As previously disclosed by Biostage,
Inc. (the “Company”, “we,” “our,” and “us”) in its periodic filings with the Securities
and Exchange Commission, on April 14, 2017, representatives for the estate of an individual plaintiff filed a wrongful death complaint
with the Suffolk Superior Court, in the County of Suffolk, Massachusetts, against the Company and other defendants, including Harvard
Bioscience, Inc. (or HBIO), the former parent of the Company that spun off the Company in 2013, as well as another third party.
The complaint seeks payment for an unspecified amount of damages and alleges that the plaintiff sustained terminal injuries allegedly
caused by products provided by certain of the named defendants and utilized in connection with surgeries performed by third parties
in Europe in 2012 and 2013.
On April 27, 2022, the Company and HBIO executed
a settlement with the plaintiffs (the “Settlement”), which resolves all claims relating to the litigation.
The Settlement will result in the dismissal with
prejudice of the wrongful death claim, and neither the Company nor HBIO admit any fault or liability in connection with the claim. The
Settlement also resolves any and all claims by and between the parties and the Company’s products liability insurance carriers,
which will result in the dismissal with prejudice of all claims asserted by or against those carriers, the Company and HBIO.
In relation to the litigation, Settlement and
related legal expenses, the Company estimates that it has or will incur approximately $6.0 million of costs, of which, approximately $5.7
million remain unpaid. The Company is required to either pay such costs directly or indemnify HBIO as to such amounts it incurs. Of such
amounts, Company anticipates that HBIO will pay an aggregate amount of $4.0 million by the end of the second quarter of 2022. With
respect to these indemnification obligations of the Company to HBIO pertaining to the costs described above, the Company and HBIO have
entered into a Preferred Issuance Agreement dated as of April 27, 2022 (or the PIA). In connection with the PIA, the Company and HBIO
have agreed that once HBIO has paid at least $4.0 million in such costs, to satisfy the Company’s indemnification obligations with
respect thereto, in lieu of paying cash, the Company will issue senior convertible preferred stock to HBIO that will contain terms as
described in the PIA, including the term sheet attached thereto. In addition, as described above, the Company will continue to pay, or
otherwise indemnify HBIO as to its payment thereof, the remaining legal expenses incurred in connection with the litigation, Settlement
and related matters. Assuming the issuance of such preferred stock, the Company currently estimates that the remaining aggregate amount
of such costs it will be obligated to pay will be approximately $1.7 million.
The issuance of such
preferred stock, and the terms thereof, are subject to the negotiation and execution of definitive documents relating thereto, but in
accordance with the PIA, such preferred stock will automatically convert into shares of common stock of the Company upon the earlier to
occur of the Company’s offering that includes common stock (whether private placement or public offering) that coincides with its
uplisting onto NASDAQ, its public offering that includes common stock following the issuance of the preferred stock, or its initial private
placement that includes common stock following the issuance of the preferred stock in the event the gross proceeds of such private placement
are $4,000,000 or more. In addition, in accordance with the PIA, such preferred stock will also be subject to optional conversion by HBIO
at any time and prior to any such automatic or optional conversion, will have dividends paid quarterly in additional shares of preferred
stock at a rate of 8% per annum. The preferred stock will also have customary liquidation preferences, and certain limited consent and
piggyback registration rights. The PIA, including the related term sheet, is filed as Exhibit 10.1 to this Current Report on Form 8-K.
The foregoing summary of the terms of the PIA is subject to, and qualified in its entirety by, such document, which is incorporated into
this Item 8.01 by reference.
Forward-Looking Statements
This Current Report on
Form 8-k includes statements that are "forward-looking" and are made pursuant to the safe harbor provision of the Private Securities
Litigation Reform Act of 1995. These "forward-looking" statements include, but are not limited to, statements relating to the
litigation matters described above and the impact of such matters, including on our financial condition and operations. These statements
involve risks and uncertainties that may cause results to differ materially from the statements set forth in this Form 8-k, including,
among other things, factors described under the heading "Item 1A. Risk Factors" in the Company's Annual Report on Form 10-K
for the fiscal year ended December 31, 2021 or described in the Company's other public filings. The forward-looking statements in this
Form 8-k speak only as of the date of this Form 8-k. The Company expressly disclaims any obligation or undertaking to release publicly
any updates or revisions to such statements to reflect any change in its expectations with regard thereto or any changes in the events,
conditions or circumstances on which any such statement is based.
