Harvard Apparatus Regenerative Technology Inc

1. Organization

Overview

Harvard Apparatus Regenerative Technology, Inc. (Harvard Apparatus Regenerative Technology or the Company) is a biotechnology company with a mission to cure patients of cancers, injuries, and birth defects of the gastro-intestinal tract and the airways. The Company believes its technology is likely to be used to treat esophageal cancer, esophageal injuries, and birth defects in the esophagus. The Company believes additional product candidates in our development pipeline may treat intestinal cancer and colon cancer. Since inception, the Company has devoted substantially all of its efforts to business planning, research and development, recruiting management and technical staff, and acquiring operating assets.

Longevity Products

In the second quarter of 2023, the Company’s subsidiary in Hong Kong, Harvard Apparatus Regenerative Technology Limited, or Longevity Products, started focusing on sales of longevity products.

Longevity Products plans to include a broad range of products focused on personal healthcare including longevity dietary supplements. The Company currently sells longevity supplements through Longevity Products. These products are commercially marketed to the general public and initially targeted at consumers in the Great China Region through eCommerce (online sales).

Going Concern

The Company has incurred substantial operating losses since its inception, and as of June 30, 2024, had an accumulated deficit of approximately $96.5 million and will require additional financing to fund future operations. The Company expects that its operating cash on-hand as of June 30, 2024 of approximately $0.1 million and equity financing of $0.4 million in gross proceeds received subsequent to June 30, 2024 will enable it to fund its operating expenses and capital expenditure requirements into the third quarter of 2024. Therefore, these conditions raise substantial doubt about the Company’s ability to continue as a going concern.

The Company will need to raise additional capital to fund its current operations. In the event the Company is unable to raise additional capital from outside sources during the third quarter of 2024, it may be forced to curtail or cease its operations.

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

The Company’s operations will be adversely affected if it is unable to raise or obtain needed funding and may materially affect the Company’s ability to continue as a going concern. The accompanying unaudited condensed consolidated financial statements have been prepared assuming that the Company will continue as a going concern and therefore, the unaudited 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.

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

Summary of Significant Accounting Policies

The accounting policies underlying the accompanying unaudited condensed consolidated financial statements are those set forth in Note 2 to the consolidated financial statements for the year ended December 31, 2023 included in the Company’s Annual Report on Form 10-K.

Prior Period Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation. “Selling and marketing” operating expenses was reclassified from “Selling, general and administrative” operating expenses on our unaudited condensed consolidated financial statements.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of Harvard Apparatus Regenerative Technology and its subsidiaries, Harvard Apparatus Regenerative Technology Limited (Hong Kong), Harvard Apparatus Regenerative Technology (Hangzhou) Limited (China), and Harvard Apparatus Regenerative Technology GmbH (Germany). All intercompany balances and transactions have been eliminated in consolidation.

Basis of Presentation

The unaudited condensed consolidated financial statements reflect the Company’s financial position, results of operations and comprehensive loss and cash flows in conformity with accounting principles generally accepted in the United States, or U.S. GAAP. These unaudited consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2023.

Use of Estimates

The process of preparing condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. Such estimates include, but are not limited to, share-based compensation, valuation of warrant liability, accrued expenses and the valuation allowance for deferred income taxes. Actual results could differ from those estimates.

Revenue

We recognize revenue in accordance with Financial Accounting Standards Board (FASB)ASC 606, Revenue from Contracts with Customers. We offer consumer products primarily through a third-party online store. Revenue is recognized at a point in time when control of the goods is transferred to the customer, which generally occurs upon the delivery to the customer. For any company direct sales to customers, revenue is recognized at a point in time upon shipment of product or hand-delivery to customer. Revenue also excludes any amounts collected on behalf of third parties, including sales and indirect taxes.

We identify a performance obligation as distinct if both the following criteria are true: the customer can benefit from the good or service either on its own or together with other resources that are readily available to the customer and the entity’s promise to transfer the good or service to the customer is separately identifiable from other promises in the contract. Determining the standalone selling price (“SSP”) and allocation of consideration from a contract to the individual performance obligations, and the appropriate timing of revenue recognition, is the result of significant qualitative and quantitative judgments. Management considers a variety of factors such as historical sales, usage rates, costs, and expected margin, which may vary over time depending upon the unique facts and circumstances related to each performance obligation in making these estimates. While changes in the allocation of the SSP between performance obligations will not affect the amount of total revenue recognized for a particular contract, any material changes could impact the timing of revenue recognition, which would have a material effect on our financial position and result of operations. This is because the contract consideration is allocated to each performance obligation, delivered or undelivered, at the inception of the contract based on the SSP of each distinct performance obligation.

Cost of sales primarily consists of the purchase price of consumer products, taxes, inbound and outbound shipping costs. Shipping costs to receive products from our suppliers are recognized as cost of sales when incurred. E-commerce processing and related transaction costs, including those associated with seller transactions, are classified in sales and marketing on our condensed consolidated statements of operations and comprehensive loss.

Research and Development

Research and development costs are expensed as incurred.

Sales and Marketing

Sales and marketing costs include advertising and payroll and related expenses for personnel engaged in marketing and selling activities.

General and Administrative

General and administrative expenses primarily consist of costs for corporate functions, including payroll and related expenses; facilities and equipment expenses, such as depreciation and amortization expense and rent; and professional fees.

Segment Information

The Company manages its operations astwo separate operating segments for the purposes of assessing performance and making operating decisions. The Company has one operating unit focused on the development and commercialization of therapies to cure patients of cancers, injuries, and birth defects of the gastro-intestinal tract and the airways. The other operating unit is focused on personal healthcare through longevity dietary supplements. We have determined that our chief executive officer is the chief operating decision maker (“CODM”). The CODM reviews financial information presented by operating unit. Resource allocation decisions are made by the CODM based on operating unit results.

Cash Concentrations

The Company maintains its cash balances with a financial institution in federally insured accounts and may periodically have cash balances in excess of insurance limits. The Company maintains its accounts with financial institutions with a high credit rating. The Company has not experienced any losses to date and believes that it is not exposed to any significant credit risk on cash.

Cash and Cash Equivalents

The Company considers all highly liquid investments with a maturity of three months or less at the date of purchase to be cash equivalents. The Company currently invests available cash in money market funds.

Accounts Receivable

Allowances for credit losses are provided for estimated amounts of accounts receivable which may not be collected. At June 30, 2024 and December 31, 2023, we determined that no allowance for credit losses against accounts receivable was necessary.

Inventory

Inventory, consisting of products available for sale, are primarily accounted for using the first-in, first-out method, and are valued at the lower of cost and net realizable value. This valuation requires us to make judgments, based on currently available information, about the likely method of disposition, such as through sales to individual customers, returns to product vendors, or liquidations, and expected recoverable values of each disposition category.

We maintain ownership of our inventory at the third-party warehouse, regardless of whether fulfillment is provided by us or the third-party e-commerce seller, and therefore these products are included in our inventory.

Deferred Financing Costs

We capitalized costs relating to a registered offering that we postponed in fiscal year 2023 but expected to resume in the near future. The costs include payments made to attorneys, accountants, regulators and consultants. We have changed our outlook and do not expect to complete the registered offering in fiscal year 2024, therefore, the deferred financing costs were expensed to general and administrative expenses on the unaudited condensed consolidated statements of operations and comprehensive loss for the quarter ended June 30, 2024.

Long-term Prepaid Contracts

We have contracted with partners relating to our clinical trial activities. Upon execution of the contracts, we made initial payments of $1.2 million as deposits recorded as long-term assets and will be applied against final invoices which are more than a year away. The deposits will be recorded as expense when the clinical trial is substantially completed. Costs for the clinical trial activities throughout our clinical trial under these contracts are recognized as expense and payable based on costs incurred. Our clinical trial partner applied $0.2 million of the $1.2 million deposits against outstanding invoices in July 2024 so we reclassified the $0.2 million as current assets as of June 30, 2024.

Property, Plant and Equipment

Property, plant and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets as follows:

Maintenance and repairs are charged to expense as incurred, while any additions or improvements are capitalized.

Foreign Currency

Assets and liabilities of non-U.S. operations where the functional currency is other than the U.S. dollar are translated from the functional currency into U.S. dollars at year end exchange rates, and revenues and expenses are translated at average rates prevailing during the year. Resulting translation adjustments are accumulated as part of accumulated other comprehensive loss. Transaction gains or losses are recognized in income or loss in the period in which they occur.

Net Loss Per Share

Basic net loss per share is calculated by dividing net loss applicable to common stockholders by the weighted-average number of shares outstanding during the period, without consideration for common stock equivalents. Diluted net loss per share is calculated by adjusting the weighted-average number of shares outstanding for the dilutive effect of common stock equivalents outstanding for the period, determined using the if-converted method. For purposes of the diluted net loss per share calculation, warrants to purchase common stock and stock options are considered to be common stock equivalents, but have been excluded from the calculation of diluted net loss per share, as their effect would be anti-dilutive for all periods presented. Therefore, basic and diluted net loss per share applicable to common stockholders were the same for all periods presented.

Unaudited Interim Financial Information

The accompanying interim condensed consolidated balance sheet as of June 30, 2024, condensed consolidated interim statements of operations and comprehensive loss and condensed consolidated statements of stockholders’ equity (deficit) for the three and six months ended June 30, 2024 and 2023, and cash flows for the six months ended June 30, 2024 and 2023 are unaudited. The interim unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP on the same basis as the annual audited consolidated financial statements and, in the opinion of management, reflect all adjustments necessary for a fair statement of the Company’s financial position as of June 30, 2024, its condensed consolidated results of operations and stockholders’ equity for the three and six months ended June 30, 2024 and 2023, and cash flows for the six months ended June 30, 2024 and 2023. The financial data and other information disclosed in these notes related to the three and six months ended June 30, 2024 and 2023 are unaudited. The results for the three and six months ended June 30, 2024 are not necessarily indicative of results to be expected for the year ending December 31, 2024, any other interim periods or any future year or period.

Recently Adopted Accounting Pronouncements

Accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not expected to have a material impact on the Company’s condensed consolidated financial statements upon adoption.

In August 2020, the FASB issued Accounting Standards Update (ASU) No. 2020-06,Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, as part of its overall simplification initiative to reduce costs and complexity of applying accounting standards while maintaining or improving the usefulness of the information provided to users of financial statements. Among other changes, the new guidance removes the beneficial conversion separation model for convertible debt. As a result, after adopting the guidance, entities will no longer account for beneficial conversion features in equity. The guidance is effective for public business entities, other than small reporting company’s financial statements starting January 1, 2022, with early adoption permitted. The Company is a small reporting company and adopted the new guidance on January 1, 2024, and the adoption of ASU 2020-06 did not have a material impact on its consolidated financial statements.

3. Fair Value Measurements

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

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

The Company had no assets or liabilities classified as Level 2 or Level 3 as of June 30, 2024 and December 31, 2023. The carrying value of financial instruments (consisting of cash, accounts payable, accrued compensation and accrued expenses) is considered to be representative of their respective fair values due to the short-term nature of those instruments. For the six months ended June 30, 2023, the Company had short-term investments generating investment income. Investment income is included as other income. Investment income for the three months ended June 30, 2024 and June 30, 2023 consists primarily of interest earned of $0 and $41,000, respectively. Investment income for the six months ended June 30, 2024 and June 30, 2023 consists of interest earned of $0 and $41,000, respectively.

4. Accrued and Other Current Liabilities

Accrued and other current liabilities consist of the following:

5. Capital Stock

Preferred Stock

The Company has authorized a total of 2,000,000 shares of preferred stock, par value $0.01 per share, none of which were outstanding at June 30, 2024 and December 31, 2023. The Company’s Board of Directors has the authority to issue preferred stock and to determine the rights, preferences, privileges, and restrictions, including voting rights.

Common Stock

On April 15, 2024, the Company entered into securities purchase agreements(each an “April Purchase Agreement,” collectively the “April Purchase Agreements”) with certain investors each named therein (the “Investor,” collectively the “Investors”) pursuant to which each of the Investors agreed to purchase in a private placement an aggregate of 367,767 shares of common stock for the aggregate gross proceeds of approximately $1.5 million at a purchase price per unit of $4.03 (the “2024 Private Placement”).

Pursuant to the April Purchase Agreements, if the Company closes an equity financing in a registered public offering of its securities on or before six (6) months from the date of the April Purchase Agreements, and the public offering price per share was less than the per share purchase price of the 2024 Private Placement, then the Company shall promptly following such closing issue to each Investor additional shares of common stock in an amount equal to the difference between (i) the shares issued in the 2024 Private Placement, and (ii) result of dividing (a) the subscription amount for each April Purchase Agreement, by (b) the public offering per share.

On April 12, 2023 and on March 31, 2023, the Company entered into Securities Purchase Agreements, each a Purchase Agreement, with new and existing investors, the Investors, pursuant to which the Investors agreed to purchase in a private placement an aggregate of 1,000,967 shares of common stock for the aggregate purchase price of approximately $6 million with a purchase price per unit of $6.00 (the “2023 Private Placement”).

On January 18, 2023, Harvard Bioscience converted 200 Series E Preferred Shares with accrued dividends of $9,545 into 31,933 shares of common stock.

In connection with the 2023 Private Placement, as of April 12, 2023, the Company had received $6.0 million in aggregate proceeds in such private placement. The 2023 Private Placement resulted in gross proceeds of at least $4,000,000 which triggered the mandatory conversion of all the Company’s outstanding Series E Preferred Stock and related accrued dividends into shares of common stock at a conversion price of $6.00 per share. The conversion resulted in 674,693 shares of common stock being issued to the holder of the Series E Preferred Stock. Following such conversion, there areno shares of Series E Preferred Stock outstanding.

Warrants

The Company had 1,113,622 warrants to purchase common stock outstanding as of June 30, 2024 with a weighted-average exercise price of $4.69.

6. Share-Based Compensation

Harvard Apparatus Regenerative Technology Amended and Restated Equity Incentive Plan

The Company maintains the Amended and Restated Equity Incentive Plan, or the Plan, for the benefit of certain officers, employees, non-employee directors, and other key persons (including consultants and advisory board members). All options and awards granted under the Plan consist of the Company’s shares of common stock. The Company’s policy is to issue stock available from its registered but unissued stock pool through its transfer agent to satisfy stock option exercises and the vesting of restricted stock units. The vesting period for awards is generally four years and the contractual life isten years. Canceled and forfeited options and awards are available to be reissued under the Plan.

As of June 30, 2024, the Company’s Plan has 9,098,000 authorized shares to be issued under the Plan. There were 4,672,994 shares available for issuance as of June 30, 2024.

The following table summarizes information concerning options outstanding and exercisable:

The Company’s outstanding stock options include 993,835 performance-based awards that have vesting provisions subject to the achievement of certain business milestones. Total unrecognized compensation expense for the performance-based awards is approximately $3.4 million. The Company recognized approximately $0.04 million and $0.08 million in stock-based compensation during the three and six months ended June 30, 2024 given that some milestone achievements for these awards have been deemed probable for accounting purposes. No expense had been recognized for these awards during the three and six months ended June 30, 2023 given that the milestone achievements for these awards were not probable at the time for accounting purposes.

Aggregate intrinsic value for outstanding options as of June 30, 2024 was approximately $1.2 million and calculated as the difference between the Company’s closing stock price of $2.92 per share as of June 28, 2024 and the weighted average exercise price of $4.56. As of June 30, 2024, unrecognized compensation cost related to unvested non-performance-based awards amounted to $3.2 million, which will be recognized over a weighted-average period of 1.7 years.

The Company uses the Black-Scholes option pricing model to value its stock options. The weighted average assumptions for valuing options granted during the six months ended June 30, 2024 and 2023 were as follows:

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

7. Commitments and Contingencies

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

On March 25, 2024, the Company entered into an operating lease agreement for office space in Beijing, China for the period from April 1, 2024 through April 10, 2026 (the “Office Lease”). Our total Office Lease obligation is $81,352, consisting of minimum annual rental obligations of $30,507 for fiscal year 2024, $40,676 for fiscal year 2025 and $10,169 for fiscal year 2026.

We currently have a co-development initiative with Yale University and the McGowan Institute for Regenerative Medicine at the University of Pittsburgh. We owe advance payments of approximately $100,000 and $61,000, respectively at June 30, 2024. We plan to make these advance payments in the third quarter of 2024. The universities started preparatory work in 2023 with substantial work being performed in 2024. Either party can terminate the contract with reasonable notice and any incurred costs will be reimbursed by us to the universities.

8. Convertible Debt – Related Party

Convertible Debt

On February 1, 2024, the Company entered into a loan arrangement with Junli He, the Chairman and Chief Executive Officer of the Company (the “Lender”), pursuant to which the Lender loaned the Company an aggregate amount of $500,000 as evidenced by a Bridge Note executed by the Company in favor of, and accepted by, the Lender (the “Bridge Note”). As of June 30, 2024, the Company accrued $16,222 of interest payable on the Bridge Note. The Company evaluated the convertible note for derivative liability treatment and has determined that the components of the Bridge Note did not qualify for derivative accounting treatment as of June 30, 2024.

The Bridge Note accrues interest at an annual fixed rate of 8%, and the principal amount thereof will be due and payable in full, together with all accrued and unpaid interest thereon, on the earlier to occur of a) the closing date (or later date of capital being provided pertaining to such continued offering that the following threshold is tripped) of the Company’s next capital raise that includes gross proceeds of at least $5,000,000 or b) February 1, 2025. The Bridge Note provides for optional conversion at the discretion of the Lender, contains covenants, and provides for certain events of default including if the Company fails to pay when due any amount owed thereunder, fails to comply with any agreement, covenant, condition, provision or term contained therein and other customary events of default.

9. Leases

The Company leases laboratory and office space and certain equipment with a remaining term of 1 year.

The laboratory and office space arrangement in Holliston, MA is under a sublease that was renewed in December of 2022. The sublease is currently on a month-to-month basis until August 31, 2024. The Company is currently negotiating with the landlord for a three-year lease starting September 1, 2024.

On March 25, 2024, the Company entered into an operating lease agreement for office space in Beijing, China for the period from April 1, 2024 through April 10, 2026. We recorded approximately $75,000 as a right-of-use asset and a corresponding operating lease liability on the Company’s unaudited condensed consolidated balance sheets upon the accounting commencement date in April 1, 2024. The lease liability was measured at the accounting commencement date utilizing a 8% discount rate. The right-of-use asset had a balance of $65,000 at June 30, 2024. The operating lease obligations totaled $65,000 at June 30, 2024 of which $40,000 is included under current liabilities and $25,000 is included under non-current liabilities.

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

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

Cash paid included in the computation of the operating lease assets and lease liability during the three and six months ended June 30, 2024 amounted to approximately $28,000 and $55,000, respectively. Cash paid included in the computation of the operating lease assets and lease liability during the three and six months ended June 30, 2023 amounted to approximately $28,000 and $57,000, respectively.

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

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

10. Net Loss Per Share

The following potential common shares were excluded from the calculation of diluted net loss per share attributable to common stockholders for the six months ended June 30, 2024 and 2023 because including them would have had an anti-dilutive effect:

11. Income Taxes

The Company did not record a federal or state income tax provision or benefit for the six months ended June 30, 2024 and 2023, respectively, due to the expected loss before income taxes to be incurred for the years ended December 31, 2024 and 2023, as well as the Company’s continued maintenance of a full valuation allowance against its net deferred tax assets.

12. Segments

The Company’s CODM is its Chief Executive Officer. The Company’s CODM evaluates the operating results of the Company’s reportable segments based on revenues and net income (loss).

The Company hastwo operating and reportable segments: i) Regenerative Biotech focused on the development of regenerative medicine treatments with operations currently in the United States and ii) Longevity Products relating to longevity products with operations currently in Asia. The following table presents the Company’s reportable segment results for the six months ended June 30, 2024:

13. Subsequent Events

On various dates between July 8, 2024 and ending on July 31, 2024, common stock warrants were exercised for an aggregate issuance of 215,000 shares of the Company’s Common Stock at an exercise price of $2.00 per share, resulting in gross proceeds to the Company of $430,000.