Note
2 – Going Concern and Management’s Plans
As
of September 30, 2019, the Company had a working capital deficiency and a stockholders’ deficiency of $13,514,377 and $12,428,533,
respectively. During the three and nine months ended September 30, 2019, the Company incurred net losses of $5,056,973 and $13,097,335,
respectively. These conditions indicate that there is substantial doubt about the Company’s ability to continue as a going
concern within the next twelve months from the filing date of this report.
The
Company’s primary source of operating funds since inception has been equity and debt financings. The Company intends to
continue to raise additional capital through debt and equity financings. There is no assurance that these funds will be sufficient
to enable the Company to fully complete its development activities or attain profitable operations. If the Company is unable to
obtain such additional financing on a timely basis or, notwithstanding any request the Company may make, the Company’s debt
holders do not agree to convert their notes into equity or extend the maturity dates of their notes, the Company may have to curtail
its development, marketing and promotional activities, which would have a material adverse effect on the Company’s business,
financial condition and results of operations, and ultimately the Company could be forced to discontinue its operations and liquidate.
The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate
continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to
represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include any adjustment
that might result from the outcome of this uncertainty.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Subsequent
to September 30, 2019, the Company has received aggregate equity financings and debt proceeds of $500,000 and $1,363,625, respectively,
debt (inclusive of accrued interest) of $250,571 has been exchanged for common stock, $1,412,202 of debt (inclusive of accrued
interest) has been repaid, and the due date for the repayment of $91,539 of debt has been extended to July 2020. As a result,
the Company expects to have the cash required to fund its operations through December 2019 while it continues to apply efforts
to raise additional capital, including through a contemplated public offering of its equity securities. While there can be no
assurance that it will be successful, the Company is seeking to raise additional capital. As of the filing date of this report,
the Company has notes payable with an aggregate principal balance of $593,400 which are past due. See Note 7 – Stockholders’
Deficiency and Note 9 – Subsequent Events for details.
Between
May 2019 and August 2019, holders of the Company’s notes in the aggregate principal amount of $1,565,000 entered into agreements
with the Company pursuant to which the parties have agreed to exchange such notes for shares of the Company’s common stock
and warrants in connection with the closing of the contemplated public offering. See Note 5 – Notes Payable – Related
Party Notes; and – Convertible Notes.
Note
3 – Summary of Significant Accounting Policies
Principles
of Consolidation
The
unaudited condensed consolidated financial statements of the Company include the accounts of Stem Pearls. All significant intercompany
transactions have been eliminated in the consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenue and expenses during the periods. The Company’s significant estimates and assumptions
include the recoverability and useful lives of long-lived assets, the fair value of the Company’s stock, stock-based compensation,
warrants issued in connection with notes payable, derivative liabilities and the valuation allowance related to the Company’s
deferred tax assets. Certain of the Company’s estimates, including the carrying amount of the intangible assets, could be
affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible
that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from
those estimates.
Deferred
Offering Costs
Deferred
offering costs, which primarily consist of direct, incremental professional fees incurred in connection with preparing for a contemplated
public offering of the Company’s equity securities (as described in Note 7 – Stockholders’ Deficiency), are
capitalized as non-current assets on the balance sheet. Upon a consummation of such contemplated offering (as to which no assurances
can be given), the deferred offering costs will be offset against the equity offering proceeds. As of September 30, 2019, the
Company incurred deferred offering costs in the amount of $371,725, of which $265,297 and $92,000 are included in accounts payable
and accrued expenses, respectively, on the September 30, 2019 condensed consolidated balance sheet, in connection with such contemplated
public offering.
Revenue
Recognition
On
January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts
with Customers” (“ASC 606”). The core principle of ASC 606 requires that an entity recognize revenue to depict
the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects
to be entitled in exchange for those goods or services. ASC 606 defines a five-step process to achieve this core principle and,
in doing so, it is possible more judgment and estimates may be required within the revenue recognition process than required under
existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount of variable consideration
to include in the transaction price and allocating the transaction price to each separate performance obligation.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
five-step process outlined in the ASC 606 is as follows:
Step
1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved
the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights
regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to
be transferred, (d) the contract has commercial substance and it is probable that the entity will collect substantially all of
the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Step
2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance
obligations each promise to transfer to the customer either (a) goods or services that are distinct or (b) a series of distinct
goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract
includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are
capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted
for as a combined performance obligation.
Step
3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize
as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to
determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration,
the Company would determine the amount of variable consideration that should be included in the transaction price based on expected
value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable
that a significant future reversal of cumulative revenue under the contract would not occur.
Step
4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate
the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the
entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction
price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step
5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods
or services are transferred to a customer. The Company satisfies each of its performance obligations by transferring control of
the promised good or service underlying that performance obligation to the customer. Control is the ability to direct the use
of, and obtain substantially all of the remaining benefits from, an asset. It includes the ability to prevent other entities from
directing the use of, and obtaining the benefits from, an asset. Indicators that control has passed to the customer include: a
present obligation to pay; physical possession of the asset; legal title; risks and rewards of ownership; and acceptance of the
asset. Performance obligations can be satisfied at a point in time or over time.
The
Company recognizes all of its revenue pursuant to a license agreement between the Company and a stem cell treatment company (“SCTC”)
entered into in January 2012, as amended in November 2015. Pursuant to the license agreement, the SCTC granted to the Company
a license to use certain intellectual property related to, among other things, stem cell disc procedures and the Company has granted
to the SCTC a non-exclusive sublicense to use, and the right to sublicense to third parties the right to use, in certain locations
in the United States and the Cayman Islands, certain of the licensed intellectual property. In consideration of the sublicenses,
the SCTC has agreed to pay the Company royalties on a per disc procedure basis.
The
Company recognizes sublicensing and royalty revenue on a per disc procedure basis when the third-party sale occurs. All sales
have fixed pricing and there are currently no variable components included in the Company’s revenue. The timing of the Company’s
revenue recognition may differ from the timing of receiving royalty payments. A receivable is recorded when revenue is recognized
prior to receipt of a royalty payment and the Company has an unconditional right to the royalty payment. Alternatively, when a
royalty payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations
are satisfied. During the three and nine months ended September 30, 2019, the Company recognized $38,000 and $98,000, respectively,
of revenue related to the Company’s sublicenses. During the three and nine months ended September 30, 2018, the Company
recognized $26,000 and $82,000, respectively, of revenue related to the Company’s sublicenses.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
Company adopted ASC 606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect
adjustment, if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s
unaudited condensed consolidated financial statements as of the date of adoption. As a result, a cumulative-effect adjustment
was not required.
Net
Loss Per Common Share
Basic
loss per common share is computed by dividing net loss by the weighted average number of vested common shares outstanding during
the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other instruments to
issue common stock were exercised or converted into common stock.
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would
have been anti-dilutive:
|
|
|
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Options
|
|
|
4,909,618
|
|
|
|
3,588,451
|
|
|
Warrants
|
|
|
5,804,891
|
|
|
|
3,413,403
|
|
|
Convertible
notes - common stock [1]
|
|
|
35,373,991
|
|
|
|
2,986,487
|
|
|
Convertible
notes - warrants
|
|
|
2,776,450
|
|
|
|
-
|
|
|
Total
potentially dilutive shares
|
|
|
48,864,950
|
|
|
|
9,988,341
|
|
|
|
[1]
|
As
of September 30, 2019 and 2018, many of the convertible notes had variable conversion prices and the shares were estimated
based on market conditions. Pursuant to the note agreements, on September 30, 2019 and September 30, 2018 there were 110,370,828
and 24,710,731 shares of common stock reserved for future note conversions, respectively. See Note 9 – Subsequent Events
regarding the Board of Directors approval to increase the number of authorized shares of common stock, subject to shareholder
approval.
|
Stock-Based
Compensation
The
Company measures the cost of services received in exchange for an award of equity instruments based on the fair value of the award.
The fair value of the award is measured on the grant date and is then recognized over the period during which services are required
to be provided in exchange for the award, usually the vesting period. The Company estimates the fair value of the awards granted
based on the market value of its freely tradable common stock as reported on the OTCQB market. Upon the exercise of an option
or warrant, the Company issues new shares of common stock out of its authorized shares.
Derivative
Financial Instruments
The
Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify
as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards
Board (“FASB”) ASC. The accounting treatment of derivative financial instruments requires that the Company record
embedded conversion options (“ECOs”) and any related freestanding instruments at their fair values as of the inception
date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating,
non-cash income or expense for each reporting period at each balance sheet date. Conversion options are recorded as a discount
to the host instrument and are amortized as amortization of debt discount on the unaudited condensed consolidated financial statements
over the life of the underlying instrument. The Company reassesses the classification of its derivative instruments at each balance
sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date
of the event that caused the reclassification.
The
Multinomial Lattice Model and Black-Scholes Model were used to estimate the fair value of the ECOs of convertible notes payable,
the warrants, and stock options that are classified as derivative liabilities on the unaudited condensed consolidated balance
sheets. The models include subjective input assumptions that can materially affect the fair value estimates. The expected volatility
is estimated based on the actual volatility during the most recent historical period of time equal to the weighted average life
of the instruments.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Sequencing
Policy
Under
ASC 815-40-35 (“ASC 815”), the Company has adopted a sequencing policy, whereby, in the event that reclassification
of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate
it has sufficient authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares
will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving
the first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees and directors, or
to compensate grantees in a share-based payment arrangement, are not subject to the sequencing policy.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no
effect on previously reported net loss.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the unaudited condensed consolidated financial statements, except as disclosed.
Recently
Issued Accounting Pronouncements
In
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee
should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use
asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee
is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach. This amendment will be effective for fiscal years beginning after December 15, 2019 and
interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted. The FASB issued ASU No. 2018-10
“Codification Improvements to Topic 842, Leases” (“ASU 2018-10”), ASU No. 2018-11 “Leases (Topic
842) Targeted Improvements” (“ASU 2018-11”) in July 2018, and ASU No. 2018-20 “Leases (Topic 842) - Narrow
Scope Improvements for Lessors” (“ASU 2018-20”) in December 2018. ASU 2018-10 and ASU 2018-20 provide certain
amendments that affect narrow aspects of the guidance issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02
to choose an additional (and optional) transition method of adoption, under which an entity initially applies the new leases standard
at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of
adoption. The Company is currently evaluating these ASUs and their impact on its unaudited condensed consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic 230) Classification of Certain Cash Receipts and
Cash Payments”. The new standard will make eight targeted changes to how cash receipts and cash payments are presented and
classified in the statement of cash flows. The new standard is effective for fiscal years beginning after December 15, 2018. The
Company has adopted this standard as of January 1, 2019. The adoption of this standard did not have a material impact on the Company’s
unaudited condensed consolidated financial statements and financial statement disclosures.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718)” (“ASU 2018-07”).
ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.
Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different.
ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based
payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting
for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity
— Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December
15, 2019 and including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s
adoption date of Topic 606, Revenue from Contracts with Customers. The Company early adopted this accounting standard as of January
1, 2019. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated
financial statements and financial statement disclosures.
In
March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“Topic 842”)
(“ASU 2019-01”). These amendments align the guidance for fair value of the underlying asset by lessors that are not
manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease
commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse
of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820,
Fair Value Measurement) should be applied. (Issue 1). The ASU also requires lessors within the scope of Topic 942, Financial Services—Depository
and Lending, to present all “principal payments received under leases” within investing activities. (Issue 2). Finally,
the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company
adopts the new leases standard. (Issue 3). The transition and effective date provisions apply to Issue 1 and Issue 2. They do
not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. This amendment
will be effective for fiscal years beginning after December 15, 2019 and interim periods within fiscal years beginning after December
15, 2020. Early adoption is permitted. The Company is currently evaluating ASU 2019-01 and its impact on its unaudited condensed
consolidated financial statements and financial statement disclosures.
In
July 2019, the FASB issued ASU 2019-07, “Codification Updates to SEC Sections — Amendments to SEC Paragraphs Pursuant
to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company
Reporting Modernization and Miscellaneous Updates (SEC Update)” (“ASU 2019-07”). ASU 2019-07 aligns the guidance
in various SEC sections of the Codification with the requirements of certain SEC final rules. ASU 2019-07 is effective immediately.
The adoption of ASU 2019-07 did not have a material impact on the Company’s unaudited condensed consolidated financial statements.
Note
4 – Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities are comprised of the following:
|
|
|
September
30, 2019
|
|
|
December
31, 2018
|
|
|
Accrued
payroll and other accrued expenses
|
|
$
|
43,779
|
|
|
$
|
91,560
|
|
|
Accrued
research and development expenses
|
|
|
746,175
|
|
|
|
646,175
|
|
|
Accrued
general and administrative expenses
|
|
|
1,320,104
|
|
|
|
1,084,831
|
|
|
Accrued
director compensation
|
|
|
507,500
|
|
|
|
482,500
|
|
|
Deferred
rent
|
|
|
7,865
|
|
|
|
33,610
|
|
|
Total
accrued expenses
|
|
|
2,625,423
|
|
|
|
2,338,676
|
|
|
Less:
accrued expenses, current portion
|
|
|
2,625,423
|
|
|
|
2,302,176
|
|
|
Accrued
expenses, non-current portion
|
|
$
|
-
|
|
|
$
|
36,500
|
|
During
the nine months ended September 30, 2019, the Company entered into a settlement agreement with a certain consultant, pursuant
to which $46,500 of previously accrued consulting fees were exchanged for 10,000 shares of the Company’s common stock and
a $10,000 cash payment. The value of the shares was $7,200, and accordingly the Company recorded a gain on settlement of payables
of $29,300 which is reflected within general and administrative expenses in the unaudited condensed consolidated statements of
operations.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable
A
summary of the notes payable activity during the nine months ended September 30, 2019 is presented below:
|
|
|
Related
Party
|
|
|
Convertible
|
|
|
Other
|
|
|
Debt
|
|
|
|
|
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Discount
|
|
|
Total
|
|
|
Outstanding,
January 1, 2019
|
|
$
|
720,000
|
|
|
$
|
4,309,415
|
|
|
$
|
132,501
|
|
|
$
|
(1,012,363
|
)
|
|
$
|
4,149,553
|
|
|
Issuances
|
|
|
485,000
|
|
|
|
8,543,089
|
[1]
|
|
|
-
|
|
|
|
-
|
|
|
|
9,028,089
|
|
|
Exchanges
for equity
|
|
|
-
|
|
|
|
(2,032,323
|
)
|
|
|
-
|
|
|
|
455,969
|
|
|
|
(1,576,354
|
)
|
|
Repayments
|
|
|
(45,000
|
)
|
|
|
(3,484,105
|
)
|
|
|
(7,500
|
)
|
|
|
428,939
|
|
|
|
(3,107,666
|
)
|
|
Extinguishment
of notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
(148,014
|
)[1]
|
|
|
6,196
|
|
|
|
(141,818
|
)
|
|
Recognition
of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,288,794
|
)
|
|
|
(4,288,794
|
)
|
|
Accretion
of interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
375,344
|
|
|
|
375,344
|
|
|
Accrued
interest reclassified to notes payable principal
|
|
|
-
|
|
|
|
-
|
|
|
|
23,013
|
|
|
|
-
|
|
|
|
23,013
|
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,221,904
|
|
|
|
3,221,904
|
|
|
Outstanding,
September 30, 2019 [2]
|
|
$
|
1,160,000
|
|
|
$
|
7,336,076
|
[3]
|
|
$
|
-
|
|
|
$
|
(812,805
|
)
|
|
$
|
7,683,271
|
|
|
|
[1]
|
During
the nine months ended September 30, 2019, a convertible note in the principal amount of $148,014 was issued concurrently with
the extinguishment of a certain note payable in the same aggregate principal amount. See below within Note 5 – Notes
Payable – Convertible Notes - Conversions, Exchanges and Other for additional details.
|
|
|
|
|
|
|
[2]
|
As
of September 30, 2019, outstanding related party notes, convertible notes and other notes in the aggregate principal amounts
of $450,000, $508,000 and $0, respectively, were considered past due (which excludes aggregate principal amounts of $25,000
and $150,000 of related party and convertible notes, respectively, which were extended to October 2019, effective as of September
30, 2019). See Note 9 – Subsequent Events for details regarding the repayment of certain past due notes payable.
|
|
|
|
|
|
|
[3]
|
As
of September 30, 2019, a portion of convertible notes with an aggregate principal balance of $4,381,076 were convertible into
shares of common stock at the election of the holder any time until the balance has been paid in full. As of September 30,
2019, a portion of convertible notes with an aggregate principal balance of $2,955,000, which are not currently convertible,
will become convertible into shares of the Company’s common stock at the election of the respective holder subsequent
to September 30, 2019. As of September 30, 2019, outstanding related party notes and convertible notes in the aggregate principal
amounts of $1,150,000 and $990,000, respectively, provided for a mandatory conversion into common stock of the Company and
warrants to purchase common stock of the Company in the same ratio upon the completion of an underwritten public offering
by the Company. See Note 9 – Subsequent Events.
|
Related
Party Notes
During
the nine months ended September 30, 2019, the Company issued to family members of officers of the Company and a Scientific Advisory
Board member (the “SAB Member”) notes payable in the aggregate principal amount of $485,000, which bear interest at
the rate of 12% per annum and provide for original maturity dates between July 2019 and December 2019.
During
the nine months ended September 30, 2019, the Company partially repaid a certain related party note in the principal amount of
$45,000.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
During
the nine months ended September 30, 2019, the holders of certain related party notes in the aggregate principal amount of
$505,000 entered into agreements with the Company pursuant to which the parties agreed that the maturity of the promissory notes
held by such holders will be extended or further extended from dates from December 2018 and August 2019 to dates between July
2019 and December 2019. In consideration of the extensions, such notes in the aggregate principal amount of $475,000 provided
for an exchange of such notes for an exchange of such notes for shares of common stock and warrants, as described below,
in connection with a public offering of the Company’s securities (the “Public Offering”). The exchange price
for the indebtedness will be equal to the lesser of (i) 75% of the public offering price of the common stock, or units of common
stock and warrants, as the case may be, offered pursuant to the Public Offering or (ii) $0.60 per share (subject to adjustment
for reverse stock splits and the like) (the “Exchange Price”). The number of shares of common stock issuable pursuant
to the warrants to be issued to such holders will be equal to the number of shares of common stock issuable to them upon conversion
of the principal amount of their respective notes. The exchange price of the warrants to be issued to such holders will be the
lesser of (i) 125% of the Exchange Price or (ii) $0.80 per share (subject to adjustment for reverse stock splits and the like).
Since the fair value of the new ECO exceeded 10% of the carrying amount of the debt, the note extensions were accounted for as
extinguishments, and accordingly the Company recognized an aggregate net loss on extinguishment of $145,066 in connection with
the derecognition of the net carrying amount of the extinguished debt of $510,887 (inclusive of $475,000 of principal and $35,887
of accrued interest) and the issuance of the new convertible notes in the same amount, plus the fair value of the new notes’
ECOs of an aggregate of $145,066. See Note 9 – Subsequent Events.
In
October 2019, the Company and a certain related party lender agreed to further extend the maturity date of a certain related party
note with a principal balance of $25,000 from a maturity date in September 2019 to a new maturity date in October 2019, effective
September 30, 2019.
During
the nine months ended September 30, 2019, the Company, a director of the Company, and a trust related to the director (the “Trust”)
agreed that promissory notes held by the director and the Trust in the outstanding principal amounts of $175,000 and $500,000,
respectively, will be exchanged for shares of common stock and warrants, as described below, in connection with the Public Offering.
The exchange price for the indebtedness will be equal to 75% of the public offering price of the common stock, or units of common
stock and warrants, as the case may be, offered pursuant to the Public Offering (the “Director/Trust Exchange Price”).
The number of shares of common stock issuable pursuant to the warrants to be issued to the director and the Trust will be in the
same ratio to the number of shares of common stock issued upon exchange of their indebtedness as the number of shares of common
stock subject to any warrants included as part of units offered pursuant to the Public Offering (the “Public Warrants”)
bears to the number of shares of common stock issued as part of the Public Offering units. The exercise price of the warrants
to be issued to the director and the Trust will be 125% of the Director/Trust Exchange Price and the term of the warrants will
be the same term as the Public Warrants. Concurrently with the exchange, the exercise prices of outstanding warrants held by the
director and the Trust for the purchase of an aggregate of 1,377,842 shares of common stock of the Company will be reduced from
between $1.50 and $4.00 per share to $0.75 per share and the expiration dates of such warrants will be extended from between December
2019 and March 2022 to December 2023. The exchange agreements were submitted for approval by the shareholders of the Company,
which was obtained in August 2019.
As
of September 30, 2019, related party notes consisted of notes payable issued to certain directors of the Company, family members
of officers of the Company, the SAB Member, and the Trust. A director and principal shareholder of the Company serves as a trustee
of the Trust, which was established for the benefit of his immediate family.
As
of September 30, 2019, certain related party notes in the aggregate principal amount of $485,000 were convertible into shares
of common stock of the Company at a conversion price of $0.60 per share, subject to adjustment, and a five year warrant (the “Warrant”)
for the purchase of a number of shares equal to the number of shares issued upon the conversion of the principal amount of the
note. The Warrant provides for an exercise price of $0.80 per share, subject to adjustment.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Convertible
Notes
Issuances
During
the nine months ended September 30, 2019, the Company issued certain lenders convertible notes payable in the aggregate principal
amount of $8,395,075 for aggregate cash proceeds of $7,847,727. The difference of $547,348 was recorded as a debt discount and
will be amortized over the terms of the respective notes. The convertible notes bear interest at rates ranging between 8% to 15%
per annum payable at maturity with original maturity dates ranging between July 2019 through September 2020. In connection with
the issuance of a certain convertible note, the Company issued the lender 68,873 shares of the Company’s common stock and
the relative fair value of $54,168 was recorded as debt discount and is being amortized over the term of the note. In connection
with the issuance of certain convertible notes, the Company issued the lenders five-year warrants to purchase an aggregate of
295,000 shares of the Company’s common stock at exercise prices ranging from $0.45 per share to $1.00 per share. The aggregate
grant date value of the warrants was $104,198, which was recorded as debt discount and is being amortized over the terms of the
respective convertible notes. The warrants were subject to the Company’s sequencing policy and, as a result, were initially
recorded as derivative liabilities. See below within this Note 5 – Notes Payable – Convertible Notes – Conversions,
Exchanges and Other and Note 8 – Derivative Liabilities for additional details regarding the ECOs of the convertible notes.
During
the nine months ended September 30, 2019, a certain convertible note in the principal amount of $148,014 was issued concurrently
with the extinguishment of a certain other note payable in the same principal amount. See below within this Note 5 – Notes
Payable – Convertible Notes – Conversions, Exchanges and Other for additional details.
Embedded
Conversion Options and Note Provisions
As
of September 30, 2019, outstanding convertible notes in the aggregate principal amount of $4,381,076 were convertible into shares
of common stock of the Company as follows: (i) $2,355,076 of aggregate principal amount of convertible notes were convertible
at a fixed price ranging from $0.25 to $2.00 per share for the first six months following the respective issue date, and thereafter
at a conversion price generally equal to 58% of the fair value of the Company’s stock, subject to adjustment, until the
respective note has been paid in full, (ii) 1,046,000 of aggregate principal amount of convertible notes were convertible generally
at a range of 58% to 65% of the fair value of the Company’s stock, subject to adjustment, depending on the note, and (iii)
$980,000 of aggregate principal amount of convertible notes were convertible into shares of common stock of the Company at a conversion
price ranging from $0.50 to $0.60 per share, subject to adjustment, and five-year warrants to purchase common stock of the Company
in the same ratio. The warrants provide for an exercise price ranging from $0.75 to $0.80 per share, subject to adjustment. Convertible
notes in the aggregate principal amount of $990,000 provide for a mandatory conversion into common stock of the Company and warrants
to purchase common stock of the Company in the same ratio upon the completion of an underwritten public offering by the Company
of its securities whereby the conversion price shall be equal to the lower of the respective original conversion terms, or 75%
of the offering price for the shares of common stock of the Company, or units of shares of common stock of the Company and warrants,
as the case may be, sold pursuant to the public offering. The Company analyzes the ECOs of its convertible notes at issuance to
determine whether the ECO should be bifurcated and accounted for as a derivative liability or if the ECO contains a beneficial
conversion feature. See below within this Note 5 – Notes Payable – Convertible Notes – Embedded Conversion Options
and Note Provisions and Note 8 – Derivative Liabilities for additional details regarding the ECOs of the convertible notes.
Also see Note 9 – Subsequent Events.
As
of September 30, 2019, a portion of convertible notes with an aggregate principal balance of $2,955,000, which were not yet convertible,
will become convertible into shares of the Company’s common stock subsequent to September 30, 2019 at a conversion
price generally equal to 58% of the fair value of the Company’s stock, subject to adjustment, until the respective notes
have been paid in full.
As
of September 30, 2019, outstanding convertible notes in the aggregate principal amount of $4,325,075 have prepayment premiums,
whereby, in the event that the Company elects to prepay certain notes during the one hundred eighty-day period following the issue
date, the respective holder is entitled to receive a prepayment premium of up to 35%, depending on the note, on the then outstanding
principal balance including accrued interest.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
As
of September 30, 2019, outstanding convertible notes in the aggregate principal amount of $4,252,688 have most favored nation
(“MFN”) provisions, whereby, so long as such respective note is outstanding, upon any issuance by the Company of any
security with certain identified provisions more favorable to the holder of such security, then at the respective holder’s
option, those more favorable terms shall become a part of the transaction documents with the holder. As of September 30, 2019,
notes with applicable MFN provisions were convertible using MFN conversion prices equal to 58% of the fair market value of the
Company’s stock, as defined.
During
the nine months ended September 30, 2019, the Company determined that certain ECOs of issued or extended convertible notes were
derivative liabilities. The aggregate issuance date value of the bifurcated ECOs was $3,990,135, of which $3,576,028 was recorded
as a debt discount and is being amortized over the terms of the respective convertible notes and $414,108 was recognized as part
of an extinguishment loss as described below. See Note 8 – Derivative Liabilities for additional details.
Conversions,
Exchanges and Other
During
the nine months ended September 30, 2019, the Company and certain lenders exchanged certain convertible notes with bifurcated
ECOs with an aggregate net carrying amount of $4,255,838 (including an aggregate of $2,032,323 of principal less debt discount
of $455,969, $122,111 of accrued interest and $2,557,373 related to the separated ECOs accounted for as derivative liabilities)
for an aggregate of 9,634,376 shares of the Company’s common stock at conversion prices ranging from $0.11 to $0.43 per
share. The common stock had an aggregate exchange date value of $4,739,017 and, as a result, the Company recorded a loss on extinguishment
of notes payable of $483,179. See Note 8 – Derivative Liabilities for additional details.
During
the nine months ended September 30, 2019, the Company repaid an aggregate principal amount of $3,484,105 of convertible notes
payable, $209,486 of the respective aggregate accrued interest and an aggregate of $813,730 of prepayment premiums. As a result
of the repayments, the Company recorded a loss on extinguishment of notes payable of $1,242,669 and an aggregate of $428,939 of
the related debt discounts were extinguished.
During
the nine months ended September 30, 2019, a certain lender to the Company acquired a promissory note (classified in Other Notes)
issued by the Company in the outstanding amount of $148,014 (inclusive of accrued interest reclassified to principal of $23,013)
from a certain lender to the Company. The Company exchanged the acquired note for a new convertible note in the principal amount
of $148,014 which accrues interest at a rate of 12% per annum, payable on the maturity date in March 2020. The ECO of the note
was subject to sequencing and the issuance date fair value of $84,798 was accounted for as a derivative liability (see Note 8
– Derivative Liabilities for additional details). Since the fair value of the new ECO exceeded 10% of the principal amount
of the new note, the note exchange was accounted for as an extinguishment, and accordingly the Company recognized a net loss on
extinguishment of $90,994 in connection with the derecognition of the net carrying amount of $141,818 of the extinguished debt
and the issuance of the new convertible notes in the aggregate principal amount $148,014 plus the fair value of the new note’s
ECO of an aggregate of $84,798.
During
the nine months ended September 30, 2019, the Company and certain lenders agreed to extend or further extend the maturity dates
of certain convertible notes payable with an aggregate principal balance of $678,102 from maturity dates ranging from June 2019
to July 2019 to new maturity dates ranging from July 2019 to July 2020. In consideration of the extensions of certain convertible
notes with an aggregate principal balance of $650,000, the Company modified the conversion terms of the lenders’ notes to
provide for a mandatory conversion into common stock of the Company and a five-year warrant to purchase common stock of the Company
in the same ratio upon the completion of an underwritten public offering by the Company of its securities, whereby, the conversion
price shall be equal to the lower of the respective original conversion terms, or 75% of the offering price for the shares of
common stock of the Company, or units of shares of common stock of the Company and warrants, as the case may be, sold pursuant
to the public offering. Since the fair value of the new ECO exceeded 10% of the carrying amount of the debt, the note extensions
were accounted for as extinguishments, and accordingly the Company recognized an aggregate net loss on extinguishment of $329,310
in connection with the derecognition of the net carrying amount of the extinguished debt of $702,387 (inclusive of $650,000 of
principal and $52,387 of accrued interest) and the issuance of the new convertible notes in the same amount, plus the fair value
of the new notes’ ECOs of an aggregate of $329,310. See Note 9 – Subsequent Events.
In
October 2019, the Company and certain lenders agreed to further extend the maturity dates of certain convertible notes payable
with an aggregate principal balance of $150,000 from maturity dates in September 2019 to new maturity dates in October 2019, effective
September 30, 2019.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Other
Notes
Exchange
and Other
During
the nine months ended September 30, 2019, the Company and a certain lender agreed to an extension of the maturity date of a certain
note payable with a principal balance of $125,000 from a maturity date in January 2019 to a new maturity date in December 2019.
In consideration of the extension, the Company issued the lender 10,000 shares of the Company’s common stock. The issuance
date fair value of the common stock of $7,052 was recorded as debt discount and is being amortized over the remaining term of
the note.
During
the nine months ended September 30, 2019, a convertible promissory note in the principal amount of $148,014 was issued concurrently
with the extinguishment of a certain other note payable in the same principal amount. See above within Note 5 – Notes Payable
– Convertible Notes – Conversions, Exchanges and Other for additional details.
During
the nine months ended September 30, 2019, the Company partially repaid a certain promissory note in the principal amount of $7,500.
Note
6 – Commitments and Contingencies
Consulting
Agreements
Business
Advisory Services
In
January 2019, an agreement for business advisory services that had expired on December 31, 2018 was further extended and now provides
for an expiration date of December 31, 2019. In consideration of the extension of the term of the consulting agreement, the Company
issued to the consultant a five-year, immediately vested warrant for the purchase of 100,000 shares of the Company’s common
stock at an exercise price of $1.00 per share. The grant date value of the warrant of $56,000 was recognized immediately as stock-based
compensation expense which is reflected as consulting expense in the unaudited condensed consolidated financial statements. The
warrant was subject to the Company’s sequencing policy and, as a result, was originally recorded as a derivative liability.
See Note 8 – Derivative Liabilities for additional details.
Operating
Lease
The
Company is a party to a lease for 6,800 square feet of space located in Melville, New York (the “Melville Lease”)
with respect to its corporate and laboratory operations. The Melville Lease was scheduled to expire in March 2020 (subject to
extension at the option of the Company for a period of five years) and calls for an annual base rental during the initial term
ranging between $132,600 and $149,260. In June 2019, the Company exercised its option to extend the Melville Lease and entered
into a lease amendment with the lessor whereby the five-year extension term will commence on January 1, 2020 with annual base
rent ranging between $153,748 and $173,060.
The
Company’s rent expense amounted to approximately $20,000 and $74,000 for the three and nine months ended September 30, 2019,
respectively. The Company’s rent expense amounted to approximately $31,000 and $92,000 for the three and nine months ended
September 30, 2018, respectively. Rent expense is reflected in general and administrative expenses and research and development
expenses in the unaudited condensed consolidated statements of operations.
Litigations,
Claims and Assessments
In
the normal course of business, the Company may be involved in legal proceedings, claims or assessments arising from the ordinary
course of business, and as of September 30, 2019, none are expected to materially impact the Company’s financial position.
The
Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Bonus
Accruals
As
of December 31, 2018, the Company had remaining accruals of approximately $91,000 for bonus milestones that were achieved in prior
years and remained unpaid. As of September 30, 2019, the remaining accruals for bonus milestones achieved in prior years had been
paid in full. In April 2019, the Company’s Compensation Committee and Board of Directors approved performance goals associated
with cash bonuses payable to certain officers for the year ending December 31, 2019 and, as a result, the Company accrued $39,114
for 2019 cash bonuses as of September 30, 2019 which were probable to be achieved.
Arena
Investors
In
July 2019, the Company entered into a securities purchase agreement (the “Arena Purchase Agreement”) with Arena Investors
LP (“Arena”) pursuant to which Arena had agreed to acquire 5,500,000 shares of Series A preferred stock, par value
$0.01 per share, of the Company, a warrant for the purchase of 6,000,000 shares of common stock, par value $0.001 per share, of
the Company and a convertible promissory note of the Company in the principal amount of $500,000, in consideration of a payment
by Arena to the Company of an aggregate of $5,400,000. The closing of the Arena Purchase Agreement was subject to, among other
things, approval by the shareholders of the Company of the Arena Purchase Agreement (which was obtained in August 2019) and the
transactions contemplated thereby, the concurrent execution of an underwriting agreement with regard to the Public Offering and
approval by the Nasdaq Stock Market of the Company’s pending listing application with respect to its shares of common stock.
The Arena Purchase Agreement provided that it could be terminated by either party if the closing did not occur by October
31, 2019. On November 1, 2019, the Arena Purchase Agreement was terminated.
Note
7 – Stockholders’ Deficiency
Authorized
Capital and 2010 Equity Plan
In
March 2019, the Board of Directors of the Company approved an increase in the number of authorized shares of common stock to 150,000,000,
subject to shareholder approval. Additionally, the Board of Directors approved an increase in the number of authorized shares
issuable under the Company’s 2010 Equity Participation Plan to 20,000,000, subject to shareholder approval. In May 2019,
such shareholder approval was obtained.
In
March 2019, the Board of Directors determined to submit to the Company’s shareholders for their approval amendments to the
Certificate of Incorporation of the Company (with the Board of Directors having the authority to select and file one such amendment)
to effect a reverse split of the Company’s common stock at a ratio of not less than 1-for-2 and not more than 1-for-20,
with the Board of Directors having the discretion as to whether or not the reverse stock split is to be effected, and with the
exact ratio of any reverse stock split to be set at a whole number within the above range as determined by the Board of Directors
in its discretion. Concurrently, the Board of Directors determined to submit to the Company’s shareholders for their approval
a proposal to authorize the Board of Directors, in the event the reverse stock split proposal is approved by the shareholders,
in its discretion, to reduce the number of authorized shares of common stock in proportion to the percentage decrease in the number
of outstanding shares of common stock resulting from the reverse split (or a lesser decrease in authorized shares of common stock
as determined by the Board of Directors in its discretion). In May 2019, the Company’s shareholders approved the foregoing
proposals.
See
Note 9 – Subsequent Events regarding the approval by the Board of Directors and shareholders of an increase in the
number of authorized shares of common stock to 300,000,000, as well as the grant to the Board of Directors of authority to
adopt an amendment to the Certificate of Incorporation of the Company to effect a reverse split of the Company’s
common stock at a ratio of not less than 1-for-2 and not more than 1-for-100.
Compensatory
Common Stock Issuance
During
the nine months ended September 30, 2019, the Company issued 75,000 shares of immediately vested common stock valued at $30,000
to a consultant for services rendered.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Warrant
and Option Valuation
The
Company has computed the fair value of warrants and options granted using the Black-Scholes option pricing model. The expected
term used for warrants and options issued to non-employees is the contractual life and the expected term used for options issued
to employees and directors is the estimated period of time that options granted are expected to be outstanding. The Company utilizes
the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option
grants. The Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period
of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry.
The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term
consistent with the expected term of the instrument being valued.
Common
Stock and Warrant Offerings
During
the nine months ended September 30, 2019, the Company issued an aggregate of 2,191,111 shares of common stock of the Company,
five-year immediately vested warrants to purchase an aggregate of 1,135,556 shares of common stock of the Company at exercise
prices ranging from $0.85 per share to $1.00 per share and one-year immediately vested warrants to purchase an aggregate of 1,055,555
shares of common stock of the Company at an exercise price of $0.70 per share to certain investors for aggregate gross proceeds
of $1,156,000. The warrants had an aggregate grant date fair value of $899,689. The warrants were subject to the Company’s
sequencing policy and, as a result, were initially recorded as derivative liabilities. See Note 8 – Derivative Liabilities
for additional details. Also see Note 9 – Subsequent Events.
Stock
Warrants
Warrant
Compensation
See
Note 6 – Commitments and Contingences for additional details associated with the issuance of a warrant in connection with
a consulting agreement extension.
The
Company recorded stock–based compensation expense of $0 and $56,000 for the three and nine months ended September 30, 2019,
respectively, related to stock warrants issued as compensation, which is reflected as consulting expense in the unaudited condensed
consolidated statements of operations. For the three and nine months ended September 30, 2018, the Company recorded stock–based
compensation expense of $43,105 and $91,297 respectively, related to stock warrants issued as compensation.
Warrant
Activity Summary
In
applying the Black-Scholes option pricing model to warrants granted or issued, the Company used the following assumptions:
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Risk
free interest rate
|
|
|
1.79%
- 1.83
|
%
|
|
|
2.73%
- 2.83
|
%
|
|
|
1.79%
- 2.62
|
%
|
|
|
1.92%
- 2.83
|
%
|
|
Contractual
term (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
1.00
- 5.00
|
|
|
|
1.98
- 5.00
|
|
|
Expected
volatility
|
|
|
133
|
%
|
|
|
139
|
%
|
|
|
133%
- 150
|
%
|
|
|
128%
- 139
|
%
|
|
Expected
dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
weighted average estimated fair value of the warrants granted during the three and nine months ended September 30, 2019 was approximately
$0.28 and $0.41 per share, respectively. The weighted average estimated fair value of the warrants granted during the three
and nine months ended September 30, 2018 was approximately $1.24 and $1.23 per share, respectively.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
A
summary of the warrant activity during the nine months ended September 30, 2019 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In
Years
|
|
|
Value
|
|
|
Outstanding,
January 1, 2019
|
|
|
3,483,403
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
2,586,111
|
|
|
|
0.77
|
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(264,623
|
)
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2019
|
|
|
5,804,891
|
|
|
$
|
2.27
|
|
|
|
2.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30, 2019
|
|
|
5,804,891
|
|
|
$
|
2.27
|
|
|
|
2.1
|
|
|
$
|
-
|
|
The
following table presents information related to stock warrants at September 30, 2019:
|
Warrants
Outstanding
|
|
|
Warrants
Exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Remaining
Life
|
|
|
Number
of
|
|
|
Price
|
|
|
Warrants
|
|
|
In
Years
|
|
|
Warrants
|
|
|
$
|
0.45
- $0.99
|
|
|
|
2,586,111
|
|
|
|
2.9
|
|
|
|
2,586,111
|
|
|
$
|
1.00
- $1.99
|
|
|
|
844,444
|
|
|
|
0.3
|
|
|
|
844,444
|
|
|
$
|
2.00
- $2.99
|
|
|
|
75,000
|
|
|
|
4.1
|
|
|
|
75,000
|
|
|
$
|
3.00
- $3.99
|
|
|
|
70,000
|
|
|
|
3.8
|
|
|
|
70,000
|
|
|
$
|
4.00
- $4.99
|
|
|
|
1,965,457
|
|
|
|
1.7
|
|
|
|
1,965,457
|
|
|
$
|
5.00
- $5.99
|
|
|
|
182,667
|
|
|
|
1.7
|
|
|
|
182,667
|
|
|
$
|
6.00
- $7.99
|
|
|
|
40,000
|
|
|
|
0.8
|
|
|
|
40,000
|
|
|
$
|
8.00
- $9.99
|
|
|
|
2,500
|
|
|
|
0.2
|
|
|
|
2,500
|
|
|
$
|
10.00
- $15.00
|
|
|
|
38,712
|
|
|
|
0.6
|
|
|
|
38,712
|
|
|
|
|
|
|
|
5,804,891
|
|
|
|
2.1
|
|
|
|
5,804,891
|
|
See
Note 9 – Subsequent Events.
Stock
Options
In
applying the Black-Scholes option pricing model to stock options granted, the Company used the following assumptions:
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Risk
free interest rate
|
|
|
1.47
|
%
|
|
|
2.74
|
%
|
|
|
1.47%
- 2.72%
|
|
|
|
2.44%
- 2.74
|
%
|
|
Expected
term (years)
|
|
|
10.00
|
|
|
|
5.01
|
|
|
|
10.00
|
|
|
|
5.01
- 9.69
|
|
|
Expected
volatility
|
|
|
133
|
%
|
|
|
139
|
%
|
|
|
133%
- 140%
|
|
|
|
129%
- 139
|
%
|
|
Expected
dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
weighted average estimated fair value of the stock options granted during the three and nine months ended September 30, 2019 was
approximately $0.25 and $0.36 per share, respectively. The weighted average estimated fair value of the stock options granted
during the three and nine months ended September 30, 2018 was approximately $1.42 and $2.92 per share, respectively.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
In
January 2019, the Company issued the Chairman of the Disc Committee of its Scientific Advisory Board (the “Disc Committee
Chairman”) a ten-year option to purchase up to 70,000 shares of the Company’s common stock at an exercise price of
$1.00 per share. The options vest ratably over three years on the issuance date anniversaries. The grant date value of the option
of $44,247 will be recognized over the expected vesting period as consulting expense in the unaudited condensed consolidated
statements of operations.
In
March 2019, the Board of Directors reduced the exercise price of outstanding stock options for the purchase of an aggregate of
4,631,700 shares of common stock of the Company (with exercise prices ranging between $1.00 and $4.70 per share) to $0.75 per
share, which was the closing price for the Company’s common stock on the day prior to determination, as reported by the
OTCQB market. The exercise price reduction related to options held by, among others, the Company’s officers, directors,
advisors and employees. The incremental value of the modified options compared to the original options, both valued as of the
respective modification date, of $452,637 is being recognized over the vesting term of the options, which will be reflected
as consulting, research and development, and general and administrative expenses in the amounts of $187,861, $56,856 and $207,920,
respectively, in the unaudited condensed consolidated statements of operations.
In
August 2019, the Company issued the Disc Committee Chairman an immediately vested ten-year option to purchase up to 175,000 shares
of the Company’s common stock at an exercise price of $0.26 per share. The grant date value of the option of $43,141 was
immediately recognized as consulting expense in the unaudited condensed consolidated statements of operations.
A
summary of the option activity during the nine months ended September 30, 2019 is presented below:
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
|
Options
|
|
|
Price
|
|
|
In
Years
|
|
|
Value
|
|
|
Outstanding,
January 1, 2019
|
|
|
4,703,785
|
|
|
$
|
1.04
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
245,000
|
|
|
|
0.40
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(39,167
|
)
|
|
|
1.49
|
|
|
|
|
|
|
|
|
|
|
Outstanding,
September 30, 2019
|
|
|
4,909,618
|
|
|
$
|
1.01
|
|
|
|
7.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
September 30, 2019
|
|
|
3,532,455
|
|
|
$
|
1.11
|
|
|
|
6.7
|
|
|
$
|
-
|
|
The
following table presents information related to stock options at September 30, 2019:
|
Options
Outstanding
|
|
|
Options
Exercisable
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
|
Exercise
|
|
|
Number
of
|
|
|
Remaining
Life
|
|
|
Number
of
|
|
|
Price
|
|
|
Options
|
|
|
In
Years
|
|
|
Options
|
|
|
$
|
0.26
- $0.74
|
|
|
|
175,000
|
|
|
|
9.9
|
|
|
|
175,000
|
|
|
$
|
0.75
- $0.99
|
|
|
|
4,623,367
|
|
|
|
6.7
|
|
|
|
3,246,204
|
|
|
$
|
1.00
- $5.99
|
|
|
|
38,751
|
|
|
|
0.6
|
|
|
|
38,751
|
|
|
$
|
6.00
- $19.99
|
|
|
|
37,500
|
|
|
|
4.3
|
|
|
|
37,500
|
|
|
$
|
20.00
- $30.00
|
|
|
|
35,000
|
|
|
|
2.5
|
|
|
|
35,000
|
|
|
|
|
|
|
|
4,909,618
|
|
|
|
6.7
|
|
|
|
3,532,455
|
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
The
following table presents information related to stock option expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
For
the Three Months
Ended
|
|
|
For
the Nine Months
Ended
|
|
|
Unrecognized at
|
|
|
Remaining
Amortization
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September 30,
|
|
|
Period
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
(Years)
|
|
|
Consulting
|
|
$
|
34,021
|
|
|
$
|
163,757
|
|
|
$
|
505,669
|
|
|
$
|
669,574
|
|
|
$
|
147,392
|
|
|
|
1.1
|
|
|
Research
and development
|
|
|
106,085
|
|
|
|
98,148
|
|
|
|
352,017
|
|
|
|
242,586
|
|
|
|
329,604
|
|
|
|
1.6
|
|
|
General
and administrative
|
|
|
93,939
|
|
|
|
(488,463
|
)
|
|
|
548,840
|
|
|
|
523,089
|
|
|
|
539,921
|
|
|
|
1.1
|
|
|
|
|
$
|
234,045
|
|
|
$
|
(226,558
|
)
|
|
$
|
1,406,526
|
|
|
$
|
1,435,249
|
|
|
$
|
1,016,917
|
|
|
|
1.3
|
|
Contemplated
Public Offering
The
Company has filed a registration statement with the Securities and Exchange Commission with regard to the contemplated public
offering of its equity securities. The registration statement has not yet become effective. These securities may not be sold nor
may offers to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q shall not constitute
an offer to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction
in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of
any such state or jurisdiction. The contemplated public offering of the Company’s securities will be made only by means
of a prospectus. No assurances can be given that the contemplated public offering will be completed on reasonable terms or otherwise.
Note
8 – Derivative Liabilities
The
following table sets forth a summary of the changes in the fair value of Level 3 derivative liabilities that are measured at fair
value on a recurring basis:
|
Beginning
balance as of January 1, 2019
|
|
$
|
1,094,607
|
|
|
Issuance
of derivative liabilities
|
|
|
5,195,089
|
|
|
Extinguishment
of derivative liabilities in connection with convertible note repayments and exchanges
|
|
|
(2,557,373
|
)
|
|
Change
in fair value of derivative liabilities
|
|
|
268,350
|
|
|
Reclassification
of derivative liabilities to equity
|
|
|
(2,809,565
|
)
|
|
Ending
balance as of September 30, 2019
|
|
$
|
1,191,108
|
|
In
applying the Multinomial Lattice and Black-Scholes option pricing models to derivatives issued and outstanding during the three
and nine months ended September 30, 2019 and 2018, the Company used the following assumptions:
|
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Risk
free interest rate
|
|
|
1.54%
- 2.16
|
%
|
|
|
1.93%
- 2.94
|
%
|
|
|
1.54%
- 2.62
|
%
|
|
|
1.22%
- 2.94
|
%
|
|
Expected
term (years)
|
|
|
0.08
- 5.00
|
|
|
|
0.25
- 5.00
|
|
|
|
0.02
- 5.00
|
|
|
|
0.25
- 5.00
|
|
|
Expected
volatility
|
|
|
91%
- 133
|
%
|
|
|
120%
- 208
|
%
|
|
|
91%
- 156
|
%
|
|
|
100%
- 208
|
%
|
|
Expected
dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
During
the nine months ended September 30, 2019, the Company recorded new derivative liabilities in the aggregate amounts of $4,135,200
and $1,059,889 related to the ECOs of certain convertible notes payable and warrants subject to sequencing, respectively. See
Note 5 – Notes Payable – Convertible Notes for additional details. See Note 6 – Commitments and Contingencies
and Note 7 – Stockholders’ Deficiency for warrants issued and deemed to be derivative liabilities.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
During
the nine months ended September 30, 2019, the Company extinguished an aggregate of $2,557,373 of derivative liabilities in connection
with repayments and exchanges of certain convertible notes payable into shares of the Company’s common stock. See Note 5
– Notes Payable – Convertible Notes for additional details.
During
the nine months ended September 30, 2019, the Company reclassified an aggregate of $2,809,565 of derivative liabilities to equity
as a result of a change in the sequencing status.
On
September 30, 2019, the Company recomputed the fair value of ECOs recorded as derivative liabilities to be $1,142,942. The Company
recorded a loss on the change in fair value of these derivative liabilities of $145,238 and $584,840 for the three and nine months
ended September 30, 2019, respectively.
On
September 30, 2019, the Company recomputed the fair value of the derivative liabilities related to outstanding warrants to be
$48,166. These warrants are either redeemable for cash equal to the Black-Scholes value, as defined, at the election of the warrant
holder upon a fundamental transaction pursuant to the warrant terms or were issued subsequent to the commencement of sequencing.
The Company recorded a gain on the change in fair value of these derivative liabilities of $80,201 and $316,490 for the three
and nine months ended September 30, 2019, respectively.
Note
9 – Subsequent Events
Authorized
Capital
Subsequent
to September 30, 2019, the Board of Directors of the Company approved an increase in the number of authorized shares
of common stock to 300,000,000, subject to shareholder approval. On November 13, 2019, such shareholder approval was
obtained and the Company filed an amendment to its Certificate of Incorporation to increase its authorized common stock to
300,000,000 shares.
Subsequent
to September 30, 2019, the Board of Directors determined to submit to the Company’s shareholders for their approval, amendments
to the Certificate of Incorporation of the Company (with the Board of Directors having the authority to select and file one such
amendment) to effect a reverse split of the Company’s common stock at a ratio of not less than 1-for-2 and not more than
1-for-100, with the Board of Directors having the discretion as to whether or not the reverse stock split is to be effected, and
with the exact ratio of any reverse stock split to be set at a whole number within the above range as determined by the Board
of Directors in its discretion. On November 13, 2019, such shareholder approval was obtained.
Common
Stock and Warrant Offering
Subsequent
to September 30, 2019, the Company issued 3,333,333 shares of common stock of the Company and a five-year immediately vested warrant
for the purchase of 3,333,333 shares of common stock of the Company at an exercise price of $0.20 per share to an investor for
gross proceeds of $500,000. In consideration of the purchase, the parties agreed to reduce the exercise prices of an aggregate
of 2,111,111 outstanding warrants previously issued to the investor with original exercise prices of $0.70 and $0.85 per share
to an exercise price of $0.15 per share and extend certain expiration dates of such outstanding warrants from dates between February
2020 and May 2020 to new expiration dates between February 2024 and May 2024.
Related
Party Notes
Subsequent
to September 30, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $150,000 to certain
related parties. The convertible notes bear interest at a rate of 12% per annum, payable at maturity, with original maturity dates
ranging from April 2020 to May 2020. The notes and the respective accrued interest are convertible at the election of the holder
at any time at a conversion price equal to 60% of the fair value of the Company’s common stock.
Subsequent
to September 30, 2019, the Company repaid a related party note in the principal amount of $25,000 and $3,164 of accrued interest.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Convertible
Notes
Subsequent
to September 30, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $1,144,500 to certain
lenders for aggregate cash proceeds of $1,038,625. The difference of $105,875 was recorded as a debt discount and will be amortized
over the terms of the respective notes. The convertible notes bear interest at a rate of 12% per annum, payable at maturity, with
original maturity dates ranging from May 2020 to October 2020. The notes are convertible as follows: (i) $921,500 of aggregate
convertible notes and the respective accrued interest are convertible into shares of the Company’s common stock at the election
of the holder after the 180th day following the issue date at a conversion price equal to the lower of the closing price on the
issuance date or generally 58% of the fair value of the Company’s common stock; (ii) $55,000 of convertible notes and the
respective accrued interest are convertible into shares of the Company’s common stock at the election of the holder after
the 180th day following the issue date at a conversion price generally equal to 58% of the fair value of the Company’s
common stock, and (iii) $168,000 of aggregate convertible notes are convertible at a fixed price ranging from $0.25 to $1.00 per
share for the first six months following the respective issue date, and thereafter at a conversion price equal to 58% of the fair
value of the Company’s stock, subject to adjustment, until the respective note has been paid in full. In connection with
the issuance of a certain convertible promissory note, the Company issued to the lender a warrant for the purchase of 100,000
shares of the Company’s common stock. In the event that the Company elects to prepay certain notes during the
180-day period following the issue date, the holder is entitled to receive a prepayment premium up to 35%, depending on
the note, of the then outstanding principal balance plus accrued interest.
Subsequent
to September 30, 2019, the Company and certain lenders agreed to exchange an aggregate principal amount of $236,062 and aggregate
accrued interest of $14,510 of certain convertible notes payable for an aggregate of 3,710,440 shares of the Company’s
common stock at exchange prices ranging between $0.05 to $0.12 per share.
Subsequent
to September 30, 2019, the Company repaid an aggregate principal amount of $1,275,000 of convertible notes payable and $109,038
of the respective aggregate accrued interest.
Subsequent
to September 30, 2019, the Company and a certain lender agreed to extend the maturity date of a certain convertible promissory
note with a principal balance of $91,539 from January 2020 to July 2020. In consideration of the extension, the parties agreed
to reduce the conversion price floor of the note from $0.10 per share to $0.01 per share.
Other
Notes
Subsequent
to September 30, 2019, the Company issued a lender a note payable in the principal amount of $175,000. The note bears interest
at a rate of 15% per annum, payable at maturity, with an original maturity date in November 2019.
Item
2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of the results of operations and financial condition of BioRestorative Therapies, Inc. (together
with its subsidiary, “BRT”) for the three and nine months ended September 30, 2019 and 2018 should be read in conjunction
with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report
on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to
“us,” “we,” “our,” and similar terms refer to BRT. This Quarterly Report contains forward-looking
statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained
in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us,
or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,”
“will,” “expect,” “believe,” “anticipate,” “project,” “plan,”
“intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended
to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events
and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence
the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include,
but are not limited to, the risks and uncertainties discussed in Item 7 (“Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition”) of
our Annual Report on Form 10-K for the year ended December 31, 2018 filed with the Securities and Exchange Commission (the “SEC”)
on March 29, 2019.
Any
one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking
statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially
from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events or otherwise.
This
Quarterly Report on Form 10-Q includes references to our federally registered trademarks, BioRestorative Therapies, the Dragonfly
Logo, brtxDISC, ThermoStem Stem Cellutrition Stem Pearls and Stem the Tides of Time. The Dragonfly Logo is also registered with
the U.S. Copyright Office. This Quarterly Report on Form 10-Q may also include references to trademarks, trade names and service
marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Quarterly
Report on Form 10-Q appear without the ®, SM or ™ symbols, and copyrighted content appears without the use of the symbol
©, but the absence of use of these symbols does not reflect upon the validity or enforceability of the intellectual property
owned by us or third parties.
Overview
We
develop therapeutic products and medical therapies using cell and tissue protocols, primarily involving adult (non-embryonic)
stem cells. We are currently pursuing our Disc/Spine Program with our lead cell therapy candidate being called BRTX-100.
We submitted an IND application to the FDA to obtain authorization to commence a Phase 2 clinical trial investigating the use
of BRTX-100 in the treatment of chronic lower back pain arising from degenerative disc disease. We have received such authorization
from the FDA. We intend to commence such clinical trial during the first quarter of 2020 (assuming the receipt of necessary funding).
We have obtained a license to utilize or sublicense a method for the hypoxic (low oxygen) culturing of cells for use in treating
disc and spine conditions, including protruding and bulging lumbar discs. The technology is an advanced stem cell injection procedure
that may offer relief from lower back pain, buttock and leg pain, and numbness and tingling in the leg and foot. We are also developing
our ThermoStem Program. This pre-clinical program involves the use of brown adipose (fat) in connection with the cell-based treatment
of type 2 diabetes and obesity as well as hypertension, other metabolic disorders and cardiac deficiencies. United States patents
related to the ThermoStem Program were issued in September 2015 and January 2019, Australian patents related to the ThermoStem
Program were issued in April 2017 and October 2019, a Japanese patent related to the ThermoStem Program was issued
in December 2017 and an Israeli patent related to the ThermoStem Program was issued in October 2019.
We
have licensed a patented curved needle device that is a needle system designed to deliver cells and/or other therapeutic products
or materials to the spine and discs or other potential sites.
Our
offices are located in Melville, New York where we have established a laboratory facility in order to increase our capabilities
for the further development of possible cellular-based treatments, products and protocols, stem cell-related intellectual property
and translational research applications.
As
of September 30, 2019, our accumulated deficit was $77,019,591, our stockholders’ deficiency was $12,428,533 and our working
capital deficiency was $13,514,377. We have historically only generated a modest amount of revenue, and our losses have principally
been operating expenses incurred in research and development, marketing and promotional activities in order to commercialize our
products and services, plus costs associated with meeting the requirements of being a public company. We expect to continue to
incur substantial costs for these activities over at least the next year. These conditions indicate that there is substantial
doubt about our ability to continue as a going concern within one year after the financial statement issuance date.
Based
upon our working capital deficiency as of September 30, 2019, and our forecast for continued operating losses, we require equity
and/or debt financing to continue our operations. As of September 30, 2019, our outstanding debt of $8,496,076, with interest
at rates ranging between 8% and 15% per annum, was due on various dates through September 2020. Subsequent to September
30, 2019, we have received aggregate equity financings and debt proceeds of $500,000 and $1,363,625, respectively, debt (inclusive
of accrued interest) of $250,571 has been exchanged for common stock, $1,412,202 of debt (inclusive of accrued interest) has been
repaid, and the due date for the repayment of $91,539 of debt has been extended to July 2020. Giving effect to the above actions,
we currently have notes payable in the aggregate outstanding principal amount of $593,400 which are past due. Based upon our working
capital deficiency and outstanding debt, we expect to be able to fund our operations through December 2019 while we continue to
apply efforts to raise additional capital. We anticipate that we will require approximately $20,000,000 in financing to commence
and complete a Phase 2 clinical trial with regard to our Disc/Spine Program. We anticipate that we will require approximately
$45,000,000 in further additional funding to complete our clinical trials using BRTX-100 (assuming the receipt of no revenues).
We will also require a substantial amount of additional funding if we determine to establish a manufacturing operation with regard
to our Disc/Spine Program (as opposed to utilizing a third-party manufacturer) and to implement our other programs, including
our metabolic ThermoStem Program. No assurance can be given that the anticipated amounts of required funding are correct or that
we will be able to accomplish our goals within the timeframes projected. In addition, no assurance can be given that we will be
able to obtain any required financing on commercially reasonable terms or otherwise.
We
have filed a registration statement with the Securities and Exchange Commission with regard to the contemplated public offering
of our equity securities. The registration statement has not yet become effective. These securities may not be sold nor may offers
to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q shall not constitute an offer
to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in
which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any
such state or jurisdiction. The contemplated public offering of the Company’s securities will be made only by means of a prospectus.
No assurances can be given that the contemplated public offering will be completed on reasonable terms or otherwise.
We
are currently seeking several different financing alternatives to support our future operations and are currently in the process
of negotiating extensions or discussing conversions to equity with respect to our outstanding indebtedness. If we are unable to
obtain such additional financing on a timely basis or, notwithstanding any request we may make, our debt holders do not agree
to convert their notes into equity or extend the maturity dates of their notes, we may have to curtail our development, marketing
and promotional activities, which would have a material adverse effect on our business, financial condition and results of operations,
and ultimately we could be forced to discontinue our operations and liquidate. See “Liquidity and Capital Resources”
below.
Between
May 2019 and August 2019, holders of our notes in the aggregate principal amount of $1,565,000 entered into agreements with us
pursuant to which the parties have agreed to exchange such notes for shares of our common stock and warrants in connection with
the closing of the Public Offering.
Consolidated
Results of Operations
Three
Months Ended September 30, 2019 Compared with Three Months Ended September 30, 2018
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the three months
ended September 30, 2019 and 2018, respectively:
|
|
|
For
The Three Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
38,000
|
|
|
$
|
26,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
Marketing
and promotion
|
|
|
156,179
|
|
|
|
155,161
|
|
|
Consulting
|
|
|
373,975
|
|
|
|
417,601
|
|
|
Research
and development
|
|
|
409,815
|
|
|
|
357,436
|
|
|
General
and administrative
|
|
|
917,027
|
|
|
|
284,472
|
|
|
Total
Operating Expenses
|
|
|
1,856,996
|
|
|
|
1,214,670
|
|
|
Loss
From Operations
|
|
|
(1,818,996
|
)
|
|
|
(1,188,670
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(394,816
|
)
|
|
|
(257,298
|
)
|
|
Amortization
of debt discount
|
|
|
(1,487,501
|
)
|
|
|
(540,488
|
)
|
|
Loss
on extinguishment of notes payable, net
|
|
|
(1,290,623
|
)
|
|
|
(320,383
|
)
|
|
Change
in fair value of derivative liabilities
|
|
|
(65,037
|
)
|
|
|
(615,322
|
)
|
|
Warrant
modification expense
|
|
|
-
|
|
|
|
(3,100
|
)
|
|
Total
Other Expense
|
|
|
(3,237,977
|
)
|
|
|
(1,736,591
|
)
|
|
Net
Loss
|
|
$
|
(5,056,973
|
)
|
|
$
|
(2,925,261
|
)
|
Revenues
For
the three months ended September 30, 2019 and 2018, we generated $38,000 and $26,000, respectively, of royalty revenue in connection
with our sublicense agreement.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the three months ended September 30, 2019, marketing and promotion expenses increased by $1,018, or 1%, from $155,161 to $156,179
as compared to the three months ended September 30, 2018.
We
expect that marketing and promotion expenses will increase in the future as we increase our marketing activities following full
commercialization of our products and services.
Consulting
Consulting
expenses consist of consulting fees and stock-based compensation to consultants. For the three months ended September 30, 2019,
consulting expenses decreased $43,626, or 10%, from $417,601 to $373,975, as compared to the three months ended September 30,
2018. The decrease is primarily due to a decrease of approximately $130,000 of stock-based compensation expense partially offset
by an increase of approximately $90,000 in cash consulting fees.
Research
and development
Research
and development expenses include cash and non-cash compensation of (a) our Vice President of Research and Development; (b) our
Scientific Advisory Board members; and (c) laboratory staff and costs related to our brown fat and disc/spine initiatives. Research
and development expenses are expensed as they are incurred. For the three months ended September 30, 2019, research and development
expenses increased by $52,379, or 15%, from $357,436 to $409,815, as compared to the three months ended September 30, 2018. The
increase was primarily a result of an increase of approximately $26,000 in laboratory staffing, an increase of approximately $21,000
in lab testing and research, and an increase of approximately $8,000 in stock-based compensation expense primarily related to
an option issued to our Disc Committee Chairman.
We
expect that our research and development expenses will increase with the continuation of the aforementioned initiatives.
General
and administrative
General
and administrative expenses consist primarily of salaries, bonuses, payroll taxes, severance costs and stock-based compensation
to employees (excluding any cash or non-cash compensation of our Vice President of Research and Development and our laboratory
staff), as well as corporate expenses such as legal and professional fees, investor relations and occupancy related expenses.
For the three months ended September 30, 2019, general and administrative expenses increased by $632,555, or 222%, from $284,472
to $917,027, as compared to the three months ended September 30, 2018. The increase was primarily due to a $644,000 nonrecurring
reversal of compensation expense related to performance milestones of an option granted to a former Senior Vice President becoming
not probable in 2018 and an increase of approximately $108,000 of legal expense due to increased legal matters regarding fundings,
conversions, intellectual property and patent issuance costs, partially offset by a decrease of approximately $64,000 in legal
expense and financial services expense related to work performed for a contemplated public offering classified as deferred offering
costs and a decrease of approximately $62,000 in stock-based compensation expense relating to fewer unvested options outstanding
in 2019.
We
expect that our general and administrative expenses will increase as we expand our staff, develop our infrastructure and incur
additional costs to support the growth of our business.
Interest
expense
For
the three months ended September 30, 2019, interest expense increased $137,518, or 53%, as compared to the three months ended
September 30, 2018. The increase was due to an increase in interest-bearing short-term borrowings as compared to the three months
ended September 30, 2018.
Amortization
of debt discount
For
the three months ended September 30, 2019, amortization of debt discount increased $947,013, or 175%, as compared to the three
months ended September 30, 2018. The increase was primarily due to the timing of the recognition of expense related to the bifurcated
embedded conversion options of convertible notes.
Loss
on extinguishment of notes payable, net
For
the three months ended September 30, 2019, the loss on extinguishment of notes payable, net increased by $970,240, or 303% from
$320,383 to $1,290,623, as compared to the three months ended September 30, 2018. The increase is associated with debt
repayments, debtholders’ exchanges of debt into equity securities, and extinguishments of debt, resulting in a loss on the
exchange.
Change
in fair value of derivative liabilities
For
the three months ended September 30, 2019, the net loss related to the change in fair value of derivative liabilities decreased
by $550,285, or 89%, from $615,322 to $65,037, as compared to the three months ended September 30, 2018. The decrease was due
to the decrease in time value of embedded conversion options within certain convertible notes payable.
Warrant
modification expense
During
the three months ended September 30, 2019 and 2018, we recorded expense related to the modification of the expiration dates and
exercise prices of certain outstanding warrants of $0 and $3,100, respectively.
Nine
Months Ended September 30, 2019 Compared with Nine Months Ended September 30, 2018
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the nine months ended
September 30, 2019 and 2018, respectively:
|
|
|
For
The Nine Months Ended
|
|
|
|
|
September
30,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
98,000
|
|
|
$
|
82,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses:
|
|
|
|
|
|
|
|
|
|
Marketing
and promotion
|
|
|
280,865
|
|
|
|
213,715
|
|
|
Consulting
|
|
|
1,507,582
|
|
|
|
1,268,485
|
|
|
Research
and development
|
|
|
1,306,544
|
|
|
|
1,137,381
|
|
|
General
and administrative
|
|
|
3,279,145
|
|
|
|
2,932,162
|
|
|
Total
Operating Expenses
|
|
|
6,374,136
|
|
|
|
5,551,743
|
|
|
Loss
From Operations
|
|
|
(6,276,136
|
)
|
|
|
(5,469,743
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Other
Expense:
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(1,039,727
|
)
|
|
|
(648,940
|
)
|
|
Amortization
of debt discount
|
|
|
(3,221,904
|
)
|
|
|
(1,884,116
|
)
|
|
Loss
on extinguishment of notes payable, net
|
|
|
(2,291,218
|
)
|
|
|
(384,171
|
)
|
|
Change
in fair value of derivative liabilities
|
|
|
(268,350
|
)
|
|
|
(557,274
|
)
|
|
Warrant
modification expense
|
|
|
-
|
|
|
|
(3,100
|
)
|
|
Total
Other Expense
|
|
|
(6,821,199
|
)
|
|
|
(3,477,601
|
)
|
|
Net
Loss
|
|
$
|
(13,097,335
|
)
|
|
$
|
(8,947,344
|
)
|
Revenues
For
the nine months ended September 30, 2019 and 2018, we generated $98,000 and $82,000, respectively, of royalty revenue in connection
with our sublicense agreement.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the nine months ended September 30, 2019, marketing and promotion expenses increased by $67,150, or 31%, from $213,715 to $280,865
as compared to the nine months ended September 30, 2018. The increase is primarily due the hiring of a public awareness firm.
We
expect that marketing and promotion expenses will increase in the future as we increase our marketing activities following full
commercialization of our products and services.
Consulting
Consulting
expenses consist of consulting fees and stock-based compensation to consultants. For the nine months ended September 30, 2019,
consulting expenses increased $239,097, or 19%, from $1,268,485 to $1,507,582, as compared to the nine months ended September
30, 2018. The increase is primarily due to an increase of approximately $370,000 of cash consulting fees in connection with clinical
trials and strategic planning, partially offset by a reduction of approximately $156,000 of stock-based compensation related to
fewer unvested outstanding options in 2019.
Research
and development
Research
and development expenses include cash and non-cash compensation of (a) our Vice President of Research and Development; (b) our
Scientific Advisory Board members; and (c) laboratory staff and costs related to our brown fat and disc/spine initiatives. Research
and development expenses are expensed as they are incurred. For the nine months ended September 30, 2019, research and development
expenses increased by $169,163, or 15%, from $1,137,381 to $1,306,544, as compared to the nine months ended September 30, 2018.
The increase was primarily a result of an increase of approximately $109,000 in stock-based compensation expense primarily related
to options issued to our Scientific Advisory Board members, incremental modification expense related to an option repricing in
2019, and an increase in laboratory staffing.
We
expect that our research and development expenses will increase with the continuation of the aforementioned initiatives.
General
and administrative
General
and administrative expenses consist primarily of salaries, bonuses, payroll taxes, severance costs and stock-based compensation
to employees (excluding any cash or non-cash compensation of our Vice President of Research and Development and our laboratory
staff), as well as corporate expenses such as legal and professional fees, investor relations and occupancy related expenses.
For the nine months ended September 30, 2019, general and administrative expenses increased by $346,983, or 12%, from $2,932,162
to $3,279,145, as compared to the nine months ended September 30, 2018. The increase is primarily due to an increase of approximately
$366,000 in legal expense relating to intellectual property, patent issuance costs, and increased legal matters regarding fundings
and conversions of debt.
We
expect that our general and administrative expenses will increase as we expand our staff, develop our infrastructure and incur
additional costs to support the growth of our business.
Interest
expense
For
the nine months ended September 30, 2019, interest expense increased $390,787, or 60%, as compared to the nine months ended September
30, 2018. The increase was due to an increase in interest-bearing short-term borrowings as compared to the nine months ended September
30, 2018.
Amortization
of debt discount
For
the nine months ended September 30, 2019, amortization of debt discount increased $1,337,788, or 71%, as compared to the nine
months ended September 30, 2018. The increase was primarily due to increased issuances of convertible notes and the timing of
the recognition of expense related to the bifurcated embedded conversion options of convertible notes.
Loss
on extinguishment of notes payable, net
For
the nine months ended September 30, 2019, we recorded a loss on extinguishment of notes payable, net, of $2,291,218, as compared
to a loss on extinguishment of notes payable, net of $384,171 for the nine months ended September 30, 2018. The increase is associated
with debt repayments and debt holders’ exchanges of debt into equity securities resulting in a loss on the exchange.
Change
in fair value of derivative liabilities
For
the nine months ended September 30, 2019, the net loss related to the change in fair value of derivative liabilities decreased
by $288,924, or 52%, from $557,274 to $268,350, as compared to the nine months ended September 30, 2018. The decrease was due
to the decrease in time value of embedded conversion options within certain convertible notes payable.
Liquidity
and Capital Resources
Liquidity
We
measure our liquidity in a number of ways, including the following:
|
|
|
September 30, 2019
|
|
|
December
31, 2018
|
|
|
Cash
|
|
$
|
98,113
|
|
|
$
|
117,523
|
|
|
|
|
|
|
|
|
|
|
|
|
Working
Capital Deficiency
|
|
$
|
(13,514,377
|
)
|
|
$
|
(9,073,901
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Notes
Payable (Gross)
|
|
$
|
8,496,076
|
|
|
$
|
5,161,916
|
|
Availability
of Additional Funds
Based
upon our working capital deficiency and stockholders’ deficiency of $13,514,377 and $12,428,533, respectively, as of September
30, 2019, we require additional equity and/or debt financing to continue our operations. These conditions raise substantial doubt
about our ability to continue as a going concern within the next twelve months from the date of this filing.
As
of September 30, 2019, our outstanding debt of $8,496,076, together with interest at rates ranging between 8% and 15% per annum,
was due on various dates through September 2020. Subsequent to September 30, 2019, we have received aggregate equity financings
and debt proceeds of $500,000 and $1,363,625, respectively, debt (inclusive of accrued interest) of $250,571 has been exchanged
for common stock, $1,412,202 of debt (inclusive of accrued interest) has been repaid, and the due date for the repayment of $91,539
of debt has been extended to July 2020. Giving effect to the above actions, we currently have notes payable in the aggregate outstanding
principal amount of $593,400 which are past due. As of the date of filing, our outstanding debt was as follows:
|
|
|
Principal
|
|
|
Maturity
Date
|
|
Amount
|
|
|
Past
Due
|
|
$
|
593,400
|
|
|
QE 12/31/2019
|
|
|
2,810,000
|
|
|
QE 3/31/2020
|
|
|
1,120,000
|
|
|
QE 6/30/2020
|
|
|
2,118,638
|
|
|
QE 9/30/2020
|
|
|
1,698,227
|
|
|
QE
12/31/2020
|
|
|
89,250
|
|
|
|
|
$
|
8,429,515
|
|
We
have filed a registration statement with the Securities and Exchange Commission with regard to the contemplated public offering
of our equity securities. The registration statement has not yet become effective. These securities may not be sold nor may offers
to buy be accepted prior to the time the registration statement becomes effective. This Form 10-Q shall not constitute an offer
to sell or the solicitation of an offer to buy, nor shall there be any sale of these securities in any state or jurisdiction in
which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any
such state or jurisdiction. The contemplated public offering of the Company’s securities will be made only by means of a prospectus.
No assurances can be given that the contemplated public offering will be completed on reasonable terms or otherwise.
Between
May 2019 and August 2019, holders of our notes in the aggregate principal amount of $1,565,000 entered into agreements with
us pursuant to which the parties have agreed to exchange such notes for shares of our common stock and warrants in connection
with the closing of our contemplated Public Offering.
Based
upon our working capital deficiency, outstanding debt and forecast for continued operating losses we expect that the cash we currently
have available will fund our operations through December 2019. Thereafter, we will need to raise further capital, through the
sale of additional equity securities (including pursuant to our contemplated Public Offering as to which no assurances can be
given) or debt securities, to support our future operations and to repay our debt (unless, if requested, the debt holders agree
to convert their notes into equity or extend the maturity dates of their notes). Our operating needs include the planned costs
to operate our business, including amounts required to fund working capital and capital expenditures. Our future capital requirements
and the adequacy of our available funds will depend on many factors, including our ability to successfully commercialize our products
and services, competing technological and market developments, and the need to enter into collaborations with other companies
or acquire other companies or technologies to enhance or complement our product and service offerings.
We
may be unable to raise sufficient additional capital when we need it or raise capital on favorable terms. Debt financing may require
us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further
indebtedness and may contain other terms that are not favorable to our stockholders or us. If we are unable to obtain adequate
funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into
financing agreements on unattractive terms.
Our
unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared
in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation
as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or
settlement values. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
During
the nine months ended September 30, 2019 and 2018, our sources and uses of cash were as follows:
Net
Cash Used in Operating Activities
We
experienced negative cash flows from operating activities for the nine months ended September 30, 2019 and 2018 in the amounts
of $5,107,743 and $3,551,542, respectively. The net cash used in operating activities for the nine months ended September 30,
2019 was primarily due to cash used to fund a net loss of $13,097,335, adjusted for non-cash expenses in the aggregate amount
of $7,781,461 partially offset by $208,131 of cash generated by changes in the levels of operating assets and liabilities, primarily
as a result of increases in accrued interest, expenses, and other current liabilities, partially offset by a decrease in accounts
payable. The net cash used in operating activities for the nine months ended September 30, 2018 was primarily due to cash used
to fund a net loss of $8,947,344, adjusted for non-cash expenses in the aggregate amount of $5,150,620 partially offset by $245,182
of cash generated by changes in the levels of operating assets and liabilities, primarily as a result of increases in accrued
interest, expenses, and other current liabilities, partially offset by a decrease in accounts payable.
Cash
Used in Investing Activities
During
the nine months ended September 30, 2019 and 2018, cash used in investing activities was $35,631 and $12,869, respectively, due
to cash used for the purchase of office, medical and computer equipment.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities during the nine months ended September 30, 2019 and 2018 was $5,123,964 and $3,218,105,
respectively. During the nine months ended September 30, 2019, $3,982,392 of net proceeds
were from debt financings, $1,156,000 of proceeds were from equity financings and $14,428 was used for incurred offering costs.
During the nine months ended September 30, 2018, $2,628,937 of net proceeds were from debt financings and other borrowings and
$589,168 of proceeds were from equity financings (including proceeds received in connection with the exercise of common stock
purchase warrants).
Critical
Accounting Policies and Estimates
There
are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2018 filed with the SEC
on March 29, 2019, except as follows:
Revenue
Recognition
Effective
January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”
(“ASC 606”). ASC 606 will require management to make significant judgments and estimates. As a result, we implemented
changes to our internal controls related to revenue recognition for the quarter ended March 31, 2019. These changes include updated
accounting policies affected by ASC 606, redesigned internal controls over financial reporting related to ASC 606, expanded data
gathering to comply with the additional disclosure requirements, and ongoing contract review requirements.
Deferred
Offering Costs
Deferred
offering costs, which primarily consist of direct, incremental professional fees incurred in connection with preparing for our
contemplated public offering of our equity securities, are capitalized as non-current assets on the balance sheet. Upon the consummation
of a public offering, the deferred offering costs will be offset against the equity offering proceeds.
Recently
Issued Accounting Pronouncements
For
a description of relevant recently issued accounting pronouncements, see Note 3 – Summary of Significant Accounting Policies
in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.