Quarterly Reports
on Form 10-Q, Current Reports on Form 8-K, and exhibits and amendments to those reports filed or furnished with the Securities
and Exchange Commission (SEC) pursuant to Section 13(a) of the Exchange Act are available for review on our website and the SEC
website at www.sec.gov. Any such materials that we file with, or furnish to, the SEC in the future will be available on our website
as soon as reasonably practicable after they are electronically filed with, or furnished to, the SEC. The information on our website
is not incorporated by reference into this Annual Report on Form 10-K.
The following factors should be reviewed carefully, in conjunction
with the other information contained in this Annual Report on Form 10-K. As previously discussed, our actual results could differ
materially from our forward-looking statements. Our business faces a variety of risks. We describe below what we believe are currently
the material risks and uncertainties we face, but they are not the only risks and uncertainties we face. Additional risks and uncertainties
of which we are unaware, or that we currently believe are not material, may also become important factors that adversely affect
our business. In addition, past financial performance may not be a reliable indicator of future performance and historical trends
should not be used to anticipate results or trends in future periods. If any of the following risks and uncertainties develops
into actual events, these events could have a material adverse effect on our business, financial condition or results of operations.
In such case, the trading price of our common stock could decline, and you may lose all or part of your investment in our securities.
The risk factors generally have been separated into three groups: (i) risks relating to our business, (ii) risks relating to the
Separation and (iii) risks relating to our common stock. These risk factors should be read in conjunction with the other information
in this Annual Report on Form 10-K.
Risks Relating To Our Business
Risks Associated with Clinical Trials and Pre-Clinical Development
The results of our clinical trials or pre-clinical
development efforts may not support our product claims or may result in the discovery of adverse side effects.
Even if our pre-clinical development efforts or clinical
trials are completed as planned, we cannot be certain that their results will support our product claims or that the U.S.
Food and Drug Administration (FDA), foreign regulatory authorities or notified bodies will agree with our conclusions
regarding them. Although we have obtained some positive results from the use of our scaffolds and bioreactors for esophageal
and trachea implants performed to date, we also discovered that our first-generation trachea product design encountered
certain body response issues that we have sought to resolve with our ongoing development of our Cellframe implant design. We
cannot be certain that our Cellframe implant design or any future modifications or improvements with respect thereto will
support our claims, and any such developments may result in the discovery of further adverse side effects. We also may not
see positive results when our products undergo clinical testing in humans in the future. Success in pre-clinical studies and
early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the later
trials will replicate the results of prior trials and pre-clinical studies. Our pre-clinical development efforts and any
clinical trial process may fail to demonstrate that our products are safe and effective for the proposed indicated uses,
which could cause us to abandon a product and may delay development of others. Also, patients receiving surgeries using our
products under compassionate use or in clinical trials may experience significant adverse events following the surgeries,
including serious health complications or death, which may or may not be related to materials provided by us. In 2017, our
Cellspan Esophageal Implant (CEI) product candidate was used in a human surgery at Mayo Clinic via an FDA-approved single-use
expanded access application. In 2013 and 2014 we had provided a previous generation trachea scaffold device that was used in
implants in human patients under compassionate use. To date, we believe that at least four of the six patients who
received those tracheal implants have died. While we believe that none of those patients died because of a failure of the
applicable device, these and any other such adverse events have and may cause or contribute to the delay or termination of
our clinical trials or pre-clinical development efforts. Any delay or termination of our pre-clinical development efforts or
clinical trials will delay the filing of our product submissions and, ultimately, our ability to commercialize our products
and generate revenues. It is also possible that patients enrolled in clinical trials will experience adverse side effects
that are not currently part of the product’s profile.
Clinical trials necessary to support a biological
product license or other marketing authorization for our products will be expensive and will require the enrollment of sufficient
patients to adequately demonstrate safety and efficacy for the product’s target populations. Suitable patients may be difficult
to identify and recruit. Delays or failures in our clinical trials will prevent us from commercializing any products and will adversely
affect our business, operating results and prospects.
In the U.S., initiating and completing clinical trials necessary
to support Biological License Applications (BLAs), will be time consuming, expensive and the outcome uncertain. Moreover, the FDA
may not agree that clinical trial results support an application for the indications sought in the application for the product.
In other jurisdictions such as the European Union (E.U.), the conduct of extensive and expensive clinical trials may also be required in order to
demonstrate the quality, safety and efficacy of our products, depending on each specific product, the claims being studied, and
the target condition or disease. The outcome of these clinical trials, which can be expensive and are heavily regulated, will also
be uncertain. Moreover, the results of early clinical trials are not necessarily predictive of future results, and any product
we advance into clinical trials following initial positive results in early clinical trials may not have favorable results in later
clinical trials.
Conducting successful clinical trials will require the enrollment
of a sufficient number of patients to support each trial’s claims, and suitable patients may be difficult to identify and
recruit. Patient enrollment in clinical trials and completion of patient participation and follow-up depends on many factors, including
the size of the patient population, the nature of the trial protocol, the attractiveness of, or the discomfort and risks associated
with, the treatments received by enrolled subjects, the availability of appropriate clinical trial investigators, support staff,
and proximity of patients to clinical sites and ability to comply with the eligibility and exclusion criteria for participation
in the clinical trial and patient compliance. For example, patients may be discouraged from enrolling in our clinical trials if
the trial protocol requires them to undergo extensive post-treatment procedures or follow-up to assess the safety and effectiveness
of our products, or if they determine that the treatments received under the trial protocols are not attractive or involve unacceptable
risks or discomfort. Also, patients may not participate in our clinical trials if they choose to participate in contemporaneous
clinical trials of competitive products. In addition, patients participating in clinical trials may die before completion of the
trial or suffer adverse medical events unrelated to investigational products.
Development of sufficient and appropriate clinical protocols to
demonstrate safety and efficacy are required and we may not adequately develop such protocols to support clearance and approval.
Further, the FDA and foreign regulatory authorities may require us to submit data on a greater number of patients than we originally
anticipated and/or for a longer follow-up period or change the data collection requirements or data analysis applicable to our
clinical trials. Delays in patient enrollment or failure of patients to continue to participate in a clinical trial may cause an
increase in costs and delays in the approval and attempted commercialization of our products or result in the failure of the clinical
trial. In addition, despite considerable time and expense invested in our clinical trials, the FDA and foreign regulatory authorities
may not consider our data adequate to demonstrate safety and efficacy. Although FDA regulations allow submission of data from clinical
trials outside the U.S., there can be no assurance that such data will be accepted or that the FDA will not apply closer scrutiny
to such data. Increased costs and delays necessary to generate appropriate data, or failures in clinical trials could adversely
affect our business, operating results and prospects. In the U.S., clinical studies for our products will be reviewed through the
Investigational New Drug (IND), pathway for biologics or combination products.
If the third parties on which we rely to
conduct our clinical trials and to assist us with pre-clinical development do not perform as contractually-required or expected,
we may not be able to obtain regulatory approval for or commercialize our products.
We do not have the ability to independently conduct our pre-clinical
and clinical trials for our products and we must rely on third parties, such as contract research organizations, medical institutions,
clinical investigators and contract laboratories to conduct, or assist us in conducting, such trials, including data collection
and analysis. We do not have direct control over such third parties’ personnel or operations. If these third parties do not
successfully carry out their contractual duties or regulatory obligations or meet expected deadlines, if these third parties need
to be replaced, or if the quality or accuracy of the data they obtain is compromised due to the failure to adhere to our clinical
protocols or any regulatory requirements, or for other reasons, our pre-clinical development activities or clinical trials may
be extended, delayed, suspended or terminated, and we may not be able to seek or obtain regulatory approval for, or successfully
commercialize, our products on a timely basis, if at all. Our business, operating results and prospects may also be adversely affected.
Furthermore, any third-party clinical trial investigators pertaining to our products may be delayed in conducting our clinical
trials for reasons outside of their control.
Risks Associated with Regulatory Approvals
If we fail to obtain, or experience significant
delays in obtaining, regulatory approvals in the U.S., China or the E.U. for our products, including those for the esophagus and
airways, or are unable to maintain such clearances or approvals for our products, our ability to commercially distribute and market
these products would be adversely impacted.
We currently do not have regulatory approval to market any of
our implant products, including those for the esophagus and airways (trachea and bronchus). Our products are subject to
rigorous regulation by the FDA, and numerous other federal and state governmental authorities in the U.S., as well as foreign
governmental authorities. In the U.S., the FDA permits commercial distribution of new medical products only after approval of
a Premarket Approval (PMA), New Drug Application (NDA) or BLA, unless the product is specifically exempt from
those requirements. A PMA, NDA or BLA must be supported by extensive data, including, but not limited to, technical,
pre-clinical, clinical trial, manufacturing and labeling data, to demonstrate to the FDA’s satisfaction the safety and
efficacy of the product for its intended use. There are similar approval processes in China, the E.U. and other foreign
jurisdictions. Our failure to receive or obtain such clearances or approvals on a timely basis or at all would have an
adverse effect on our results of operations.
The first bioengineered trachea implant approved in the U.S.
using our first-generation trachea scaffold in an implant was approved under the IND pathway through the FDA’s Center
for Biologics Evaluation and Research (CBER) for a single compassionate use. Such initial U.S. surgery was led by Professor
Paolo Macchiarini, M.D., a surgeon pioneering tracheal replacement techniques. Dr. Macchiarini was not employed or affiliated
with our company, and we did not pay him any compensation or consulting fees. In June 2014, shortly after our Chief
Medical Officer joined our company, we ceased support of any human surgeries with Dr. Macchiarini. Since the time we withdrew
from involvement with Dr. Macchiarini, allegations that Dr. Macchiarini had failed to obtain informed consent and
accurately report patient conditions, among other things, for surgeries performed at the Karolinska Institutet in Stockholm,
Sweden, were made public.
The Karolinska Institutet investigated the allegations and concluded
that while in some instances Dr. Macchiarini did act without due care, his actions did not qualify as scientific misconduct. Subsequent
to this investigation, further negative publicity and claims continued to be released questioning the conduct of Dr. Macchiarini,
the Karolinska Institutet, the Krasnodar Regional Hospital in Krasnodar, Russia as well as our company relating to surgeries performed
by Dr. Macchiarini and other surgeons at such facilities. In February 2015, the Karolinska Institutet announced that it would conduct
an additional investigation into the allegations made about Dr. Macchiarini and the Karolinska Institutet’s response and
actions in the earlier investigation. In March 2015, the Karolinska Institutet announced that it was terminating Dr. Macchiarini’s
employment, and in December 2016 the Karolinska Institutet found Dr. Macchiarini, along with three co-authors, guilty of scientific
misconduct. These allegations, the results of the investigation and any further actions that may be taken in connection with these
matters, have and may continue to harm the perception of our product candidates or company and make it difficult to recruit patients
for any clinical trials.
The FDA has informed us that our CEI would be viewed by the FDA
as a combination product comprised of a biologic (cells) and a medical device component. Nevertheless, we cannot be certain how
the FDA will regulate our products. The FDA may require us to obtain marketing clearance and approval from multiple FDA centers.
The review of combination products is often more complex and more time consuming than the review of products under the jurisdiction
of only one center within the FDA.
While the FDA has informed us that our CEI would be regulated by
the FDA as a combination product, we cannot be certain that any of our other products would also be regulated by the FDA as a combination
product. For a combination product, the Office of Combination Products (OCP) within FDA can determine which center or centers within
the FDA will review the product and under what legal authority the product will be reviewed. Generally, the center within the FDA
that has the primary role in regulating a combination product is determined based on the primary mode of action of the product.
Generally, if the primary mode of action is as a device, the FDA’s Center for Devices and Radiological Health (CDRH) takes
the lead. Alternatively, if the primary mode of action is cellular, then the CBER takes the lead. On October 18, 2016, we also received written confirmation from the CBER that the FDA intends to regulate
our CEI as a combination product under the primary jurisdiction of CBER. We further understand that CBER may choose to consult
or collaborate with CDRH with respect to the characteristics of the synthetic scaffold component of our product based on CBER’s
determination of need for such assistance.
The process of obtaining FDA marketing approval is lengthy, expensive,
and uncertain, and we cannot be certain that our products, including products pertaining to the esophagus, airways, or otherwise,
will be cleared or approved in a timely fashion, or at all. In addition, the review of combination products is often more complex
and can be more time consuming than the review of a product under the jurisdiction of only one center within the FDA.
We cannot be certain that the FDA will not elect to have our combination
products reviewed and regulated by only one FDA center and/or different legal authority, in which case the path to regulatory approval
would be different and could be more lengthy and costly.
If the FDA does not approve or clear our products in a timely fashion,
or at all, our business and financial condition will be adversely affected.
In the E.U., our esophagus product will likely be regulated as
a combined advanced therapy medicinal product and our other products, including for the trachea or bronchus, may also be viewed
as advanced therapy medicinal products, which could delay approvals and clearances and increase costs of obtaining such approvals
and clearances.
On May 28, 2014, we received notice from the European Medicines
Agency (EMA) that our first-generation trachea product would be regulated as a combined advanced therapy medicinal product. While
we have not had any formal interaction with the EMA with respect to our Cellframe implant technology, including pertaining to the
esophagus, we believe that such implant technology would likely be regulated as a combined advanced therapy medicinal product.
In the event of such classification, it would be necessary to seek a marketing authorization for these products granted by the
European Commission before being marketed in the E.U.
Other products we may develop, including any products pertaining
to the airways or otherwise, may similarly be regulated as advanced therapy medicinal products or combined advanced therapy medicinal
products. The regulatory procedures leading to marketing approval of our products vary among jurisdictions and can involve substantial
additional testing. Compliance with the FDA requirements does not ensure clearance or approval in other jurisdictions, and the
ability to legally market our products in any one foreign country does not ensure clearance, or approval by regulatory authorities
in other foreign jurisdictions. The foreign regulatory process leading to the marketing of the products may include all of the
risks associated with obtaining FDA approval in addition to other risks. In addition, the time required to comply with foreign
regulations and market products may differ from that required to obtain FDA approval, and we may not obtain foreign approval or
clearance on a timely basis, if at all.
The United Kingdom’s vote to leave the European Union will
have uncertain effects and could adversely affect us.
On June 23, 2016, eligible members of the electorate in the
United Kingdom (U.K.) decided by referendum to leave the the E.U., commonly referred to as "Brexit".
On March 29, 2017, the U.K. formally notified the E.U. of its intention to withdraw pursuant to the Treaty on the E.U. The withdrawal
of the U.K. from the E.U. will take effect either when agreed upon or, in the absence of such an agreement, two years after the
U.K. provided its notice of withdrawal. It appears likely that this withdrawal will continue to involve a process of lengthy negotiations
between the U.K. and the E.U. member states to determine the terms of the withdrawal as well as the U.K.’s relationship with
the E.U. going forward. The effects of Brexit will depend on any agreements the U.K. makes to retain access to the E.U. markets
either during a transitional period or more permanently. Since a significant proportion of the regulatory framework in the U.K.
is derived from the E.U. directives and regulations, the referendum could materially change the regulatory regime applicable to
the approval of any product candidates in the U.K. In addition, since the EMA is located in the U.K., the implications for the
regulatory review process in the E.U. has not been clarified and could result in relocation of the EMA or a disruption in the EMA
review process.
Further, Brexit could adversely affect European and worldwide economic
or market conditions and could contribute to instability in global financial markets. Brexit is likely to lead to legal uncertainty
and potentially divergent national laws and regulations as the U.K. determines which E.U. laws to replace or replicate. Any of
these effects of Brexit, and others we cannot anticipate, could adversely affect our business and financial condition.
Financial and Operating Risks
Our audited financial statements for the year ended December
31, 2018 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 unable to obtain needed
funding.
We ended December 31, 2018 with approximately $1.4 million of cash
on-hand and will need to raise additional capital in the second quarter to fund operations. We believe that our existing cash resources
will be sufficient to fund our planned operations into the second quarter of 2019, and if we do not raise additional capital from
outside sources in the very near future, we may be forced to 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 March 29, 2019, included
in this Form 10-K. Our cash requirements and cash resources will vary significantly depending upon the timing, 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 capital expenditures from 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 and the growth, if any, of our business in general. We will require additional
funding by the end of the second quarter of 2019 to continue our anticipated operations and support our capital 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. We may also pursue debt financings, other financing mechanisms, strategic collaborations
and licensing arrangements. We may not be able to obtain additional financing on terms favorable to us, if at all. In addition,
general market conditions, 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, we may be required to relinquish certain rights 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 research and
development activities, develop or enhance our products, take advantage of future opportunities, grow our business, respond to
competitive pressures or unanticipated requirements, or at worst may be forced to curtail or cease our operations.
We are subject to new U.S. foreign investment regulations, which
may impose additional burdens on or may limit certain investors’ ability to purchase our common stock, potentially making
our common stock less attractive to investors, and may also impact our ability to generate revenues outside of the U.S.
In October 2018, the U.S. Department of Treasury announced a pilot
program to implement part of the FIRRMA, effective November 10, 2018. The pilot program expands the jurisdiction of CFIUS
to include certain direct or indirect foreign investments in a defined category of U.S. companies, which may include companies
such as Biostage in the biotechnology industry. Among other things, FIRRMA empowers CFIUS to require certain foreign investors
to make mandatory filings and permits CFIUS to charge filing fees related to such filings. Such filings are subject to review
by CFIUS. Any such restrictions on the ability to purchase shares of our common stock may have the effect of delaying or deterring
any particular investment and could also affect the price that some investors are willing to pay for our common stock. In addition,
such restrictions could also limit the opportunity for our stockholders to receive a premium for their shares of our common stock
in relation to any potential change in control.
We intend to generate significant revenues outside the U.S., including
in China. Restrictions, such as those related to CFIUS, not only affect foreign ownership and investments, but also the transfer
or licensing of technology from the U.S. into certain foreign markets, including China. Such restrictions, including to the extent
they block strategic transactions that might otherwise be in shareholders’ interests, may materially and adversely affect
our ability to generate revenues in those foreign markets and the results of our operations.
We have generated insignificant revenue to date and have an accumulated
deficit. We anticipate that we will incur losses for the foreseeable future. We may never achieve or sustain profitability.
We have generated insignificant revenues to date and we have generated
no revenues from sales of any clinical products, and as of December 31, 2018, we had an accumulated deficit of approximately $55.8
million. We expect to continue to experience losses in the foreseeable future due to our limited anticipated revenues and significant
anticipated expenses. We do not anticipate that we will achieve meaningful revenues for the foreseeable future. In addition, we
expect that we will continue to incur significant operating expenses as we continue to focus on additional research and development,
preclinical testing, clinical testing and regulatory review and/or approvals of our products and technologies. As a result, we
cannot predict when, if ever, we might achieve profitability and cannot be certain that we will be able to sustain profitability,
if achieved.
Our products are in an early stage of development. If we are
unable to develop or market any of our products, our financial condition will be negatively affected, and we may have to curtail
or cease our operations.
We are in the early stage of product development. One must evaluate
us in light of the uncertainties and complexities affecting an early stage biotechnology company. Our products require additional
research and development, preclinical testing, clinical testing and regulatory review and/or approvals or clearances before marketing.
In addition, we may not succeed in developing new products as an alternative to our existing portfolio of products. If we fail
to successfully develop and commercialize our products, including our esophageal or airway products, our financial condition may
be negatively affected, and we may have to curtail or cease our operations.
We have a limited operating history and it is difficult to predict
our future growth and operating results.
We have a limited operating history and limited operations and
assets. Accordingly, one should consider our prospects in light of the costs, uncertainties, delays and difficulties
encountered by companies in the early stage of development, particularly companies in new and evolving markets, such as bioengineered
organ implants, and regenerative medicine. These risks include, but are not limited to, unforeseen capital requirements, delays
in obtaining regulatory approvals, failure to gain market acceptance and competition from foreseen and unforeseen sources. As such, our development timelines have been and may continue to
be subject to delay that could negatively affect our cash flow and our ability to develop or bring products to market, if at
all. Our estimates of patient population are based on published data and analysis of external databases by third parties and
are subject to uncertainty and possible future revision as they often require inference or extrapolations from one country to
another or one patient condition to another.
If we fail to retain key personnel, we may not be able to compete
effectively, which would have an adverse effect on our operations.
Our success is highly dependent on the continued services of key
management, technical and scientific personnel and collaborators. Our management and other employees may voluntarily terminate
their employment at any time upon short notice. The loss of the services of any member of our senior management team, including
our Chief Executive Officer, James McGorry, our President, Hong Yu, our Chief Financial Officer, Thomas McNaughton, our Chief Scientific
Officer, Dr. William Fodor, and our other key scientific, technical and management personnel, may significantly delay or prevent
the achievement of product development and other business objectives.
If our collaborators do not devote sufficient time and resources
to successfully carry out their duties or meet expected deadlines, we may not be able to advance our products in a timely manner
or at all.
We are currently collaborating with multiple academic researchers
and clinicians at a variety of research and clinical institutions. Our success depends in part on the performance of our collaborators.
Some collaborators may not be successful in their research and clinical trials or may not perform their obligations in a timely
fashion or in a manner satisfactory to us. Typically, we have limited ability to control the amount of resources or time our collaborators
may devote to our programs or potential products that may be developed in collaboration with us. Our collaborators frequently depend
on outside sources of funding to conduct or complete research and development, such as grants or other awards. In addition, our
academic collaborators may depend on graduate students, medical students, or research assistants to conduct certain work, and such
individuals may not be fully trained or experienced in certain areas, or they may elect to discontinue their participation in a
particular research program, creating an inability to complete ongoing research in a timely and efficient manner. As a result of
these uncertainties, we are unable to control the precise timing and execution of any experiments that may be conducted.
Although we have co-development collaboration arrangements with
Mayo Clinic and Connecticut Children’s Medical Center, we do not have formal agreements in place with other collaborators,
and most of our collaborators retain the ability to pursue other research, product development or commercial opportunities that
may be directly competitive with our programs. If any of our collaborators elect to prioritize or pursue other programs in lieu
of ours, we may not be able to advance product development programs in an efficient or effective manner, if at all. If a collaborator
is pursuing a competitive program and encounters unexpected financial or capability limitations, they may be motivated to reduce
the priority placed on our programs or delay certain activities related to our programs. Any of these developments could harm or
slow our product and technology development efforts.
Public perception of ethical and social issues surrounding the
use of cell technology may limit or discourage the use of our technologies, which may reduce the demand for our products and technologies
and reduce our revenues.
Our success will depend in part upon our collaborators’ ability
to develop therapeutic approaches incorporating, or discovered through, the use of cells. If either bioengineered organ implant
technology is perceived negatively by the public for social, ethical, medical or other reasons, governmental authorities in the
U.S. and other countries may call for prohibition of, or limits on, cell-based technologies and other approaches to bioengineering
and tissue engineering. Although the surgeons using our products have not, to date, used the more controversial stem cells derived
from human embryos or fetuses in the human transplant surgeries using our products, claims that human-derived stem cell technologies
are ineffective or unethical may influence public attitudes. The subject of cell and stem cell technologies in general has at times
received negative publicity and aroused public debate in the U.S. and some other countries. Ethical and other concerns about such
cells could materially harm the market acceptance of our products.
Our products will subject us to liability exposure.
We face an inherent risk of product liability claims, especially
with respect to our products that will be used within the human body, including the scaffolds we manufacture. Product liability
coverage is expensive and sometimes difficult to obtain. We may not be able to obtain or maintain insurance at a reasonable cost.
We may be subject to claims for liabilities for unsuccessful outcomes of surgeries involving our products, which may include claims
relating to patient death. We may also be subject to claims for liabilities relating to patients that suffer serious complications
or death during or following implantations involving our products, including the patients who had surgeries utilizing our first-generation
scaffold device or our bioreactor technology or our esophageal implant, or patients that may have surgeries utilizing any of our
products in the future. Our current product liability coverage is $10 million per occurrence and in the aggregate. We will need
to increase our insurance coverage if and when we begin commercializing any of our products. There can be no assurance that existing
insurance coverage will extend to other products in the future. Any product liability insurance coverage may not be sufficient
to satisfy all liabilities resulting from product liability claims. A successful claim may prevent us from obtaining adequate product
liability insurance in the future on commercially desirable items, if at all. If claims against us substantially exceed our coverage,
then our business could be adversely impacted. Regardless of whether we are ultimately successful in any product liability litigation,
such litigation could consume substantial amounts of our financial and managerial resources and could result in, among others:
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significant awards or judgments against us;
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substantial litigation costs;
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injury to our reputation and the reputation of our products;
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withdrawal of clinical trial participants; and
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adverse regulatory action.
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Any of these results would substantially harm our business.
If restrictions on reimbursements or other conditions imposed
by payers limit our customers’ actual or potential financial returns on our products, our customers may not purchase our
products or may reduce their purchases.
Our customers’ willingness to use our products will depend
in part on the extent to which coverage for these products is available from government payers, private health insurers and other
third-party payers. These payers are increasingly challenging the price of medical products and services. Significant uncertainty
exists as to the reimbursement status of newly approved treatments and products in the fields of biotechnology and regenerative
medicine, and coverage and adequate payments may not be available for these treatments and products. In addition, third-party payers
may require additional clinical trial data to establish or continue reimbursement coverage. These clinical trials, if required,
could take years to complete and could be expensive. There can be no assurance that the payers will agree to continue reimbursement
or provide additional coverage based upon these clinical trials. Failure to obtain adequate reimbursement would result in reduced
sales of our products.
We depend upon a single-source supplier for the hardware used
for our organ bioreactor control and acquisition system. The loss of this supplier, or future single-source suppliers we may rely
on, or their failure to provide us with an adequate supply of their products or services on a timely basis, could adversely affect
our business.
We currently have a single supplier for certain
components that we use for our organ bioreactor control and acquisition systems as well as materials used in scaffolds. We may
also rely on other single-source suppliers for critical components of our products in the future. If we were unable to acquire
hardware or other products or services from applicable single-source suppliers, we could experience a delay in developing and manufacturing
our products.
If we incur higher costs as a result of trade policies, treaties,
government regulations or tariffs, it could have a materially adverse effect on our business, financial condition or results of
operations.
There is currently significant uncertainty about the future relationship
between the United States and China, including with respect to trade policies, treaties, government regulations and tariffs. The
current U.S. administration has called for substantial changes to U.S. foreign trade policy including greater restrictions on international
trade and significant increases in tariffs on goods imported into the U.S. Under the current status, we do not expect that this
tariff will significantly impact any Biostage products and thus the tariff should not have a materially adverse effect on our business,
financial condition or results of operations. We are unable to predict whether or when additional tariffs will be imposed or the
impact of any such future tariff increases.
We use and generate hazardous materials in our business and must
comply with environmental laws and regulations, which can be expensive.
Our research, development and manufacturing involve the controlled
use of hazardous chemicals, and we may incur significant costs as a result of the need to comply with numerous laws and regulations.
For example, certain volatile organic laboratory chemicals we use, such as fluorinated hydrocarbons, must be disposed of as hazardous
waste. We are subject to laws and regulations enforced by the FDA, foreign health authorities and other regulatory requirements,
including the Occupational Safety and Health Act, the Environmental Protection Act, the Toxic Substances Control Act, the Resource
Conservation and Recovery Act, and other current and potential federal, state, local and foreign laws and regulations governing
the use, manufacturing, storage, handling and disposal of our products, materials used to develop and manufacture our products,
and resulting waste products. Although we believe that our safety procedures for handling and disposing of such materials comply
with the standards prescribed by state and federal regulations, the risk of accidental contamination or injury from these materials
cannot be completely eliminated. In the event of such an accident, our operations could be interrupted. Further, we could be held
liable for any damages that result and any such liability could exceed our resources.
Our products are novel and will require market acceptance.
Even if we receive regulatory approvals for the commercial use of
our products, their commercial success will depend upon acceptance by physicians, patients, third party payers such as health insurance
companies and other members of the medical community. Market acceptance of our products is also dependent upon our ability to provide
acceptable evidence and the perception of the positive characteristics of our products relative to existing or future treatment
methods, including their safety, efficacy and/or other positive advantages. If our products fail to gain market acceptance, we
may be unable to earn sufficient revenue to continue our business. Market acceptance of, and demand for, any product that we may
develop and commercialize will depend on many factors, both within and outside of our control. If our products receive only limited
market acceptance, our business, financial condition and results of operations would be materially and adversely affected.
Our long-term growth depends on our ability to develop products
for other organs.
Our growth strategy includes expanding the use of our products in
treatments pertaining to organs other than the esophagus and airways, such as the lungs, GI tract, among others. These other organs
are more complex than the esophagus and airways. There is no assurance that we will be able to successfully apply our technologies
to these other more complex organs, which might limit our expected growth.
Our success will depend partly on our ability to operate without
infringing on, or misappropriating, the intellectual property or confidentiality rights of others.
We may be sued for infringing on the intellectual property or confidentiality
rights of others, including the patent rights, trademarks and trade names and confidential information of third parties. To the
extent that any of such claims are valid, if we had utilized, or were to utilize, such patent applications or patents without an
agreement from the owner thereof, it could result in infringement of the intellectual property rights of the respective owner.
Intellectual property and related litigation is costly and the outcome is uncertain. If we do not prevail in any such intellectual
property or related litigation, in addition to any damages we might have to pay, we could be required to stop the infringing activity,
or obtain a license to or design around the intellectual property or confidential information in question. If we are unable to
obtain a required license on acceptable terms or are unable to design around any third-party patent, we may be unable to sell some
of our products and services, which could result in reduced revenue.
We may be involved in lawsuits to protect or enforce our patents
that would be expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate
patent litigation against third parties. We may also become subject to interference proceedings conducted in the patent and trademark
offices of various countries to determine the priority of inventions. The defense and prosecution, if necessary, of intellectual
property suits, interference proceedings and related legal and administrative proceedings would be costly, and may divert our technical
and management personnel from their normal responsibilities. We may not prevail in any of these suits should they occur. An adverse
determination of any litigation or defense proceedings could put our patents at risk of being invalidated or interpreted narrowly
and could put our patent applications at risk of being rejected and patents not being issued.
Furthermore, because of the substantial amount of discovery required
in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised
by disclosure during this type of litigation. For example, during the course of this kind of litigation, there could be public
announcements of the results of hearings, motions or other interim proceedings or developments in the litigation. Securities analysts
or investors may perceive these announcements to be negative, which could cause the market price of our stock to decline.
If we are unable to effectively protect our intellectual property,
third parties may use our technology, which would impair our ability to compete in our markets.
Our continued success will depend significantly on our ability to
obtain and maintain meaningful patent protection for certain of our products throughout the world. Patent law relating to the scope
of claims in the biotechnology, regenerative medicine, and medical device fields in which we operate is still evolving. The degree
of future protection for our proprietary rights is uncertain. We may rely on patents to protect a significant part of our intellectual
property and to enhance our competitive position. However, our presently pending or future patent applications may not be accepted
and patents might not be issued, and any patent previously issued to us may be challenged, invalidated, held unenforceable or circumvented.
Furthermore, the claims in patents which have been issued or which may be issued to us in the future may not be sufficiently broad
to prevent third parties from producing competing products similar to our products. We may also operate in countries where we do
not have patent rights and in those countries we would not have patent protection. We also rely on trademarks and trade names in
our business. The laws of various foreign countries in which we compete may not protect our intellectual property to the same extent
as do the laws of the U.S. If we fail to obtain adequate patent protection for our proprietary technology, our ability to be commercially
competitive could be materially impaired. It is also possible that our intellectual property may be stolen via cyber-attacks or
similar methods.
In addition to patent protection, we also rely on protection of
trade secrets, know-how and confidential and proprietary information. To maintain the confidentiality of trade-secrets and proprietary
information, we generally seek to enter into confidentiality agreements with our employees, consultants and strategic partners
upon the commencement of a relationship. However, we may not be able to obtain these agreements in all circumstances in part due
to local regulations. In the event of unauthorized use or disclosure of this information, these agreements, even if obtained, may
not provide meaningful protection for our trade-secrets or other confidential information. In addition, adequate remedies may not
exist in the event of unauthorized use or disclosure of this information. The loss or exposure of our trade secrets and other proprietary
information would impair our competitive advantages and could have a materially adverse effect on our operating results, financial
condition and future growth prospects.
Our competitors and potential competitors may have greater resources
than we have and may develop products and technologies that are more effective or commercially attractive than our products and
technologies or may develop competing relationships with our key collaborators.
We expect to compete with multiple pharmaceutical, biotechnology,
medical device and scientific research product companies. Companies working in competing areas include, among others, Aldagen,
Asterias Biotherapeutics, Athersys, BioTime, Caladrius Biosciences, Celgene, Cytori Therapeutics, E. I. du Pont de Nemours and
Company, InVivo Therapeutics, Mesoblast, Miramatrix Medical, Nanofiber Solutions, Neuralstem, Orgagen, Organovo, Osiris Therapeutics,
Pluristem Therapeutics, Smiths Medical, Tissue Genesis, Inc., Tissue Growth Technologies, United Therapeutics, Vericel Corporation,
and W.L. Gore and Associates. In addition, there are many academic and clinical centers that are developing bioengineered or regenerative
organ technologies that may one day become competitors for us. Many of our competitors and potential competitors have substantially
greater financial, technological, research and development, marketing, and personnel resources than we do. We cannot, with any
accuracy, forecast when or if these companies are likely to bring bioengineered organ or regenerative medicine products to market
for indications that we are also pursuing. Many of these potential competitors may be further along in the process of product development
and also operate large, company-funded research and development programs.
We expect that other products will compete with our current and
future products based on efficacy, safety, cost, and intellectual property positions. While we believe that these will be the primary
competitive factors, other factors include obtaining marketing exclusivity under certain regulations, availability of supply, manufacturing,
marketing and sales expertise and capability, and reimbursement coverage. Our competitors may develop or market products that are
more effective or commercially attractive than our current or future products and may also develop competing relationships with
our key collaborators. In addition, we may face competition from new entrants into the field. We may not have the financial resources,
technical expertise or marketing, distribution or support capabilities to compete successfully in the future. The effects of any
such actions of our competitors may have a materially adverse effect on our business, operating results and financial condition.
If we do not successfully manage our growth, our business goals
may not be achieved.
To manage growth, we will be required to continue to improve existing,
and implement additional, operational and financial systems, procedures and controls, and hire, train and manage additional employees.
Our current and planned personnel, systems, procedures and controls may not be adequate to support our anticipated growth and we
may not be able to hire, train, retain, motivate and manage required personnel. Competition for qualified personnel in the biotechnology
and regenerative medicine area is intense, and we operate in several geographic locations where labor markets are particularly
competitive, including Boston, Massachusetts, where demand for personnel with these skills is extremely high and is likely to remain
high. As a result, competition for qualified personnel is intense and the process of hiring suitably qualified personnel is often
lengthy and expensive, and may become more expensive in the future. If we are unable to hire and retain a sufficient number of
qualified employees or otherwise manage our growth effectively, our ability to conduct and expand our business could be seriously
reduced.
We are exposed to a variety of risks relating to our international
sales and operations, including fluctuations in exchange rates, local economic conditions and delays in collection of accounts
receivable.
We intend to generate significant revenues outside the U.S. in multiple
foreign currencies including Chinese Renminbi, Euros, British pounds, and in U.S. dollar-denominated transactions conducted with
customers who generate revenue in currencies other than the U.S. dollar. For those foreign customers who purchase our products
in U.S. dollars, currency fluctuations between the U.S. dollar and the currencies in which those customers do business may have
a negative impact on the demand for our products in foreign countries where the U.S. dollar has increased in value compared to
the local currency.
Since we have vendors and customers outside the U.S. and we may
generate revenues and incur operating expenses in multiple foreign currencies, we will experience currency exchange risk with respect
to any foreign currency-denominated revenues and expenses. We cannot predict the consolidated effects of exchange rate fluctuations
upon our future operating results because of the number of currencies involved, the variability of currency exposure and the potential
volatility of currency exchange rates. Our international activities subject us to laws regarding sanctioned countries, entities
and persons, customs, import-export, laws regarding transactions in foreign countries, the U.S. Foreign Corrupt Practices Act and
local anti-bribery and other laws regarding interactions with healthcare professionals. Among other things, these laws restrict,
and in some cases prohibit, U.S. companies from directly or indirectly selling goods, technology or services to people or entities
in certain countries. In addition, these laws require that we exercise care in structuring our sales and marketing practices in
foreign countries.
Local economic conditions, legal, regulatory or political considerations,
disruptions from strikes, the effectiveness of our sales representatives and distributors, local competition and changes in local
medical practice could also affect our sales to foreign markets. Relationships with customers and effective terms of sale frequently
vary by country, often with longer-term receivables than are typical in the U.S.
Comprehensive tax reform legislation could adversely affect our
business and financial condition.
On December 22, 2017, the U.S. government enacted the Tax Cuts
and Jobs Act of 2017 (TCJA), which significantly reforms the Internal Revenue Code of 1986, as amended. The TCJA, among
other things, contains significant changes to corporate taxation, including reduction of the corporate tax rate from a top
marginal rate of 35% to a flat rate of 21%, effective January 1, 2018; limitation of the tax deduction for interest
expense; limitation of the deduction for net operating losses and elimination of net operating loss carrybacks, in each case,
for losses arising in taxable years beginning after December 31, 2017 (though any such tax losses may be carried
forward indefinitely); and modifying or repealing many business deductions and credits, including reducing the business tax
credit for certain clinical testing expenses incurred in the testing of certain drugs for rare diseases or conditions
generally referred to as “orphan drugs”. The tax rate change resulted in (i) a reduction in the gross amount of
our deferred tax assets recorded as of December 31, 2017, without an impact on the net amount of our deferred tax assets,
which are recorded with a full valuation allowance. We continue to examine the impact this tax reform legislation may have on
our business. However, the effect of the TCJA on us and our affiliates, whether adverse or favorable, is uncertain and may
not become evident for some period of time. We urge investors to consult with their legal and tax advisers regarding
the implications of the TCJA on an investment in our common stock.
Changes in the European regulatory environment regarding privacy
and data protection regulations could have a materially adverse impact on our results of operations.
The E.U. has adopted a comprehensive overhaul of its data protection
regime in the form of the General Data Protection Regulation (GDPR), which came into effect in May 2018. GDPR extends the scope
of the existing E.U. data protection law to foreign companies processing personal data of E.U. residents. The regulation imposes
a strict data protection compliance regime with severe penalties of 4% of worldwide turnover or €20 million, whichever is
greater, and includes new rights such as the right of erasure of personal data. Although the GDPR will apply across the E.U., as
has been the case under the current data protection regime, E.U. Member States have some national derogations and local data protection
authorities that will still have the ability to interpret the GDPR, which has the potential to create inconsistencies on a country-by-country
basis. Implementation of, and compliance with the GDPR could increase our cost of doing business and/or force us to change our
business practices in a manner adverse to our business. In addition, violations of the GDPR may result in significant fines, penalties
and damage to our brand and business which could, individually or in the aggregate, materially harm our business and reputation.
Risk Associated with Product Marketing
Even if our products are cleared or approved by regulatory authorities,
if we or our suppliers fail to comply with ongoing FDA or other foreign regulatory authority requirements, or if we experience
unanticipated problems with our products, these products could be subject to restrictions or withdrawal from the market.
Any product for which we obtain clearance or approval in the
U.S., China or the E.U., and the manufacturing processes, reporting requirements, post-approval clinical data and promotional
activities for such product, will be subject to continued regulatory review, oversight and periodic inspections by the FDA
and other domestic and foreign regulatory authorities or notified bodies. In particular, we and our suppliers are required to
comply with the FDA’s Quality System Regulations (QSR), and current Good Manufacturing Practices (cGMP) for our
medical products, and International Standards Organization (ISO), regulations for the manufacture of our products and other
regulations which cover the methods and documentation of the design, testing, production, control, quality assurance,
labeling, packaging, storage and shipping of any product for which we obtain clearance or approval. Manufacturing may also be
subject to controls by the FDA for parts of the system or combination products that the FDA may find are controlled by the
biologics regulations. Equivalent regulatory obligations apply in foreign jurisdictions. Regulatory authorities, such as the
FDA, China’s National Medical Products Administration, the competent authorities of the E.U. Member States, the EMA and
notified bodies, enforce the QSR, cGMP and other applicable regulations in the U.S. and in foreign jurisdictions through
periodic inspections. The failure by us or one of our suppliers to comply with applicable statutes and regulations
administered by the FDA and other regulatory authorities or notified bodies in the U.S. or in foreign jurisdictions, or the
failure to timely and adequately respond to any adverse inspectional observations or product safety issues, could result in,
among other things, any of the following enforcement actions:
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untitled letters, warning letters, fines, injunctions, consent decrees and civil penalties;
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unanticipated expenditures to address or defend such actions;
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customer notifications for repair, replacement, or refunds;
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recall, detention or seizure of our products;
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operating restrictions or partial suspension or total shutdown of production;
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withdrawing BLA or NDA approvals that have already been granted;
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withdrawal of the marketing authorization granted by the European Commission or delay in obtaining such marketing authorization;
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withdrawal of the CE Certificates of Conformity granted by the notified body or delay in obtaining these certificates;
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refusal to grant export approval for our products; and
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Post-market enforcement actions can generate
adverse commercial consequences.
Even if regulatory approval of a product is granted, such clearance
or approval may be subject to limitations on the intended uses for which the product may be marketed and reduce our potential to
successfully commercialize the product and generate revenue from the product. If the FDA or a foreign regulatory authority determines
that our promotional materials, labeling, training or other marketing or educational activities constitute promotion of an unapproved
use, it could request that we cease or modify our training or promotional materials or subject us to regulatory enforcement actions.
It is also possible that other federal, state or foreign enforcement authorities might take action if they consider our training
or other promotional materials to constitute promotion of an unapproved use, which could result in significant fines or penalties
under other statutory authorities, such as laws prohibiting false claims for reimbursement. In addition, we may be required to
conduct costly post-market testing and surveillance to monitor the safety or effectiveness of our products, and we must comply
with medical products reporting requirements, including the reporting of adverse events and malfunctions related to our products.
Later discovery of previously unknown problems with our products, including unanticipated adverse events or adverse events of unanticipated
severity or frequency, manufacturing problems, or failure to comply with regulatory requirements such as QSR, may result in changes
to labeling, restrictions on such products or manufacturing processes, withdrawal of the products from the market, voluntary or
mandatory recalls, a requirement to repair, replace or refund the cost of any medical device we manufacture or distribute, fines,
suspension of regulatory approvals, product seizures, injunctions or the imposition of civil or criminal penalties which would
adversely affect our business, operating results and prospects.
Healthcare legislative reform measures may
have a materially adverse effect on our business and results of operations.
In the United States, there have been and continue to be a number
of legislative initiatives to contain healthcare costs. For example, in March 2010, the Affordable Care Act (ACA) was passed, which
substantially changes the way healthcare is financed by both governmental and private insurers, and significantly impacts the U.S.
pharmaceutical industry. The ACA, among other things, subjects biological products to potential competition by lower-cost biosimilars,
addresses a new methodology by which rebates owed by manufacturers under the Medicaid Drug Rebate Program are calculated for drugs
that are inhaled, infused, instilled, implanted or injected, increases the minimum Medicaid rebates owed by manufacturers under
the Medicaid Drug Rebate Program and extends the rebate program to individuals enrolled in Medicaid managed care organizations,
establishes annual fees and taxes on manufacturers of certain branded prescription drugs, and creates a new Medicare Part D coverage
gap discount program, in which manufacturers must agree to offer 50% (70% commencing January 1, 2019) point-of-sale discounts off
negotiated prices of applicable brand drugs to eligible beneficiaries during their coverage gap period, as a condition for the
manufacturer’s outpatient drugs to be covered under Medicare Part D. Some of the provisions of the ACA have yet to be fully
implemented, while certain provisions have been subject to Judicial and Congressional challenges, as well as efforts by the Trump
administration to repeal or replace certain aspects of the ACA. Since January 2017, President Trump has signed two Executive Orders
designed to delay the implementation of certain provisions of the ACA or otherwise circumvent some of the requirements for health
insurance mandated by the ACA.
Concurrently, Congress has considered legislation that would repeal
or repeal and replace all or part of the ACA. While Congress has not passed comprehensive repeal legislation, two bills affecting
the implementation of certain taxes under the ACA have been signed into law. The TCJA includes a
provision repealing, effective January 1, 2019, the tax-based shared responsibility payment imposed by the ACA on certain individuals
who fail to maintain qualifying health coverage for all or part of a year that is commonly referred to as the “individual
mandate.” Additionally, on January 22, 2018, President Trump signed a continuing resolution on appropriations for fiscal
year 2018 that delayed the implementation of certain ACA-mandated fees, including the so-called “Cadillac” tax, an
annual fee on certain high cost employer-sponsored insurance plans, the annual fee imposed on certain health insurance providers
based on market share, and the Medical Device Excise Tax (MDET) on non-exempt medical devices. Further, the Bipartisan Budget Act
of 2018, or the BBA, among other things, amends the ACA, effective January 1, 2019, to reduce the coverage gap in most Medicare
drug plans, commonly referred to as the “donut hole.” The effect that the ACA and its possible repeal and replacement
may have on our business remains unclear.
Other legislative changes have been proposed and adopted in
the United States since the ACA was enacted. On August 2, 2011, the Budget Control Act of 2011, among other things, created measures
for spending reductions by Congress. A Joint Select Committee on Deficit Reduction, tasked with recommending a targeted deficit
reduction of at least $1.2 trillion for the years 2013 through 2021, was unable to reach required goals, thereby triggering the
legislation’s automatic reduction to several government programs. This includes aggregate reductions of Medicare payments
to providers of 2% per fiscal year. These reductions went into effect on April 1, 2013 and, due to subsequent legislative amendments
to the statute, will remain in effect through 2027 unless additional congressional action is taken. On January 2, 2013, the American
Taxpayer Relief Act of 2012 was signed into law, which, among other things, further reduced Medicare payments to several types
of providers.
Moreover, payment methodologies may be subject to changes
in healthcare legislation and regulatory initiatives. For example, the Middle Class Tax Relief and Job Creation Act of 2012
required that the Centers for Medicare & Medicaid Services (CMS), the agency responsible for administering the Medicare
program, reduce the Medicare clinical laboratory fee schedule by 2% in 2013, which served as a base for 2014 and subsequent
years. In addition, effective January 1, 2014, CMS also began bundling the Medicare payments for certain laboratory tests
ordered while a patient received services in a hospital outpatient setting. We expect that additional state and federal
healthcare reform measures will be adopted in the future, any of which could limit the amounts that federal and state
governments will pay for healthcare products and services, which could result in reduced demand for any product candidate we
develop or complementary diagnostics or companion diagnostics or additional pricing pressures.
Additionally, there has been increasing legislative and enforcement
interest in the United States with respect to specialty drug pricing practices. Specifically, there have been several recent U.S.
Congressional inquiries and proposed and enacted federal and state legislation designed to, among other things, bring more transparency
to drug pricing, reduce the cost of prescription drugs under Medicare, review the relationship between pricing and manufacturer
patient programs, and reform government program reimbursement methodologies for drugs.
Any of these regulatory changes and events could limit our ability
to form collaborations and our ability to commercialize our products, and if we fail to comply with any such new or modified regulations
and requirements it could adversely affect our business, operating results and prospects.
If we fail to complete the required
IRS forms for exemptions, make timely semi-monthly payments of collected excise taxes, or submit quarterly reports as required
by the MDET, we may be subject to penalties, such as Section 6656 penalties for any failure to make timely
deposits.
Section 4191 of the Internal Revenue Code, enacted by Section
1405 of the Health Care and Education Reconciliation Act of 2010, Public Law 111-152 (124 Stat. 1029 (2010)), in conjunction with
the Patient Protection and the ACA, Public Law 111-148 (124 Stat. 119 (2010)), imposed as of January 1, 2013, an excise tax on
the sale of certain medical devices. The MDET imposed by Section 4191 is 2.3% of the price for which
a taxable medical device is sold within the U.S.
While the provision for the MDET has been suspended since 2016,
there is no guarantee that the moratorium will be approved for subsequent years. The MDET will apply to future sales of any company
medical device listed with the FDA under Section 510(j) of the Federal Food, Drug, and Cosmetic Act and 21 C.F.R. Part 807, unless
the device falls within an exemption from the MDET, such as the exemption governing direct retail sale of devices to consumers
or for foreign sales of these devices. We will need to assess to what extent the MDET may impact the sales price and distribution
agreements under which any of our products are sold in the U.S. We also expect general and administrative expense to increase due
to the MDET. We will need to submit IRS forms applicable to relevant exemptions, make semi-monthly payments of any collected excise
taxes, and make timely (quarterly) reports to the IRS regarding the MDET. To the extent we do not comply with the requirements
of the MDET we may be subject to penalties.
Risks Related To Our Separation From Harvard Bioscience
If the Separation and related distribution of all of the
shares of our common stock by Harvard Bioscience, together with certain related transactions, does not qualify as a transaction
that is generally tax-free for U.S. federal income tax purposes, Harvard Bioscience could be subject to significant tax liability
and, in certain circumstances, we could be required to indemnify Harvard Bioscience for material taxes pursuant to indemnification
obligations under the tax sharing agreement.
Harvard Bioscience has informed us that on June 28, 2013 it
received a Supplemental Ruling to the Private Letter Ruling dated March 22, 2013 from the IRS to the effect that, among other things,
the Separation and related distribution of all of the shares of our common stock by Harvard Bioscience (the Distribution), will
qualify as a transaction that is tax-free for U.S. federal income tax purposes under Section 355 and 368(a)(1)(D) of the Internal
Revenue Code continuing in effect. The private letter and supplemental rulings and the tax opinion that Harvard Bioscience received
from Burns & Levinson LLP, special counsel to Harvard Bioscience, rely on certain representations, assumptions and undertakings,
including those relating to the past and future conduct of our business, and neither the private letter and supplemental rulings
nor the opinion would be valid if such representations, assumptions and undertakings were incorrect. Moreover, the private letter
and supplemental rulings do not address all the issues that are relevant to determining whether the Distribution will qualify for
tax-free treatment. Notwithstanding the private letter and supplemental rulings and opinion, the IRS could determine the Distribution
should be treated as a taxable transaction for U.S. federal income tax purposes if, among other reasons, it determines any of the
representations, assumptions or undertakings that were included in the request for the private letter and supplemental rulings
are false or have been violated or if it disagrees with the conclusions in the opinion that are not covered by the IRS ruling.
If the Distribution fails to qualify for tax-free treatment,
in general, Harvard Bioscience would be subject to tax as if it had sold our common stock in a taxable sale for its fair market
value, and Harvard Bioscience stockholders who received shares of our common stock in the Distribution would be subject to tax
as if they had received a taxable Distribution equal to the fair market value of such shares.
Under the tax sharing agreement between Harvard Bioscience and
us, we would generally be required to indemnify Harvard Bioscience against any tax resulting from the Distribution to the extent
that such tax resulted from (i) an acquisition of all or a portion of our stock or assets, whether by merger or otherwise, (ii)
other actions or failures to act by us, or (iii) any of our representations or undertakings being incorrect or violated. Our indemnification
obligations to Harvard Bioscience and its subsidiaries, officers and directors are not limited by any maximum amount. If we are
required to indemnify Harvard Bioscience or such other persons under the circumstances set forth in the tax sharing agreement,
we may be subject to substantial liabilities.
We may have received better terms from unaffiliated third
parties than the terms we received in our agreements with Harvard Bioscience.
The agreements related to the Separation, including the separation
and distribution agreement, tax sharing agreement, transition services agreement and the other agreements, were negotiated in the
context of the Separation while we were still part of Harvard Bioscience and, accordingly, may not reflect terms that would have
resulted from arm’s-length negotiations among unaffiliated third parties. The terms of the agreements we negotiated in the
context of the Separation related to, among other things, allocation of assets, liabilities, rights, indemnifications and other
obligations among Harvard Bioscience and us. We may have received better terms from third parties because third parties may have
competed with each other to win our business.
Third parties may seek to hold us responsible for liabilities
of Harvard Bioscience that we did not assume in our agreements.
In connection with the Separation, Harvard Bioscience has generally
agreed to retain all liabilities that did not historically arise from our business. Third parties may seek to hold us responsible
for Harvard Bioscience’s retained liabilities. Under our agreements with Harvard Bioscience, Harvard Bioscience has agreed
to indemnify us for claims and losses relating to these retained liabilities. However, if those liabilities are significant and
we are ultimately liable for them, we cannot assure you that we will be able to recover the full amount of our losses from Harvard
Bioscience.
Any disputes that arise between us and Harvard Bioscience
with respect to our past and ongoing relationships could harm our business operations.
Disputes may arise between Harvard Bioscience and us in a number
of areas relating to our past and ongoing relationships, including:
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intellectual property, technology and business matters,
including failure to make required technology transfers and failure to comply with non-compete provisions applicable to Harvard
Bioscience and us;
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labor, tax, employee benefit, indemnification and other matters arising from the Separation;
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distribution and supply obligations;
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employee retention and recruiting;
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business combinations involving us;
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sales or distributions by Harvard Bioscience of all or any portion of its ownership interest in us; and
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business opportunities that may be attractive to both Harvard Bioscience and us.
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We may not be able to resolve any potential conflicts, and even
if we do, the resolution may be less favorable than if we were dealing with a different party.
Risks Relating To Our Common Stock
Our principal stockholders hold a majority of voting power
and will be able to exert significant control over us.
The
stockholders who purchased shares of our common stock and related warrants pursuant to a Securities Purchase Agreement dated December
27, 2017 collectively hold shares of common stock that represent approximately 41% of all outstanding voting power, and as such
may significantly influence the results of matters voted on by our shareholders. The interests of these stockholders may conflict
with your interests. These stockholders have the right to nominate a majority of our Board of Directors and, therefore, effectively
could control many other major decisions regarding our operations.
This significant concentration of share ownership may
adversely affect the trading price for our
common stock
because
investors may perceive disadvantages in owning stock in companies with controlling stockholders.
Substantial sales of common stock have and may continue to
occur, or may be anticipated, which have and could continue to cause our stock price to decline.
We expect that we will seek to raise additional capital from
time to time in the future, which may involve the issuance of additional shares of common stock, or securities convertible or exercisable
into common stock. On February 10, 2017, we completed a public offering of 1,000,000 shares of common stock and the issuance of
warrants to purchase 1,000,000 shares of common stock. Additionally, we issued to the placement agent warrants to purchase 50,000
shares of common stock to the placement agent for the offering. The purchasers of the shares of common stock and warrants to purchase
shares of common stock from that offering, as well as our December 2017 private placement and other offerings consummated thereafter,
may sell significant quantities of our common stock in the market, which may cause a decline in the price of our common stock.
Further, we cannot predict the effect, if any, that any additional market sales of common stock, or anticipation of such sales,
or the availability of those shares of common stock for sale will have on the market price of our common stock. Any future sales
of significant amounts of our common stock, or the perception in the market that this will occur, may result in a decline in the
price of our common stock.
A trading market that will provide you with adequate liquidity
may not develop for our common stock.
The current public market for our common stock has limited trading
volume and liquidity. We cannot predict the extent to which investor interest in our company will lead to the development of a
more active trading market in our common stock, or how liquid that market might be.
Our revenues, operating results and cash flows may fluctuate
in future periods and we may fail to meet investor expectations, which may cause the price of our common stock to decline.
Variations in our quarterly and year-end operating results are
difficult to predict and may fluctuate significantly from period to period. If our revenues or operating results fall below the
expectations of investors or securities analysts, the price of our common stock could decline substantially. In addition to the
other factors discussed under these “Risk Factors,” specific factors that may cause fluctuations in our operating results
include:
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demand and pricing for our products;
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government or private healthcare reimbursement policies;
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adverse events or publicity related to our products, our research or investigations, or our collaborators or other partners;
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physician and patient acceptance of any of our current or future products;
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manufacturing stoppages or delays;
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introduction of competing products or technologies;
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our operating expenses which fluctuate due to growth of our business; and
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timing and size of any new product or technology acquisitions we may complete.
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The market price of our shares may fluctuate widely.
The market price of our common stock may fluctuate widely, depending
upon many factors, some of which may be beyond our control, including:
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the success and costs of preclinical and clinical testing and obtaining regulatory approvals or clearances for our products;
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the success or failure of surgeries and procedures involving the use our products;
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a shift in our investor base;
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our quarterly or annual results of operations, or those of other companies in our industry;
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actual or anticipated fluctuations in our operating results due to factors related to our business;
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changes in accounting standards, policies, guidance, interpretations or principles;
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announcements by us or our competitors of significant acquisitions, dispositions or intellectual property developments or issuances;
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the failure of securities analysts to cover our common stock;
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changes in earnings estimates by securities analysts or our ability to meet those estimates;
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the operating and stock price performance of other comparable companies; our issuance of equity, debt or other financing instruments;
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overall market fluctuations; and
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general macroeconomic conditions.
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Stock markets in general have experienced volatility that has
often been unrelated to the operating performance of a particular company. These broad market fluctuations may adversely affect
the trading price of our common stock.
Your percentage ownership will be diluted in the future.
Your percentage ownership will be diluted in the future because
of equity awards that we expect will be granted to our directors, officers and employees, as well as shares of common stock, or
securities convertible into common stock, we issue in connection with future capital raising or strategic transactions. Our 2013
Equity Incentive Plan provides for the grant of equity-based awards, including restricted stock, restricted stock units, stock
options, stock appreciation rights and other equity-based awards to our directors, officers and other employees, advisors and consultants.
In addition, your percentage ownership will be diluted by our issuance of common stock following the exercise of options, or vesting
of restricted stock units, we issued pertaining to the adjustment and conversion of outstanding Harvard Bioscience equity awards
as a result of the Separation. The issuance of any shares of our stock would dilute the proportionate ownership and voting power
of existing security holders.
Provisions of Delaware law, of our amended and restated charter
and amended and restated bylaws may make a takeover more difficult, which could cause our stock price to decline.
Provisions in our amended and restated certificate of incorporation
and amended and restated bylaws and in the Delaware corporate law may make it difficult and expensive for a third party to pursue
a tender offer, change in control or takeover attempt, which is opposed by management and the Board of Directors. Public stockholders
who might desire to participate in such a transaction may not have an opportunity to do so. We have a staggered Board of Directors
that makes it difficult for stockholders to change the composition of the Board of Directors in any one year. Any removal of directors
will require a super-majority vote of the holders of at least 75% of the outstanding shares entitled to be cast on the election
of directors which may discourage a third party from making a tender offer or otherwise attempting to obtain control of us. These
anti-takeover provisions could substantially impede the ability of public stockholders to change our management and Board of Directors.
Such provisions may also limit the price that investors might be willing to pay for shares of our common stock in the future.
Any issuance of preferred stock in the future may dilute
the rights of our common stockholders.
Our Board of Directors has the authority to issue up to 2,000,000
shares of preferred stock and to determine the price, privileges and other terms of these shares. Our Board of Directors is empowered
to exercise this authority without any further approval of stockholders. The rights of the holders of common stock may be adversely
affected by the rights of future holders of preferred stock.
We have in the past issued, and we may at any time in the future
issue, additional shares of authorized preferred stock. For example, in our December 2017 private placement transaction, we authorized
12,000 shares of Series D convertible preferred stock, of which we issued 3,108 shares, all of which have been converted into shares
of common stock.
We do not intend to pay cash dividends on our common stock.
Currently, we do not anticipate paying any cash dividends to
holders of our common stock. As a result, capital appreciation, if any, of our common stock will be a stockholder’s sole
source of gain
The JOBS Act allows us to postpone the date by which we must
comply with certain laws and regulations and to reduce the amount of information provided in reports filed with the SEC. We cannot
be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive
to investors.
We are and we will remain an “emerging growth company”
until the earliest to occur of (i) the last day of the fiscal year during which our total annual revenues equal or exceed $1 billion
(subject to adjustment for inflation), (ii) the last day of the fiscal year following the fifth anniversary of the date of our
first sale of common equity securities pursuant to an effective registration statement, (iii) the date on which we have, during
the previous three-year period, issued more than $1 billion in non-convertible debt, or (iv) the date on which we are deemed a
“large accelerated filer” under the Securities and Exchange Act of 1934, as amended, or the Exchange Act. For so long
as we remain an “emerging growth company” as defined in the JOBS Act, we may take advantage of certain exemptions from
various reporting requirements that are applicable to other public companies that are not “emerging growth companies”
including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley
Act, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions
from the requirements of holding a non-binding advisory vote on executive compensation and stockholder approval of any golden parachute
payments not previously approved. We cannot predict if investors will find our common stock less attractive because we will rely
on some or all of these exemptions. If some investors find our common stock less attractive as a result, there may be a less active
trading market for our common stock and our stock price may be more volatile. If we avail ourselves of certain exemptions from
various reporting requirements, our reduced disclosure may make it more difficult for investors and securities analysts to evaluate
us to a level acceptable by them and may result in less investor confidence.
Our common stock has been delisted on the NASDAQ Capital
Market, which may negatively impact the trading price of our common stock and the levels of liquidity available to our stockholders.
Our common stock was suspended from trading on the NASDAQ
Capital Market, prior to the opening of the market on October 6, 2017 and began quotation on the OTCQB Venture Market on that
date, retaining the symbol “BSTG”. On December 7, 2017, the NASDAQ Capital Market filed a Form 25-NSE with the
SEC to complete the delisting process. The trading of our common stock on the OTCQB Venture Market rather than the
NASDAQ Capital Market may negatively impact the trading price of our common stock and the levels of liquidity available
to our stockholders.
Upon such delisting, our common stock became subject to the
regulations of the SEC relating to the market for penny stocks. A penny stock is any equity security not traded on a national securities
exchange that has a market price of less than $5.00 per share. The regulations applicable to penny stocks may severely affect the
market liquidity for our common stock and could limit the ability of shareholders to sell securities in the secondary market. Accordingly,
investors in our common stock may find it more difficult to dispose of or obtain accurate quotations as to the market value of
our common stock, and there can be no assurance that our common stock will continue to be eligible for trading or quotation on
the OTCQB Venture Market or any other alternative exchanges or markets.
The delisting of our common stock from the NASDAQ Capital Market
may adversely affect our ability to raise additional financing through public or private sales of equity securities, may significantly
affect the ability of investors to trade our securities, and may negatively affect the value and liquidity of our common stock.
Such delisting may also have other negative results, including the potential loss of confidence by employees, the loss of institutional
investor interest and fewer business development opportunities. Furthermore, because of the limited market and low volume of trading
in our common stock that could occur, the share price of our common stock could more likely be affected by broad market fluctuations,
general market conditions, fluctuations in our operating results, changes in the market’s perception of our business, and
announcements made by us, our competitors, parties with whom we have business relationships or third parties.