HARVARD APPARATUS REGENERATIVE TECHNOLOGY INC. Forward Looking Statements
This Quarterly Report on Form 10-Q contains statements that are not statements of historical fact and are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934 (the "Exchange Act"). The forward-looking statements are principally, but not exclusively, contained in "Item 2: Management's Discussion and Analysis of Financial Condition and Results of Operations." Forward-looking statements include, but are not limited to, statements about management's confidence or expectations and our plans, objectives, expectations and intentions that are not historical facts and the potential impact of COVID-19 on our business and operations. In some cases, you can identify forward-looking statements by terms such as "may," "will," "should," "could," "would," "expects," "plans," "anticipates," "believes," "goals," "sees," "estimates," "projects," "predicts," "intends," "think," "potential," "objectives," "optimistic," "strategy," and similar expressions intended to identify forward-looking statements. These statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Factors that may cause our actual results to differ materially from those in the forward-looking statements include our ability to access debt and equity markets and raise additional funds when needed; the success of our collaborations, clinical trials and pre-clinical development efforts and programs, which success may not be achieved on a timely basis or at all; our ability to obtain and maintain regulatory approval for our implant products, bioreactors, scaffolds and other devices we pursue, including for the esophagus or airway, which approvals may not be obtained on a timely basis or at all; the number of patients who can be treated with our products; the amount and timing of costs associated with our development of implant products, bioreactors, scaffolds and other devices; our failure to comply with regulations and any changes in regulations; unpredictable difficulties or delays in the development of new technology; our collaborators or other third parties we contract with, including with respect to conducting any clinical trial or pre-clinical development efforts, not devoting sufficient time and resources to successfully carry out their duties or meet expected deadlines; our ability to attract and retain qualified personnel and key employees and retain senior management; potential liability exposure with respect to our products; the availability and price of acceptable raw materials and components from third-party suppliers; difficulties in obtaining or retaining the management and other human resource competencies that we need to achieve our business objectives; increased competition in the field of regenerative medicine and bioengineering, and the financial resources of our competitors; our ability to obtain and maintain intellectual property protection for our device and product candidates; our inability to implement our growth strategy; the control our principal stockholders can exert based on holding a majority of voting power; plus factors described under the heading "Item 1A. Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2021 filed with theSecurities and Exchange Commission (the "SEC") onMarch 31, 2022 or described in our other public filings. Our results may also be affected by factors of which we are not currently aware. We may not update these forward-looking statements, even though our situation may change in the future, unless we have obligations under the federal securities laws to update and disclose material developments related to previously disclosed information.
Business Overview
We are a clinical-stage biotechnology company focused on the development of regenerative medicine treatments for disorders of the gastro-intestinal system and the airway that result from cancer, trauma or birth defects. Our technology is based on our proprietary cell-therapy platform that uses a patient's own stem cells to regenerate and restore function to damaged organs. We believe that our technology represents a next generation solution for restoring organ function because it allows the patient to regenerate their own organ, thus eliminating the need for human donor or animal transplants, the sacrificing of another of the patient's own organs or permanent artificial implants. We conducted the world's first successful regeneration of the esophagus in a cancer patient inAugust 2017 . This surgery was performed by Dr.Denis Wigle , Chair of Thoracic Surgery at theMayo Clinic in a patient with esophageal cancer. The results were published in theJournal of Thoracic Oncology Clinical and Research Reports inAugust 2021 . The procedure demonstrated that using theBiostage technology, we were able to successfully regenerate esophageal tissue, including the mucosal lining, to restore the integrity, continuity and functionality of the esophageal tube. This successful first-in-human experience, plus the research we have performed on 45 pigs, led the FDA to approve our 10-patient combined phase 1 and phase 2 clinical trial. This combination trial will measure both safety and efficacy in the patient population. 20
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We were incorporated and commenced operations onNovember 1, 2013 as a result of a spin-off from Harvard Bioscience, Inc., or Harvard Bioscience. On that date, we became an independent company that operates the regenerative medicine business previously owned by Harvard Bioscience. The spin-off was completed through the distribution of all the shares of common stock ofBiostage to Harvard Bioscience stockholders. We have also formed a subsidiary inHong Kong ,Harvard Apparatus Regenerative Technology Limited , as we continue to assess the market and regulatory approval pathway inChina as to our implant products. We are not certain at this time as to which market, includingU.S. orChina for example, may provide the most viable initial pathway for regulatory approval to a commercial product. This will depend on a number of factors, including the approval and development processes, related costs, ability to raise capital and the terms and conditions thereof, as well as the ongoing impact of the COVID-19 pandemic, among other factors. Any development and capital raising efforts inChina may include a joint venture in relation to ourHong Kong subsidiary, and would also involve a number of commercial variables, including rights and obligations pertaining to licensing, development, and financing, among others. Our failure to receive or obtain such clearances or approvals on a timely basis or at all, whether that be in theU.S. ,China or otherwise, would have an adverse effect on our results of operations. Since our incorporation, we have devoted substantially all of our resources to developing our programs, building our intellectual property portfolio, business planning, raising capital and providing general and administrative support for these operations. To date, we have financed our operations with proceeds from the sales of common stock and preferred stock. InDecember 2017 , we sold the inventory and rights to manufacture and sell research-only versions of our bioreactors to Harvard Bioscience. We did not recognize any revenues during the quarters endedSeptember 30, 2022 and 2021.
Our product candidates are currently in development and have not yet received regulatory approval for sale anywhere in the world.
Financial Condition and Need for Additional Funds
We expect to continue to incur operating losses and negative cash flows from operations for 2022 and in future years.
Operating Losses and Cash Requirements
We have incurred substantial operating losses since our inception, and as ofSeptember 30, 2022 had an accumulated deficit of approximately$81.5 million and will require additional financing to fund future operations. We expect that our operating cash on-hand as ofSeptember 30, 2022 of approximately$3.0 million will enable us to fund our operating expenses and capital expenditure requirements into the second quarter of 2023. We expect to continue to incur operating losses and negative cash flows from operations for 2022 and in future years. Therefore, as disclosed in Note 1 to our Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q, these conditions raise substantial doubt about our ability to continue as a going concern. We will need to raise additional funds to fund our operations. In the event we do not raise additional capital from outside sources prior to the end of June of 2023, we may be forced to curtail or cease our operations. Cash requirements and cash resource needs will vary significantly depending upon the timing of the financial and other resource needs that will be required to complete ongoing development, pre-clinical and clinical testing of product candidates, as well as regulatory efforts and collaborative arrangements necessary for our product candidates that are currently under development. We are currently seeking and will continue to seek financings from other existing and/or new investors to raise necessary funds through a combination of public or private equity offerings. We may also pursue debt financings, other financing mechanisms, research grants, or strategic collaborations and licensing arrangements. We may not be able to obtain additional financing on favorable terms, if at all. Our operations will be adversely affected if we are unable to raise or obtain needed funding and may materially affect our ability to continue as a going concern. Our condensed consolidated financial statements have been prepared assuming that we will continue as a going concern and therefore, the condensed consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amount and classifications of liabilities that may result from the outcome of this uncertainty. 21 Table of Contents
Small Business Innovation Research Grant
OnMarch 28, 2018 , we were awarded aFast-Track Small Business Innovation Research (SBIR) grant by theEunice Kennedy National Institute of Child Health and Human Development (NICHD) to support testing of pediatricBiostage Esophageal Implants. For the three and nine-month periods endedSeptember 30, 2021 , the Company recognized approximately$0 and$165,000 , respectively, of grant income from the SBIR grant. The SBIR grant expired effectiveSeptember 30, 2021 . Components of Operating Loss
Research and development expense. Research and development expense consists of salaries and related expenses, including share-based compensation, for personnel and contracted consultants and various materials and other costs to develop our new products, primarily: synthetic scaffolds, including investigation and development of materials and investigation and optimization of cellularization, autoseeders, and 3D bioreactors, as well as studies of cells and cell behavior. Other research and development expenses include the costs of outside service providers and material costs for prototype and test units and outside laboratories and testing facilities performing cell growth and materials experiments, as well as the costs of all other preclinical research and testing including animal studies and expenses related to potential patents. We expense research and development costs as incurred. General and administrative expense. General and administrative expense consists primarily of salaries and other related expenses, including share-based compensation, for personnel in executive, accounting, information technology and human resources roles. Other costs include professional fees for legal and accounting services, insurance, investor relations and facility costs. Forgiveness of notes payable. OnMay 23, 2021 , we were notified by our lender that provided our related Loan that the SBA determined that our application for loan forgiveness was approved, and the SBA remitted the forgiveness amount to our lender. We have accounted for this loan forgiveness as an extinguishment during the nine months endedSeptember 30, 2021 . Sublease income. OnJanuary 5, 2022 , the Company executed a four-month sublease agreement for certain laboratory and office space at itsHolliston, Massachusetts facility. The Company further extended the sublease agreement to a month-to-month basis untilAugust 31, 2022 when the other party vacated the premises.. For the three and nine months endedSeptember 30, 2022 , the Company recorded sublease income of approximately$26,000 and$87,000 , respectively, relating to this agreement. Grant income. Grant income reflects income earned under the SBIR grant. Grant income was recognized based on timing of when qualified research and development costs are incurred. Other (expense) income, net. Other (expense) income, net, consists primarily of the changes in fair value of our warrant liability from the change in the fair value of common stock warrants classified as liability awards during the three and nine months endedSeptember 30, 2021 . We previously used the Black-Scholes pricing model to value the related warrant liability. In February of 2022, the underlying common stock warrants expired unexercised.
Critical Accounting Policies and Estimates
Our management's discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with accounting principles generally accepted inthe United States , or. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, as well as the expenses during the reporting periods. We evaluate these estimates and judgments on an ongoing basis. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Our actual results may differ materially from these estimates under different assumptions or conditions. While our significant accounting policies are discussed in more detail in Note 2 to our Condensed Consolidated Financial Statements appearing elsewhere in this Quarterly Report on Form 10-Q, we believe that the following accounting policies are the most critical for fully understanding and evaluating our financial condition and results of operations. 22 Table of Contents Share-based Compensation We account for our share-based compensation in accordance with the fair value recognition provisions of current authoritative guidance. Share-based awards, including stock options, are measured at fair value as of the grant date and recognized as expense over the requisite service period (generally the vesting period), which we have elected to amortize on a straight-line basis. Expense on share-based awards for which vesting is performance or milestone based is recognized on a straight-line basis from the date when we determine the achievement of the milestone is probable to the vesting/milestone achievement date. Since share-based compensation expense is based on awards ultimately expected to vest, it has been reduced by an estimate for future forfeitures. We estimate forfeitures at the time of grant and revise our estimate, if necessary, in subsequent periods. We estimate the fair value of options granted using the Black-Scholes option valuation model. Significant judgment is required in determining the proper assumptions used in this model. The assumptions used include the risk-free interest rate, expected term, expected volatility, and expected dividend yield. We base our assumptions on historical data when available or, when not available, on a peer group of companies. However, these assumptions consist of estimates of future market conditions, which are inherently uncertain and subject to our judgment, and therefore any changes in assumptions could significantly impact the future grant date fair value of share-based awards.
Warrant Liability
Most of the warrants to purchase shares of our common stock have been classified on our condensed consolidated balance sheets as equity. We classify warrants as a liability in our condensed consolidated balance sheets if the warrant is a free-standing financial instrument that may require us to transfer cash consideration upon exercise and that cash transfer event would be out of our control. Such a "liability warrant" is initially recorded at fair value on the date of grant using the Black-Scholes model, net of issuance costs, and it is subsequently re-measured to fair value at each subsequent balance sheet date. Changes in fair value of the warrants is recognized as a component of other income (expense) in the condensed consolidated statements of operations. The warrants classified as a liability expired unexercised during the nine months endedSeptember 30, 2022 and the remaining liability on the expiration date of approximately$2,000 was recognized as other income.
Results of Operations
The following table summarizes the results of our operations for the three and
nine-months ended
Three months ended September 30, Change 2022 vs. 2021 For the Nine Months Ended September 30, Change 2022 vs. 2021
2022 2021 Change % 2022 2021 Change %
Operating expenses
Research and
development $ 369 $ 250 $ 119 48 % $ 998 $ 1,023 $ (25) (2) %
General and
administrative 711 572 139 24 % 3,662 1,712 1,950 114 %
Total operating
expenses 1,080 822 258 31 % 4,660 2,735 1,925 70 %
Other income (expense)
Forgiveness of notes
payable - - - nm % - 408 (408) (100) %
Sublease income 26 - 26 nm % 87 - 87 100 %
Grant income - - - nm % - 165 (165) (100) %
Other (expense) income,
net (2) (27) 25 (93) % (5) 57 (62) (109) %
Total other income
(expense), net 24 (27) 51 (189) % 82 630 (548) (87) %
Net loss $ (1,056) $ (849) $ (207) 24 % $ (4,578) $ (2,105) $ (2,473) 117 %
nm = not meaningful
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Comparison of the three months ended
Research and Development Expense
Research and development expense increased approximately$0.1 million , or 48%, to approximately$0.4 million for the three months endedSeptember 30, 2022 as compared to approximately$0.3 million for the three months endedSeptember 30, 2021 . This increase was primarily due to legal costs incurred for a patent application and consulting fees.
General and Administrative Expense
General and administrative expense increased approximately$0.1 million , or 24%, to approximately$0.7 million for the three months endedSeptember 30, 2022 as compared to approximately$0.6 million for the three months endedSeptember 30, 2021 . This increase was primarily due to higher share-based compensation expense and increased headcount related costs of approximately$0.1 million and an increase of approximately$0.1 million for outside consulting fees for supporting our ongoing public company requirements and special meeting of stockholders offset by the reduced legal and related costs of approximately$0.1 million relating to the completion of litigation for a wrongful death complaint and related matters more fully described in Note 8 to our condensed consolidated financial statements. Sublease income
OnJanuary 5, 2022 , we executed a four-month sublease agreement for certain laboratory and office space at ourHolliston, Massachusetts facility. The Company further extended the sublease agreement on a month-to-month basis which is ongoing as ofSeptember 30, 2022 . For the three months endedSeptember 30, 2022 , we recorded sublease income of approximately$26,000 relating to this agreement.
Grant income
For the three months endedSeptember 30, 2022 and 2021, we recorded grant income of approximately$0 in both periods for qualified expenditures under our SBIR grant which expired effectiveSeptember 30, 2021 .
Other (expense) income, net
During the three months endedSeptember 30, 2021 , the change in fair value of our warrant liability resulted in other expense of approximately$27,000 due primarily to an increase in the stock price of the underlying common shares.
During the three months ended
Comparison of the nine months ended
Research and Development Expense. Research and development expense decreased approximately$25,000 , or 2%, to$1 million for the nine months endedSeptember 30, 2022 as compared to approximately$1 million for the nine months endedSeptember 30, 2021 . This decrease was primarily due to approximately$0.1 million decrease in outsourced study costs offset by an increase of$0.1 million relating to laboratory operations. General and Administrative Expense. General and administrative expense increased approximately$2 million , or 114%, to approximately$3.7 million for the nine months endedSeptember 30, 2022 compared to approximately$1.7 million for the nine months endedSeptember 30, 2021 . This increase was due to primarily to an increase in legal and related costs of approximately$1.4 million relating to the contingency matter for our litigation that has been settled for a wrongful death compliant and related matters more fully described in Note 8 to our condensed consolidated financial statements, an increase of approximately$0.4 million for higher stock-based compensation expenses and increased headcount related costs and an increase of approximately$0.2 million for outside consulting fees for supporting our ongoing public company requirements. Forgiveness of notes payable. OnMay 23, 2021 , we were notified by the Lender that provided our PPP Loan that theSmall Business Administration determined that our application for PPP loan forgiveness was approved, and the SBA remitted the forgiven amount to 24 Table of Contents
the Lender. As a result, we recorded a gain from forgiveness of our notes
payable of approximately
Sublease income. OnJanuary 5, 2022 , we executed a four-month sublease agreement for certain laboratory space at ourHolliston, Massachusetts facility. For the nine months endedSeptember 30, 2022 , we recorded sublease income of approximately$0.1 million relating to this agreement.
Grant income
For the nine months endedSeptember 30, 2022 and 2021, we recorded grant income of approximately$0 and$0.2 million , respectively, for qualified expenditures under our SBIR grant which expired effectiveSeptember 30, 2021 .
Other (expense) income, net
The warrants classified as a liability expired unexercised during the nine months endedSeptember 30, 2022 and the remaining liability on the expiration date of approximately$2,000 was recognized as other income. During the nine months endedSeptember 30, 2021 , the change in fair value of our warrant liability resulted in other expense of approximately$14,000 due primarily to a higher stock price of the underlying common shares. During the nine months endedSeptember 30, 2022 , we recorded interest expense of approximately$7,000 for on insurance installment payments. During the nine months endedSeptember 30, 2021 , we received a refund payment of approximately$0.1 million for certain withholding taxes paid in previous years to the German tax authorities which were remitted on to us on behalf ofHarvard Apparatus Regenerative Technology GmbH , our German subsidiary.
Liquidity and Capital Resources
Sources of liquidity. We have incurred operating losses since inception, and as ofSeptember 30, 2022 , we had an accumulated deficit of approximately$81.5 million . We are currently investing significant resources in the development and commercialization of our product candidates for use by clinicians and researchers in the fields of regenerative medicine and bioengineering. As a result, we expect to incur operating losses and negative operating cash flows for the foreseeable future.
The following table sets forth the primary uses of cash for the nine months
ended
Nine Months Ended September 30,
2022 2021
Net cash used in operating activities
(8) $ -
Net cash provided by financing activities $ 5,060 $
2,596
Comparison of Nine months Ended
Operating activities. Net cash used in operating activities of approximately$3.4 million for the nine months endedSeptember 30, 2022 was due primarily to our net loss of approximately$4.6 million and an increase of$0.3 million for financing costs offset by adjustments for non-cash items of approximately$0.8 million due to non-cash expenses for share-based compensation and depreciation, and an approximately$.7 million increase to cash from changes in working capital due to the timing of payments for accounts payable, accrued expenses and prepaid expenses. Net cash used in operating activities of approximately$1.6 million for the nine months endedSeptember 30, 2021 was due primarily to our net loss of approximately$2.1 million and adjustments for non-cash items of approximately$0.1 million due to the add-back for a gain from forgiveness of our notes payable, offset, in part, by non-cash expenses including share-based compensation, depreciation and the change in fair value of our warrant liability. These cash outflows were offset, in part, by an approximately$0.4 million increase to cash from changes in working capital due to the timing of payments for prepaid expenses and accounts payable.
Investing activities. Net cashed used in investing activities for the nine
months ended
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Financing activities. Net cash generated from financing activities during the nine months endedSeptember 30, 2022 of approximately$5.1 million consisted of net proceeds received from a private placement transaction that resulted in the issuance of 854,771 shares of our common stock at a purchase price of$5.92 per share and warrants to purchase 427,390 shares of common stock at an exercise price of$8.88 per share to a group of investors. Net cash generated from financing activities during the nine months endedSeptember 30, 2021 of approximately$2.6 million consisted of net proceeds received from private placement transactions that resulted in the issuance of 1,300,000 shares of our common stock at a purchase price of$2.00 per share and warrants to purchase 150,000 shares of common stock at an exercise price of$2.00 per share to a group of investors.
Off-Balance Sheet Arrangements
We do not have any material off-balance sheet arrangements as of
Other Information
None.
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