PART
I
Forward-Looking
Statements
This
Annual 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 Annual 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, that may influence the accuracy of the statements and the projections upon which the statements
are based. Factors which may affect our results include, but are not limited to, the risks and uncertainties discussed in Item
7 of this Annual Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations -
“Factors That May Affect Future Results and Financial Condition”).
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.
Intellectual
Property
This
Annual Report includes references to our federally registered trademarks, BioRestorative Therapies and Dragonfly design,
BRTX-100, ThermoStem and Stem Pearls. We also own an allowed trademark application for BRTX. The Dragonfly Logo
is also registered with the U.S. Copyright Office. This Annual Report also includes 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 Annual Report 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.
As
used in this Annual Report on Form 10-K (the “Annual Report”), references to the “Company”, “we”,
“us”, or “our” refer to BioRestorative Therapies, Inc. and its subsidiaries.
We
were incorporated in Nevada on June 13, 1997. On August 15, 2011, we changed our name from “Stem Cell Assurance, Inc.”
to “BioRestorative Therapies, Inc.” Effective January 1, 2015, we reincorporated in Delaware.
In
January 2017, we submitted an Investigational New Drug (“IND”) application to the U.S. Food and Drug Administration
(the “FDA”) to obtain authorization to commence a Phase 2 clinical trial investigating the use of BRTX-100,
our lead cell therapy candidate, in the treatment of chronic lower back pain arising from degenerative disc disease. In February
2017, we received such authorization from the FDA.
Material
Events During 2019
In
January 2019, a United States patent related to our ThermoStem Program was issued to us.
In
October 2019, an Australian patent related to our ThermoStem Program was issued to us.
In
October 2019, an Israeli patent related to our ThermoStem Program was issued to us.
During the year ended
December 31, 2019, we received aggregate equity and debt financing of $1,658,500 and $10,888,339, respectively.
Material
Events During 2020
In
March 2020, our collaboration with the University of Pennsylvania resulted in a publication in Cell Reports, a respected
peer reviewed journal, with regard to our ThermoStem Program.
In
March 2020, a United States patent related to our ThermoStem Program was issued to us.
In
April 2020, a European patent related to our ThermoStem Program was issued to us. This European patent was validated in
Belgium, France, Germany, Italy, Poland, Spain, Sweden, Switzerland, and the United Kingdom.
In
May 2020, an Israeli patent related to our ThermoStem Program was issued to us.
In
November 2020, a notice of allowance was issued for a United States patent application in the ThermoStem Program. This
application is expected to issue as a United States patent in 2021.
In
November 2020, a notice of allowance was issued for a European patent application in the ThermoStem Program. This application
issued as a European patent in January 2021.
During
the period from January 1, 2020 through March 19, 2020 (prior to the commencement of the Chapter 11 reorganization discussed below),
we received aggregate equity and debt financing of $10,000 and $441,762, respectively.
During
the Chapter 11 reorganization proceeding, we received debtor-in-possession financing of $1,189,413 as well as debt financing in
the aggregate amount of $3,848,548 at the effective date of our plan of reorganization. We have not received any equity financing
since the commencement of our Chapter 11 reorganization proceeding and have not received any debt financing following the effective
date of our plan of reorganization.
Chapter
11 Reorganization
On
March 20, 2020 (the “Petition Date”), we filed a voluntary petition commencing a case under chapter 11 of title 11
of the U.S. Code in the United States Bankruptcy Court for the Eastern District of New York (the “Bankruptcy Court”).
On
August 7, 2020 we and Auctus Fund, LLC (“Auctus”), our largest unsecured creditor and a stockholder as of the Petition
Date, filed an Amended Joint Plan of Reorganization (the “Plan”) and on October 30, 2020, the Bankruptcy Court entered
an order (the “Confirmation Order”) confirming the Plan, as amended. Amendments to the Plan are reflected in the Confirmation
Order. On November 16, 2020 (the “Effective Date”), the Plan became effective.
Reference
is made to Item 1.03 of our Current Report on Form 8-K, filed with the Securities and Exchange Commission on November 20, 2020
(https://www.sec.gov/Archives/edgar/data/1505497/000102177120000081/0001021771-20-000081-index.htm) for a description of
the Plan, as amended and confirmed by the Confirmation Order, and the events that had occurred as of the filing date, which Item
1.03 is incorporated herein by reference.
Effective
as of the Effective Date, as contemplated by the Plan, Mark Weinreb, A. Jeffrey Radov, Paul Jude Tonna and Robert B. Catell resigned
as directors of the Company and Mr. Weinreb resigned as our President, Chief Executive Officer and Chairman of the Board..
Effective
as of the Effective Date, as contemplated by the Plan, Lance Alstodt was elected President, Chief Executive Officer, Chairman
of the Board and a director of the Company and Francisco Silva, our Vice President, Research and Development, was elected a director
of the Company. See Item 10 (“Directors, Executive Officers and Corporate Governance”).
General
We
are a life sciences company focused on the development of regenerative medicine products and therapies using cell and tissue protocols,
primarily involving adult (non-embryonic) stem cells. Our two core developmental programs, as described below, relate to the treatment
of disc/spine disease and metabolic disorders:
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Disc/Spine
Program (brtxDisc). Our lead cell therapy candidate, BRTX-100, is a product formulated from autologous (or
a person’s own) cultured mesenchymal stem cells (“MSCs”) collected from the patient’s bone marrow.
We intend that the product will be used for the non-surgical treatment of painful lumbosacral disc disorders or as a complimentary
therapeutic to a surgical procedure. The BRTX-100 production process involves collecting bone marrow and whole blood
from a patient, isolating and culturing (in a proprietary method) stem cells from the bone marrow and cryopreserving the cells
in an autologous carrier. In an outpatient procedure, BRTX-100 is to be injected by a physician into the patient’s
painful disc. The treatment is intended for patients whose pain has not been alleviated by non-surgical procedures or conservative
therapies and who potentially face the prospect of highly invasive surgical procedures. 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 third quarter of 2021 (assuming the receipt of necessary funding). See “Disc/Spine
Program” below.
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Metabolic
Program (ThermoStem). We are developing a cell-based therapy candidate to target obesity and metabolic disorders using
brown adipose (fat) derived stem cells (“BADSC”) to generate brown adipose tissue (“BAT”). We refer
to this as our ThermoStem Program. BAT is intended to mimic naturally occurring brown adipose depots that regulate
metabolic homeostasis in humans. Initial preclinical research indicates that increased amounts of brown fat in animals may
be responsible for additional caloric burning, as well as reduced glucose and lipid levels. Researchers have found that people
with higher levels of brown fat may have a reduced risk for obesity and diabetes. See “Metabolic Brown Adipose (Fat)
Program” below.
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We
have also licensed an investigational curved needle device designed to deliver cells and/or other therapeutic products or material
to the spine and discs (and other parts of the body). We anticipate that FDA approval or clearance will be necessary for this
device prior to commercialization. We do not intend to utilize this device in connection with our contemplated Phase 2 clinical
trial with regard to BRTX-100. See “Curved Needle Device” below.
The
patents and patent applications for the Disc/Spine Program, the ThermoStem Program and the curved needle device
are listed below under “Technology; Research and Development.”
Overview
Every
human being has stem cells in his or her body. These cells exist from the early stages of human development until the end of a
person’s life. Throughout our lives, our body continues to produce stem cells that regenerate to produce differentiated
cells that make up various aspects of the body such as skin, blood, muscle and nerves. These are generally referred to as adult
(non-embryonic) stem cells. These cells are important for the purpose of medical therapies aiming to replace lost or damaged cells
or tissues or to otherwise treat disorders.
Regenerative
cell therapy relies on replacing diseased, damaged or dysfunctional cells with healthy, functioning ones or repairing damaged
or diseased tissue. A great range of cells can serve in cell therapy, including cells found in peripheral and umbilical cord blood,
bone marrow and adipose (fat) tissue. Physicians have been using adult stem cells from bone marrow to treat various blood cancers
for more than 60 years (the first successful bone marrow transplant was performed in 1956). Recently, physicians have begun to
use stem cells to treat various other diseases. We intend to develop cell and tissue products and regenerative therapy protocols,
primarily involving adult stem cells, to allow patients to undergo cellular-based treatments.
We
intend to concentrate initially on therapeutic areas in which risk to the patient is low, recovery is relatively easy, results
can be demonstrated through sufficient clinical data, and patients and physicians will be comfortable with the procedure. We believe
that there will be readily identifiable groups of patients who will benefit from these procedures. We also believe that these
procedures will be significantly less expensive than the most common surgical procedure alternatives and will compare favorably,
over the long-term, to conservative treatment costs which may persist for years.
Accordingly,
we have focused our initial developmental efforts on cellular-based therapeutic products and clinical development programs in
selective areas of medicine for which the treatment protocol is minimally invasive. Such areas include the treatment of the disc
and spine and metabolic-related disorders. Upon regulatory approval, we will seek to obtain third party reimbursement for our
products and procedures; however; patients may be required to pay for our products and procedures out of pocket in full and without
the ability to be reimbursed by any governmental and other third party payers.
We
have undertaken research and development efforts in connection with the development of investigational therapeutic products and
medical therapies using cell and tissue protocols, primarily involving adult stem cells. See “Disc/Spine Program,”
“Metabolic Brown Adipose (Fat) Program” and “Curved Needle Device” below. As a result of these programs,
we have obtained four United States patents and seven foreign patents related to research regarding our ThermoStem Program,
we have obtained licenses for one patent application related to our Disc/Spine Program and we have obtained a license for
one United States patent related to a curved needle device.
We
have established a laboratory facility and will seek to further develop cellular-based treatments, products and protocols, stem
cell-related intellectual property (“IP”) and translational research applications. See “Laboratory” below.
We
have not generated any significant revenues from our operations. The implementation of our business plan, as discussed below,
will require the receipt of sufficient equity and/or debt financing to purchase necessary equipment, technology and materials,
fund our research and development efforts, including our contemplated clinical trials, retire our outstanding debt (if such debt
is not converted into equity) (see Item 7 of this Annual Report - “Management’s Discussion and Analysis of Financial
Condition and Results of Operations—Liquidity and Capital Resources—Availability of Additional Funds”) and otherwise
fund our operations. We intend to seek such financing from current stockholders and debtholders as well as from other accredited
investors. We also intend to seek to raise capital through investment bankers and from biotech funds, strategic partners and other
financial institutions. We anticipate that we will require approximately $12,000,000 in financing to commence and complete a Phase
2 clinical trial investigating the use of BRTX-100 in the treatment of chronic lower back pain arising from degenerative
disc disease and we will require approximately $45,000,000 in further additional funding to complete such clinical trials, as
further described in this section (assuming the receipt of no revenues from operations). We will also require a substantial amount
of additional funding to implement our other programs described in this section, repay our outstanding debt (assuming such debt
is not converted into equity) and fund general operations. 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 may also
seek to have our debtholders convert all or a portion of their debt into equity. No assurance can be given that debtholders will
convert such debt into equity. If we are unable to obtain adequate funding, we may be required to significantly curtail or discontinue
our proposed operations. See Item 7 of this Annual Report (“Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Factors That May Affect Future Results and Financial Condition – We will need to obtain a significant
amount of financing to initiate and complete our clinical trials and implement our business plan. – We may need to obtain
additional financing to satisfy debt obligations. An event of default pursuant to our outstanding debt obligations could trigger
an acceleration of the due date of such obligations, including our secured debt.”).
Disc/Spine
Program
General
Among
the initiatives that we are currently pursuing is our Disc/Spine Program, with our initial product candidate being called
BRTX-100. We have obtained a license (see “License” below) that permits us to use technology for adult stem
cell treatment of disc and spine conditions. The technology is an advanced stem cell culture and injection procedure into the
intervertebral disc (“IVD”) that may offer relief from lower back pain, buttock and leg pain, and numbness and tingling
in the leg and foot.
Lower
back pain is the most common, most disabling, and most costly musculoskeletal ailment faced worldwide. According to a recent market
report, of the 250 million American adults, nearly 25 million have chronic lower back pain of which approximately 12 million have
been diagnosed with and treated for disc degeneration and approximately 5.6 million have pain caused by a protruding or injured
disc. We believe that between 500,000 and 1 million invasive surgical procedures are performed each year to try to alleviate the
pain associated with these lower back conditions and that such procedures cost approximately $40 billion. Clinical studies have
documented that the source of the pain is most frequently damage to the IVD. This can occur when forces, whether a single load
or repetitive microtrauma, exceed the IVD’s inherent capacity to resist those loads. Aging, obesity, smoking, lifestyle,
and certain genetic factors may predispose one to an IVD injury. Current surgical approaches to back pain are extremely invasive
(often altering the spine’s biomechanics unfavorably and predisposing it to further disc degeneration) and are associated
with unacceptably low success rates (with a second operation occurring 10% to 20% of the time). In addition, current surgical
approaches are costly with spinal fusion surgery costing approximately $110,000, discectomy costing approximately $20,000 to $50,000
and disc replacement surgery costing approximately $80,000 to $150,000. Even conservative treatments can be costly, with oral
medications costing between $1,000 and $2,000 per year, injection treatments costing approximately $8,000 per year and physical
therapy costing approximately $20,000 annually. We anticipate that the cost of a single treatment using BRTX-100 will compare
favorably to conservative treatments which may continue for years and will be less expensive than the most common surgical procedures.
While
once thought to be benign, the natural history of lower back pain is often one of chronic recurrent episodes of pain leading to
progressive disability. This is believed to be a direct result of the IVD’s poor healing capacity after injury. The IVD
is the largest avascular (having few or no blood vessels) structure in the body and is low in cellularity. Therefore, its inherent
capacity to heal after injury is poor. The clinical rationale of BRTX-100 is to deliver a high concentration of the patient’s
own cultured MSCs into the site of pathology to promote healing and relieve pain.
We
have developed a mesenchymal stem cell product candidate, BRTX-100, derived from autologous (or a person’s own) human
bone marrow, cultured and formulated, in a proprietary method, specifically for introduction into a painful lumbar disc. As described
below under “BRTX-100” and “Production and Delivery,” BRTX-100 is a hypoxic (low oxygen) stem cell product.
In order to enhance the survivability of our bone marrow-derived MSCs in the avascular environment of the damaged disc, BRTX-100
is designed to expand under hypoxic conditions. This process is intended to result in a large cell count population with enhanced
viability and therapeutic potential following injection into the injured disc.
We
submitted an IND application to the FDA to obtain authorization to commence a Phase 2 clinical trial investigating the use of
BRTX-100, our lead cell therapy candidate, in the treatment of chronic lower back pain arising from degenerative disc disease.
We received such authorization from the FDA in February 2017. We intend to commence such clinical trial during the third quarter
of 2021 (assuming the receipt of necessary funding).
In
addition to developing BRTX-100, we may also seek to sublicense the technology to a strategic third party, who may assist
in gaining FDA approval for a lumbar disc indication, or third parties for use in connection with cellular-based developmental
programs with regard to disc and spine related conditions.
We
have established a laboratory, which includes a clean room facility, to perform the production of cell products (possibly including
BRTX-100) for use in our clinical trials, for third party cell products or for general research purposes. We may also use
this laboratory to develop our pipeline of future products and expand our stem cell-related IP. See “Laboratory” and
“Technology; Research and Development” below.
BRTX-100
Our
lead product candidate, BRTX-100, is an autologous hypoxic (low oxygen) cultured mesenchymal stem cell product derived
from a patient’s own bone marrow and formulated with a proprietary biomaterial carrier (platelet lysate) to increase potency,
viability and survivability. We have designed the cryopreserved sterile cellular product candidate to be provided in vials for
injection into painful lumbar discs. We anticipate the product candidate will be delivered using a standard 20 gauge 3.5 inch
introducer needle and a 25 gauge 6 inch needle that will extend into the disc center upon delivery. Upon regulatory approval,
we plan to provide training to medical practitioners with regard to the approved injection procedure. It is anticipated that the
delivery of the product candidate will be a 30 minute procedure.
Mesenchymal
stem cells used in BRTX-100 are similar to other MSCs under development by others; however, in order to enhance the survivability
of our bone marrow-derived MSCs in the avascular environment of the damaged disc, BRTX-100 is designed to expand under
hypoxic conditions for a period of approximately three weeks. This process is intended to result in an approximate 40 million
cell count population with enhanced viability and therapeutic potential following injection locally into injured spinal discs.
Publications and scientific literature have indicated that MSCs preconditioned in hypoxic environment show enhanced skeletal muscle
regeneration properties and improved impacts upon circulation and vascular formation compared to MSCs cultured under normoxic
(normal oxygen) conditions.
In
August 2018, the Journal of Translational Medicine published the results of our study evaluating the benefits of long-term
hypoxic culturing of human bone marrow-derived MSCs.
Production
and Delivery
The
production of our product candidate, BRTX-100, begins with the physician collecting bone marrow from the patient under
local anesthesia. Peripheral blood is also collected from the patient. The physician will then send the patient’s bone marrow
and blood samples to our laboratory (or a contract laboratory) for culturing and formulation. The hypoxic culturing process is
intended to result in the selection of a cell population that is suitable for an improved possibility of survival in the internal
disc environment. We anticipate that the cell culturing process and product formulation will take approximately three weeks, with
an additional two weeks required for quality control testing required to meet product release criteria. We will then send the
therapeutic cryopreserved stem cells (BRTX-100) in a sterile vial back to the physician’s offices where it will undergo
a controlled thaw prior to the procedure. The price structure for the procedure and our services has not been determined and no
assurances can be given as to the effect that such price structure will have on the marketability of such procedure and services.
The following illustrates the process:
License
Pursuant
to our license agreement with Regenerative Sciences, LLC (“Regenerative”) that became effective in April 2012 (the
“Regenerative License Agreement”) we have obtained, among other things, a worldwide (excluding Asia and Argentina),
exclusive, royalty-bearing license from Regenerative to utilize or sublicense a certain method for culturing cells for use in
our developmental program involving disc and spine conditions, including protruding or painful discs and the treatment of avascular
zones. The investigational technology that has been licensed is an advanced stem cell culture and injection procedure that may
offer relief from lower back pain, buttock and leg pain, and numbness and tingling in the leg and foot. Pursuant to the Regenerative
License Agreement, we have also obtained a worldwide, exclusive, royalty-bearing license from Regenerative to utilize or sublicense
a certain investigational curved needle device for the administration of specific cells and/or cell products to the disc and/or
spine (and other parts of the body). It will be necessary to advance the design of this investigational device to facilitate the
delivery of substances, including living cells, to specific locations within the body and minimize the potential for damage to
nearby structures.
The
Regenerative License Agreement provides for the requirement that we complete our Phase 2 clinical trial by a certain date (which
we believe to be February 2022) in order to maintain the exclusive nature of the licenses. The Regenerative License Agreement
also provides for a royalty-bearing sublicense of certain aspects of the technology to Regenerative for use for certain purposes,
including in the United States and the Cayman Islands. Further, the Regenerative License Agreement requires that Regenerative
furnish certain training, assistance and consultation services with regard to the licensed technology. The patents that are the
subject of the Regenerative License Agreement have been assigned to Regenexx, LLC which we have been advised is an affiliate of
Regenerative.
Animal
Study
The
efficacy and safety of our product candidate, BRTX-100, has been tested in a degenerative intervertebral rabbit disc model.
In this study, 80 rabbits underwent surgery to create a puncture in the discs. Four weeks post surgery, each rabbit had either
contrast, a biomaterial carrier or BRTX-100 injected into the discs. In order to study the biodistribution and efficacy
of BRTX-100, the rabbits were evaluated at day 56 and day 120.
The
key safety findings of the animal study are as follows:
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There
was no evidence or observation of gross toxicity related to the administration of BRTX-100 at either time point. The
clinical pathology across both groups and time points were within expected normal historical ranges and under the conditions
of the test. No abnormalities (including fractures or overt signs of lumbar disc disease) were identified after review of
the radiographic images taken at both endpoints for both groups. No toxicity or adverse finding was evident in the systemic
tissues or the discs of animals receiving BRTX-100.
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There
was no detectable presence of human cells (BRTX-100) observed at the day 56 interim time point. This is consistent
with the proposed mechanism of action that BRTX-100 acts through a paracrine effect of secreted growth and immunomodulation
factors.
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The
key efficacy findings of the animal study are as follows:
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BRTX-100
showed a statistically significant DHI (disc height increase) over the control group at day 120.
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BRTX-100
showed a statistically significant improvement in disc histology over the control group at day 120 as graded by a validated
histology scale. BRTX-100 showed a significant improvement in the cellularity and matrix of the disc when compared
to the control at day 120.
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Clinical
Trial
We
submitted an IND application to the FDA to obtain authorization to commence a Phase 2 clinical trial investigating the use of
BRTX-100, our lead cell therapy candidate, 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 third quarter of 2021 (assuming
the receipt of necessary funding).
The
following describes the Phase 2 clinical trial authorized by the FDA:
A
Phase 2 Prospective, Double-Blinded, Placebo Controlled, Randomized Study
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General
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99
patients; randomized 2:1, BRTX-100 to control, 40 million cells/dose
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10-20
clinical trial sites
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Primary
efficacy endpoint at 12 months
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Patient
safety and efficacy follow up at 24 months
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Included
subjects must have only one symptomatic diseased disc
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Included
subjects must have current diagnosis of chronic lumbar disc disease typical pain with degeneration of a single disc confirmed
by history, exam, radiography, or other acceptable means
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Included
subjects must have exhausted previous conservative non-operative therapies
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Primary
Efficacy Endpoint
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Responder
endpoint - % of patients that meet the improvement in function and reduction in pain threshold
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Improvement
in function defined as at least a 30% increase in function based on the Oswestry questionnaires (ODI)
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Reduction
of pain defined as at least a 30% decrease in pain as measured using the Visual Analogue Scale (VAS)
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Additional
or Secondary Endpoints
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Clinical
response at 12 months
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Changes
from baseline in pain as assessed with the VAS score and ODI at weeks 2, 12, 26, 52 and 104
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Changes
from baseline in function as assessed with the ODI at weeks 2, 12, 26, 52 and 104
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Changes
from baseline in function as assessed by Roland Morris Disability Questionnaire (RMDQ) at weeks 26, 52 and 104
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Changes
from baseline function as assessed by Functional Rating Index (FRI) at weeks 12, 52 and 104
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Changes
from baseline Quality of Life assessment (SF-12 questionnaire) scores at weeks 2, 12, 26, 52 and 104
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The
FDA approval process can be lengthy, expensive and uncertain and there is no guarantee that the clinical trial(s) will be commenced
or completed or that the product will ultimately receive approval or clearance. See “Government Regulation” below
and “Item 7 of this Annual Report (“Management’s Discussion and Analysis of Financial Condition and Results
of Operations - Factors That May Affect Future Results and Financial Condition – Risks Related to Our Cell Therapy Product
Development Efforts; and – Risks Related to Government Regulation.”).
As
an alternative to undertaking the Phase 3 clinical trial ourselves, we may explore the licensing of our rights with respect to
our product candidate, BRTX-100, to a strategic partner. Such an arrangement could possibly eliminate or significantly
reduce the need to raise the substantial capital needed to commence and complete the clinical trials and undertake the commercialization
of BRTX-100 and would provide licensing-related revenue to us. No assurance can be given that any licensing agreement will
be entered into, whether upon commercially reasonable terms or otherwise.
Defined
Health Report
In
March 2018, we engaged Defined Health, a business development and strategy consulting firm, to conduct an independent review of
BRTX-100. Defined Health has worked with many of the leading companies in the pharmaceutical, biotech and healthcare industries
for over 25 years.
The
review was intended to collect informed, independent opinions regarding BRTX-100 among key opinion leaders (“KOLs”)
(i.e., orthopedic surgeons specializing in back and spine surgery with experience in stem cell therapy), who, upon studying applicable
clinical material, could offer opinions regarding the future therapeutic potential of BRTX-100.
As
noted in the Defined Health report, the KOLs indicated that stem cell therapies have great potential to treat chronic lumbar disc
disease and other therapeutic areas. The KOLs reacted positively to the value proposition of our product candidate, BRTX-100,
and were optimistic that the clinical data presented to date is likely to be mirrored in future clinical investigations. Given
the opportunity, the KOLs indicated that they would likely participate in a clinical trial should it be offered at their center
and that they would recommend the study to appropriately eligible patients. The report indicated that, if BRTX-100 were
to be granted FDA approval, the KOLs anticipate that it would be integrated into the standard of care for eligible chronic lumbar
disc disease patients.
Similar
Therapies
Human
data from studies of therapies comparative to BRTX-100 have shown reduced pain, increased function, and an absence of significant
safety issues with a durable response, as shown below:
Impact
on Public Health
The
United States is the world’s leading consumer of hydrocodone (99%) and oxycodone (83%) and leads the world in per capital
consumption of such drugs (twice as much as second ranked Canada). Each year 42,000 Americans die from overdoses and in 2012 there
were enough pain prescriptions in the United States for every adult to obtain a bottle of pills.
Total
annual healthcare and lost productivity costs in the United States related to pain, including headache, back pain and neck pain,
are estimated to be $600 billion, which is twice the annual costs related to heart disease and greater than the combined annual
costs related to cancer and diabetes.
Metabolic
Brown Adipose (Fat) Program
Since
June 2011, we have been engaging in pre-clinical research efforts with respect to an investigational platform technology utilizing
brown adipose (fat) derived stem cells (“BADSCs”) for therapeutic purposes. We have labeled this initiative our ThermoStem
Program.
Brown
fat is a specialized adipose (fat) tissue found in the human body that plays a key role in the evolutionarily conserved mechanisms
underlying thermogenesis (generation of non-shivering body heat) and energy homeostasis in mammals - long known to be present
at high levels in hibernating mammals and human newborns. Recent studies have demonstrated that brown fat is present in the adult
human body and may be correlated with the maintenance and regulation of healthy metabolism, thus potentially being involved in
caloric regulation. The pre-clinical ThermoStem Program involves the use of a cell-based (brown adipose tissue construct)
treatment for metabolic disease, such as type 2 diabetes, obesity, hypertension and other metabolic disorders, as well as cardiac
deficiencies. The diseases, disorders and syndromes that may be targeted by our ThermoStem Program are as follows:
We
have had initial success in transplanting the brown adipose tissue construct in animals, and we are currently exploring ways to
deliver into humans. Even though present, BAT mass is very low in healthy adults and even lower in obese populations. Therefore,
it may not be sufficient to either naturally impact whole body metabolism, or to be targeted by drugs intended to increase its
activity in the majority of the population. Increasing BAT mass is crucial in order to benefit from its metabolic activity and
this is what our ThermoStem Program seeks to accomplish. We may also identify other naturally occurring biologics and chemically
engineered molecules that may enhance brown adipose tissue performance and activity.
Obesity,
the abnormal accumulation of white fat tissue, leads to a number of metabolic disorders and is the driving force behind the rise
of type 2 diabetes and cardiovascular diseases worldwide. Pharmacological efforts to alter metabolic homeostasis through modulating
central control of appetite and satiety have had limited market penetration due to significant psychological and physiological
safety concerns directly attributed to modulating these brain centers. Adipose tissue is one of the largest organs in the human
body and plays a key role in central energy balance and lipid homeostasis. White and brown adipose tissues are found in mammals.
White adipose tissue’s function is to store energy, whereas BAT specializes in energy expenditure. Recent advancements in
unraveling the mechanisms that control the induction, differentiation, proliferation, and thermogenic activity of BAT, along with
the application of imaging technologies for human BAT visualization, have generated optimism that these advances may provide novel
strategies for targeting BAT activation/thermogenesis, leading to efficacious and safe obesity targeted therapies.
We
are developing a cell-based product candidate to target obesity and metabolic disorders using BADSCs. Our goal is to develop a
bioengineered implantable brown adipose tissue construct intended to mimic ones naturally occurring in the human body. We have
isolated and characterized a human multipotent stem cell population that resides within BAT depots. We have expanded these stem
cells to clinically relevant numbers and successfully differentiated them into functional brown adipocytes. We intend to use adult
stem cells that may be differentiated into progenitor or fully differentiated brown adipocytes, or a related cell type, which
can be used therapeutically in patients. We are focusing on the development of treatment protocols that utilize allogeneic cells
(i.e., stem cells from a genetically similar but not identical donor).
In
order to deliver these differentiated cells into target locations in vivo, we seeded BADSCs onto 3-dimensional biological
scaffolds. Pre-clinical animal models of diet-induced obesity, that were transplanted with differentiated BADSCs supported by
a biological scaffold, presented significant reductions in weight and blood glucose levels compared to scaffold only controls.
We are identifying technology for in vivo delivery in small animal models. Having completed our proof of concept using
our BAT in small animals, we are currently developing our next generation BAT. It is anticipated that this next version will contain
a higher purity of BADSC and a greater percent of functional brown adipocytes, which is expected to increase the therapeutic effect
compared to our first generation product. In addition, we are exploring the delivery of the therapeutic using encapsulation technology,
which will only allow for reciprocal exchange of small molecules between the host circulation and the BAT implant. We expect that
encapsulation may present several advantages over our current biological scaffolds, including prevention of any immune response
or implant rejection that might occur in an immunocompetent host and an increase in safety by preventing the implanted cells from
invading the host tissues. We have developed promising data on the loading of human stem cell-derived tissue engineered brown
fat into an encapsulation device to be used as a cell delivery system for our metabolic platform program for the treatment of
type 2 diabetes, obesity, hyperlipidemia and hypertension. This advancement may lead to successful transplantation of brown fat
in humans. We are evaluating the next generation of BAT constructs that will first be tested in small animal models. No assurance
can be given that this delivery system will be effective in vivo in animals or humans. Our allogeneic brown adipose derived
stem cell platform potentially provides a therapeutic and commercial model for the cell-based treatment of obesity and related
metabolic disorders.
In
June 2012, we entered into an Assignment Agreement with the University of Utah Research Foundation (the “Foundation”)
and a Research Agreement with the University of Utah (the “Utah Research Agreement”). Pursuant to the Assignment Agreement,
which provides for royalty payments, we acquired the rights to two provisional patent applications that relate to human brown
fat cell lines. No royalty amounts are payable to date. The applications have been converted to a utility application in the United
States and several foreign jurisdictions. Pursuant to the Utah Research Agreement, the University of Utah provided research services
relating to the identification of brown fat tissue and the development and characterization of brown fat cell lines. The Utah
Research Agreement provides that all inventions, discoveries, patent rights, information, data, methods and techniques, including
all cell lines, cell culture media and derivatives thereof, are owned by us. In February 2019, we entered into a Services Agreement
with the University of Utah pursuant to which the university has been retained to provide research services with regard to the
ThermoStem Program. Pursuant to this agreement, we will initiate preclinical models to study the efficacy of our generation
2 encapsulated brown adipose tissue construct.
In
February 2014, our research with regard to the identification of a population of brown adipose derived stem cells was published
in Stem Cells, a respected stem cell journal.
In
March 2014, we entered into a Research Agreement with Pfizer Inc., a global pharmaceutical company (“Pfizer”). Pursuant
to the Research Agreement with Pfizer, we were engaged to provide research and development services with regard to a joint study
of the development and validation of a human brown adipose cell model. The Research Agreement with Pfizer provided for an initial
payment to us of $250,000 and the payment of up to an additional $525,000 during the two-year term of the Agreement, all of which
has been received.
In
August 2015, we entered into a one year research collaboration agreement with the University of Pennsylvania with regard to the
understanding of brown adipose biology and its role in metabolic disorders. In September 2018, we entered into a one year material
transfer agreement with the University of Pennsylvania pursuant to which the university was provided access to our proprietary
brown adipose tissue cells for research purposes. No amounts are payable by or to us pursuant to either agreement.
In
September 2015, a United States patent related to the ThermoStem Program was issued to us.
In
April 2017, an Australian patent related to the ThermoStem Program was issued to us.
In
December 2017, a Japanese patent related to the ThermoStem Program was issued to us.
In
January 2019, a United States patent related to the ThermoStem Program was issued to us.
In
October 2019, an Australian patent related to the ThermoStem Program was issued to us.
In
October 2019, an Israeli patent related to the ThermoStem Program was issued to us.
In
March 2020, a United States patent related to our ThermoStem Program was issued to us.
In
March 2020, our collaboration with the University of Pennsylvania resulted in a publication in Cell Reports, a respected
peer reviewed journal, with regard to our ThermoStem Program.
In
April 2020, a European patent related to our ThermoStem Program was issued to us. This European patent was validated in
Belgium, France, Germany, Italy, Poland, Spain, Sweden, Switzerland, and the United Kingdom.
In
May 2020, an Israeli patent related to our ThermoStem Program was issued to us.
In
November 2020, a notice of allowance was issued for a United States patent application in the ThermoStem Program. This
application is expected to issue as a United States patent in 2021.
In
November 2020, a notice of allowance was issued for a European patent application in the ThermoStem Program. This application
issued as a European patent in January 2021.
Following
our research activities, we intend to undertake preclinical animal studies in order to determine whether our proposed treatment
protocol is feasible. Such studies are planned to begin by the third quarter of 2021 (assuming the receipt of necessary financing).
Following the completion of such studies, we intend to file an IND with the FDA and initiate a clinical trial. See “Government
Regulation” below and Item 7 of this Annual Report (“Management’s Discussion and Analysis of Financial Condition
and Results of Operations - Factors That May Affect Future Results and Financial Condition – Risks Related to Our Cell Therapy
Product Development Efforts; and – Risks Related to Government Regulation.”). The FDA approval process can be lengthy,
expensive and uncertain and there is no guarantee of ultimate approval or clearance.
We
anticipate that much of our development work in this area will take place at our laboratory facility, outside core facilities
at academic, research or medical institutions, or contractors. See “Laboratory” below.
Curved
Needle Device
Pursuant
to the Regenerative License Agreement discussed under “Disc/Spine Program-License” above, we have licensed
and further developed an investigational curved needle device (“CND”) that is a needle system with a curved inner
cannula to allow access to difficult-to-locate regions for the delivery or removal of fluids and other substances. The investigational
CND is intended to deliver stem cells and/or other therapeutic products or material to the interior of a human intervertebral
disc, the spine region, or potentially other areas of the body. The device is designed to rely on the use of pre-curved nested
cannulae that allow the cells or material to be deposited in the posterior and lateral aspects of the disc to which direct access
is not possible due to outlying structures such as vertebra, spinal cord and spinal nerves. We anticipate that the use of the
investigational CND will facilitate the delivery of substances, including living cells, to specific locations within the body
and minimize the potential for damage to nearby structures. The investigational device may also have more general use applications.
In August 2015, a United States patent for the CND was issued to the licensor, Regenerative. We anticipate that FDA approval or
clearance will be necessary for the investigational CND prior to commercialization. We do not intend to utilize the CND in connection
with our contemplated Phase 2 clinical trial with regard to BRTX-100. See “Government Regulation” below and
Item 7 of this Annual Report (“Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Factors That May Affect Future Results and Financial Condition – Risks Related to Our Cell Therapy Product Development
Efforts; and – Risks Related to Government Regulation.”). The FDA review and approval process can be lengthy, expensive
and uncertain and there is no guarantee of ultimate approval or clearance.
Laboratory
We
have established a laboratory in Melville, New York for research purposes and have built a cleanroom within the laboratory for
the possible production of cell-based product candidates, such as BRTX-100, for use in a clinical trial, for third party
cell products or general research purposes.
As
operations grow, our plans include the expansion of our laboratory to perform cellular characterization and culturing, protocol
and stem cell-related IP development, translational research and therapeutic outcome analysis. As we develop our business and
our stem cell product candidates and obtain regulatory approval, we will seek to establish ourselves as a key provider of adult
stem cells for therapies and expand to provide cells in other market areas for stem cell therapy. We may also use outside laboratories
specializing in cell therapy services and manufacturing of cell products.
Technology;
Research and Development
We
intend to utilize our laboratory or a third party laboratory in connection with cellular research activities. We also intend to
obtain cellular-based therapeutic technology licenses and increase our IP portfolio. We intend to seek to develop potential stem
cell delivery systems or devices. The goal of these specialized delivery systems or devices is to deliver cells into specific
areas of the body, control the rate, amount and types of cells used in a treatment, and populate these areas of the body with
sufficient stem cells so that there is a successful therapeutic result.
We
also intend to perform research to develop certain stem cell optimization compounds, media designed to enhance cellular growth
and regeneration for the purpose of improving pre-treatment and post-treatment outcomes.
In
our Disc/Spine Program, two patent applications have been filed with regard to technology that is the subject of the Regenerative
License Agreement (see “Disc/Spine Program-License” above). Regenerative has been issued a patent from one of these
applications with regard to its curved needle therapeutic delivery device. The other application remains pending. The patents
that are the subject of the Regenerative License Agreement have been assigned to Regenexx, LLC which we have been advised is an
affiliate of Regenerative.
In
our ThermoStem Program, we have three pending United States patent applications and four United States patents within three
patent families. With regards to the first patent family in the ThermoStem Program, patent applications have been filed
in five foreign jurisdictions (of which four applications have been granted as foreign patents and one application, which is not
listed in the table below, has lapsed). With regards to the second patent family in the ThermoStem Program, patent applications
have been filed in four foreign jurisdictions (of which three applications have been granted as foreign patents). With regards
to the third patent family in the ThermoStem Program, a U.S. application and PCT application have been filed.
Our
patent applications and those of Regenexx, LLC are currently in prosecution (i.e., we and Regenexx, LLC are seeking issued patents).
A description of the active patent applications and issued patents is set forth in the table below:
Program
|
|
Patent
Family
|
|
I.D.
|
|
Jurisdiction
|
|
Title
|
Disc/Spine
(brtxDisc)
|
|
1
|
|
16/441,897*
|
|
US
|
|
Methods
and compositions to facilitate repair of avascular tissue
|
|
|
1
|
|
U.S.
Patent No. 9,113,950 B2**
|
|
US
|
|
Therapeutic
delivery device
|
|
|
|
|
|
|
|
|
|
Metabolic
|
|
2
|
|
U.S.
Patent No. 9,133,438
|
|
US
|
|
Brown
fat cell compositions and methods
|
(ThermoStem)
|
|
2
|
|
U.S.
Patent No. 10,597,638
|
|
US
|
|
|
|
|
2
|
|
15/910,625
|
|
US
|
|
|
|
|
2
|
|
AU
Patent No. 2012275335
|
|
Australia
|
|
|
|
|
2
|
|
EP
Patent No. 2726603
|
|
Europe
|
|
|
|
|
|
|
(validated
in Belgium, France, Germany, Italy, Poland, Spain, Sweden, Switzerland, and the United Kingdom)
|
|
|
|
|
|
|
2
|
|
IL
Patent No. 230237
|
|
Israel
|
|
|
|
|
2
|
|
JP
Patent No. 6243839
|
|
Japan
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3
|
|
U.S.
Patent No. 10,167,449
|
|
US
|
|
Human
brown adipose derived stem cells and uses
|
|
|
3
|
|
16/183,370***
|
|
US
|
|
|
|
|
3
|
|
17/165,074
|
|
US
|
|
|
|
|
3
|
|
AU
Patent No. 2014253920
|
|
Australia
|
|
|
|
|
3
|
|
2019240634
|
|
Australia
|
|
|
|
|
3
|
|
EP
Patent No. 2986714
|
|
Europe
|
|
|
|
|
3
|
|
20204990.4
|
|
Europe
|
|
|
|
|
3
|
|
IL
Patent No. 242150
|
|
Israel
|
|
|
|
|
3
|
|
274995
|
|
Israel
|
|
|
|
|
3
|
|
2016-509105
|
|
Japan
|
|
|
|
|
3
|
|
2019-95972
|
|
Japan
|
|
|
|
|
4
|
|
16/862,226
|
|
US
|
|
Non-naturally
occurring three-dimensional (3D) brown adipose-derived stem cell aggregates, and methods of generating and using the same
|
|
|
4
|
|
PCT/US2020/030520
|
|
PCT
|
|
|
*Patent
application filed by licensor assignee, Regenexx, LLC
**Patent
issued to licensor assignee, Regenexx, LLC
***Application
has been allowed, but not yet issued as a US patent.
In
March 2014, we entered into a Research and Development Agreement with Rohto Pharmaceutical Co., Ltd., a Japanese pharmaceutical
company (“Rohto”). Pursuant to the Research and Development Agreement with Rohto, we were engaged to provide research
and development services with regard to stem cells.
In
March 2014, we entered into the Research Agreement with Pfizer, as discussed above under “Metabolic Brown Adipose (Fat)
Program.”
We
have secured registrations in the U.S. Patent and Trademark Office for the following trademarks:
|
●
|
|
|
●
|
BRTX-100
|
|
●
|
THERMOSTEM
|
|
●
|
STEM
PEARLS
|
We
own a published application in the U.S. Patent and Trademark Office for the trademark BRTX. The Dragonfly Logo is also
registered with the U.S. Copyright Office.
We
also have federal common law rights in the trademark BioRestorative Therapies and other trademarks and trade names used in the
conduct of our business that are not registered.
Our
success will depend in large part on our ability to develop and protect our proprietary technology. We intend to rely on a combination
of patent, trade secret and know-how, copyright and trademark laws, as well as confidentiality agreements, licensing agreements,
non-compete agreements and other agreements, to establish and protect our proprietary rights. Our success will also depend upon
our ability to avoid infringing upon the proprietary rights of others, for if we are judicially determined to have infringed such
rights, we may be required to pay damages, alter our services, products or processes, obtain licenses or cease certain activities.
During
the years ended December 31, 2019 and 2018, we incurred $1,722,338 and $1,513,150, respectively, in research and development expenses.
Scientific
Advisors
We
have established a Scientific Advisory Board whose purpose is to provide advice and guidance in connection with scientific matters
relating to our business. The Scientific Advisory Board has established a Disc Advisory Committee which focuses on matters relating
to our Disc/Spine Program. Our Scientific Advisory Board members are Dr. Wayne Marasco (Chairman), Dr. Naiyer Imam, Dr.
Wayne Olan, Dr. Joy Cavagnaro, Dr. Jason Lipetz, Dr. Harvinder Sandhu, Dr. Christopher Plastaras and Dr. Gerard A. Malanga. The
Disc Advisory Committee members are Dr. Lipetz (Chairman), Dr. Olan, Dr. Sandhu, Dr. Plastaras and Dr. Malanga. See Item 10 (“Directors,
Executive Officers and Corporate Governance–Scientific Advisors”) for a listing of the principal positions for Drs.
Marasco, Imam, Olan, Cavagnaro, Lipetz, Sandhu, Plastaras and Malanga.
Competition
We
will compete with many pharmaceutical, biotechnology and medical device companies, as well as other private and public stem cell
companies involved in the development and commercialization of cell-based medical technologies and therapies.
Regenerative
medicine is rapidly progressing, in large part through the development of cell-based therapies or devices designed to isolate
cells from human tissues. Most efforts involve cell sources, such as bone marrow, adipose tissue, embryonic and fetal tissue,
umbilical cord and peripheral blood and skeletal muscle.
Companies
working in the area of regenerative medicine with regard to the disc and spine include, among others, Mesoblast, SpinalCyte, DiscGenics
and Isto Biologics. Companies that are developing products and therapies to combat obesity and diabetes, including through the
use of brown fat, include, among others, Novo Nordisk, Sanofi, Merck, Eli Lilly, Roche, Pfizer and Regeneron.
Many
of our competitors and potential competitors have substantially greater financial, technological, research and development, marketing
and personnel resources than we do. We cannot, with any accuracy, forecast when or if these companies are likely to bring their
products and therapies to market in competition with those that we are pursuing.
With
the enactment of the Biologics Price Competition and Innovation Act of 2009 (the “BPCIA”), an abbreviated pathway
for the approval of biosimilar and interchangeable biological products was created. For the FDA to approve a biosimilar product,
it must find that there are no clinically meaningful differences between the reference product and the proposed biosimilar product.
Interchangeability requires that a product is biosimilar to the reference product, and the product must demonstrate that it can
be expected to produce the same clinical results as the reference product and, for products administered multiple times, the biologic
and the reference biologic may be switched after one has been previously administered without increasing safety risks or risks
of diminished efficacy relative to exclusive use of the reference biologic. Under the BPCIA, an application for a biosimilar product
cannot be submitted to the FDA until four years following approval of the reference product, and it may not be approved by the
FDA until 12 years after the original branded product is approved under a biologics license application (“BLA”).
We
believe that, if any of our product candidates are approved as a biological product under a BLA, it should qualify for the 12-year
period of exclusivity. However, there is a risk that the FDA could permit biosimilar applicants to reference approved biologics
other than our therapeutic candidates, thus circumventing our exclusivity and potentially creating the opportunity for competition
sooner than anticipated. Additionally, this period of regulatory exclusivity does not apply to companies pursuing regulatory approval
via their own traditional BLA, rather than via the abbreviated pathway. Moreover, the extent to which a biosimilar, once approved,
will be substituted for any one of our reference products in a way that is similar to traditional generic substitution for non-biological
products is not yet clear, and will depend on a number of marketplace and regulatory factors that are still developing.
Set
forth below is a comparison of BRTX-100 to Mesoblast’s adult stem cell biologic:
We
believe that BRTX-100 has competitive advantages to Mesoblast’s product for the following reasons:
|
●
|
The
use of autologous cells results in low to no risk of rejection, greater safety profile (introduction of viral/genetic) and
streamlined regulatory path
|
|
●
|
Hypoxic
culturing creates increased cell proliferation, greater plasticity, increased paracrine effect and increased cell survival
after application
|
|
●
|
Autologous
platelet lysate provides growth factors that interact with the cells, allowing for better cell survival
|
|
●
|
Low
to no risk of safety concerns related to immunological and zoonotic (animal to human) transmission
|
|
●
|
Strong
runway for value creation with successful clinical results
|
Customers
Upon
regulatory approval, our cell product candidates are intended to be marketed to physicians, other health care professionals, hospitals,
research institutions, pharmaceutical companies and the military. It is anticipated that physicians who are trained and skilled
in performing spinal injections will be the physicians most likely to treat discs with injections of BRTX-100 upon regulatory
approval. These physicians would include interventional physiatrists (physical medicine physicians), pain management anesthesiologists,
interventional radiologists and neurosurgeons.
Governmental
Regulation
U.S.
Government Regulation
The
health care industry is highly regulated in the United States. The federal government, through various departments and agencies,
state and local governments, and private third-party accreditation organizations, regulate and monitor the health care industry,
associated products, and operations. The FDA and comparable regulatory agencies in state and local jurisdictions and in foreign
countries impose substantial requirements upon the clinical development, approval, manufacture, distribution and marketing of
medical products, including drugs, biologics, and medical devices. These agencies and other federal, state and local entities
regulate research and development activities and the testing, manufacture, quality control, safety, effectiveness, labeling, packaging,
storage, distribution, record keeping, approval, post-approval monitoring, advertising, promotion, sampling and import and export
of medical products. The following is a general overview of the laws and regulations pertaining to our business.
FDA
Regulation of Stem Cell Treatment and Products
The
FDA regulates the manufacture of human stem cell treatments and associated products under the authority of the Public Health Service
Act (“PHSA”) and the Federal Food, Drug, and Cosmetic Act (“FDCA”). Stem cells can be regulated under
the FDA’s Human Cells, Tissues, and Cellular and Tissue-Based Products Regulations (“HCT/Ps”) or may also be
subject to the FDA’s drug, biologic, or medical device regulations, each as discussed below.
Human
Cells, Tissues, and Cellular and Tissue-Based Products Regulation
Under
Section 361 of the PHSA, the FDA issued specific regulations governing the use of HCT/Ps in humans. Pursuant to Part 1271 of Title
21 of the Code of Federal Regulations (“CFR”) (the “HCT/P Regulations”), the FDA established a unified
registration and listing system for establishments that manufacture and process HCT/Ps. The regulations also include provisions
pertaining to donor eligibility determinations; current good tissue practices covering all stages of production, including harvesting,
processing, manufacture, storage, labeling, packaging, and distribution; and other procedures to prevent the introduction, transmission,
and spread of communicable diseases.
The
HCT/P Regulations define HCT/Ps as articles “containing or consisting of human cells or tissues that are intended for implantation,
transplantation, infusion or transfer into a human recipient.” The HCT/P Regulations strictly constrain the types of products
that may be regulated solely as HCT/P. Factors considered include the degree of manipulation, whether the product is intended
for a homologous function, whether the product has been combined with noncellular or non-tissue components, and the product’s
effect or dependence on the body’s metabolic function. In those instances where cells, tissues, and cellular and tissue-based
products have been only minimally manipulated, are intended strictly for homologous use, have not been combined with noncellular
or nontissue substances, and do not depend on or have any effect on the body’s metabolism, the manufacturer is only required
to register with the FDA, submit a list of manufactured products, and adopt and implement procedures for the control of communicable
diseases. If one or more of the above factors has been exceeded, the product would be regulated as a drug, biological product,
or medical device rather than an HCT/P.
Because
we are an enterprise in the early stages of operations and have not generated significant revenues from operations, it is difficult
to anticipate the likely regulatory status of the array of products and services that we may offer. We believe that some of the
adult autologous (self derived) stem cells that will be used in our cellular therapy products and services, including the brown
adipose (fat) tissue that we intend to use in our ThermoStem Program, may be regulated by the FDA as HCT/Ps under the HCT/P
Regulations. However, the FDA may disagree with this position or conclude that some or all of our stem cell therapy products or
services do not meet the applicable definitions and exemptions to the regulation. In July, 2020, the FDA issued an updated guidance
document entitled “Regulatory Considerations for Human Cells, Tissues, and Cellular and Tissue-Based Products: Minimal Manipulation
and Homologous Use” that provides additional guidance on how FDA interprets the HCT/P Regulations, particularly the definition
of the terms “minimally manipulated” and “homologous use.” In the guidance, FDA stated it will exercise
enforcement discretion until May 31, 2021 for products that do not comply with the HCT/P Regulations. After that date, manufacturers
of products marketed as HCT/Ps that do not comply with the HCT/P Regulations will be subject to immediate FDA enforcement action.
If we are not regulated solely under the HCT/P Regulations, we would need to expend significant resources to comply with the FDA’s
broad regulatory authority under the FDCA. Third party litigation concerning the autologous use of a stem cell mixture to treat
musculoskeletal and spinal injuries has increased the likelihood that some of our products and services are likely to be regulated
as a drug or biological product and require FDA approval. In past litigation, the FDA asserted that the defendants’ use
of cultured stem cells without FDA approval is in violation of the FDCA, claiming that the defendants’ product is a drug.
The defendants asserted that their procedure is part of the practice of medicine and therefore beyond the FDA’s regulatory
authority. The District Court ruled in favor of the FDA, and in February 2014 the Circuit Court affirmed the District Court’s
holding.
If
regulated solely under the FDA’s HCT/P statutory and regulatory provisions, once our laboratory in the United States becomes
operational, it will need to satisfy the following requirements, among others, to process and store stem cells:
|
●
|
registration
and listing of HCT/Ps with the FDA;
|
|
|
|
|
●
|
donor
eligibility determinations, including donor screening and donor testing requirements;
|
|
|
|
|
●
|
current
good tissue practices, specifically including requirements for the facilities, environmental controls, equipment, supplies
and reagents, recovery of HCT/Ps from the patient, processing, storage, labeling and document controls, and distribution and
shipment of the HCT/Ps to the laboratory, storage, or other facility;
|
|
●
|
tracking
and traceability of HCT/Ps and equipment, supplies, and reagents used in the manufacture of HCT/Ps;
|
|
|
|
|
●
|
adverse
event reporting;
|
|
|
|
|
●
|
FDA
inspection; and
|
|
|
|
|
●
|
abiding
by any FDA order of retention, recall, destruction, and cessation of manufacturing of HCT/Ps.
|
Non-reproductive
HCT/Ps and non-peripheral blood stem/progenitor cells that are offered for import into the United States and regulated solely
under Section 361 of the PHSA must also satisfy the requirements under 21 C.F.R. § 1271.420. Section 1271.420 requires that
the importer of record of HCT/Ps notify the FDA prior to, or at the time of, importation and provide sufficient information for
the FDA to make an admissibility decision. In addition, the importer must hold the HCT/P intact and under conditions necessary
to prevent transmission of communicable disease until an admissibility decision is made by the FDA.
If
the FDA determines that we have failed to comply with applicable regulatory requirements, it can impose a variety of enforcement
actions including public warning letters, fines, consent decrees, orders of retention, recall or destruction of product, orders
to cease manufacturing, and criminal prosecution. If any of these events were to occur, it could materially adversely affect us.
To
the extent that our cellular therapy activities are limited to developing products and services outside the United States, as
described in detail below, the products and services would not be subject to FDA regulation, but will be subject to the applicable
requirements of the foreign jurisdiction. We intend to comply with all applicable foreign governmental requirements.
Drug
and Biological Product Regulation
An
HCT/P product that does not meet the criteria for being solely regulated under Section 361 of the PHSA will be regulated as a
drug, device or biological product under the FDCA and/or Section 351 of the PHSA, and applicable FDA regulations. The FDA has
broad regulatory authority over drugs and biologics marketed for sale in the United States. The FDA regulates the research, clinical
testing, manufacturing, safety, effectiveness, labeling, storage, recordkeeping, promotion, distribution, and production of drugs
and biological products. The FDA also regulates the export of drugs and biological products manufactured in the United States
to international markets in certain situations.
The
process required by the FDA before a drug or biologic may be marketed in the United States generally involves the following:
●
completion of non-clinical laboratory tests, animal studies and formulation studies conducted according to Good Laboratory Practice
(“GLP”) or other applicable regulations;
●
submission of an IND, which allows clinical trials to begin unless the FDA objects within 30 days;
●
performance of adequate and well-controlled human clinical trials to establish the safety and efficacy of the proposed drug or
biologic for its intended use or uses conducted in accordance with FDA regulations and Good Clinical Practices (“GCP”),
which are international ethical and scientific quality standards meant to ensure that the rights, safety and well-being of trial
participants are protected and that the integrity of the data is maintained;
●
registration of clinical trials of FDA-regulated products and certain clinical trial information;
●
preparation and submission to the FDA of a new drug application (“NDA”), in the case of a drug or BLA in the case
of a biologic;
●
review of the product by an FDA advisory committee, where appropriate or if applicable;
●
satisfactory completion of pre-approval inspection of manufacturing facilities and clinical trial sites at which the product,
or components thereof, are produced to assess compliance with Good Manufacturing Practice, or cGMP, requirements and of selected
clinical trial sites to assess compliance with GCP requirements; and
●
FDA approval of an NDA or BLA which must occur before a drug or biologic can be marketed or sold.
Approval
of an NDA requires a showing that the drug is safe and effective for its intended use and that the methods, facilities, and controls
used for the manufacturing, processing, and packaging of the drug are adequate to preserve its identity, strength, quality, and
purity. To obtain a BLA, a manufacturer must show that the proposed product is safe, pure, and potent and that the facility in
which the product is manufactured, processed, packed, or held meets established quality control standards.
For
purposes of an NDA or BLA approval by the FDA, human clinical trials are typically conducted in the following phases (which may
overlap):
●
Phase 1: The investigational product is initially given to healthy human subjects or patients and tested for safety, dosage tolerance,
absorption, metabolism, distribution and excretion. These trials may also provide early evidence on effectiveness. During Phase
1 clinical trials, sufficient information about the investigational product’s pharmacokinetics and pharmacologic effects
may be obtained to permit the design of well-controlled and scientifically valid Phase 2 clinical trials.
●
Phase 2: These clinical trials are conducted in a limited number of human subjects in the target population to identify possible
adverse effects and safety risks, to determine the efficacy of the investigational product for specific targeted diseases and
to determine dosage tolerance and dosage levels. Multiple Phase 2 clinical trials may be conducted by the sponsor to obtain information
prior to beginning larger and more costly Phase 3 clinical trials.
●
Phase 3: Phase 3 clinical trials are undertaken after Phase 2 clinical trials demonstrate that a dosage range of the investigational
product appears effective and has a tolerable safety profile. The Phase 2 clinical trials must also provide sufficient information
for the design of Phase 3 clinical trials. Phase 3 clinical trials are conducted to provide statistically significant evidence
of clinical efficacy and to further test for safety risks in an expanded human subject population at multiple clinical trial sites.
These clinical trials are intended to further evaluate dosage, effectiveness and safety, to establish the overall benefit-risk
profile of the investigational product and to provide an adequate basis for product labeling and approval by the FDA. In most
cases, the FDA requires two adequate and well-controlled Phase 3 clinical trials to demonstrate the efficacy of an investigational
drug or biologic.
All
clinical trials must be conducted in accordance with FDA regulations, GCP requirements and their protocols in order for the data
to be considered reliable for regulatory purposes. Progress reports detailing the results of the clinical trials must be submitted
at least annually to the FDA and more frequently if serious adverse events occur. Phase 1, Phase 2 and Phase 3 clinical trials
may not be completed successfully within any specified period, or at all. These government regulations may delay or prevent approval
of product candidates for a considerable period of time and impose costly procedures upon our business operations.
The
FDA may require, or companies may pursue, additional clinical trials, referred to as Phase 4 clinical trials, after a product
is approved. Such trials may be made a condition to be satisfied for continuing drug approval. The results of Phase 4 clinical
trials can confirm the effectiveness of a product candidate and can provide important safety information. In addition, the FDA
has authority to require sponsors to conduct post-marketing trials to specifically address safety issues identified by the agency.
Under
the Pediatric Research Equity Act (“PREA”), certain NDAs and BLAs and certain supplements to an NDA or BLA must contain
data to assess the safety and efficacy of the drug for the claimed indications in all relevant pediatric subpopulations and to
support dosing and administration for each pediatric subpopulation for which the product is safe and effective. The FDA may grant
deferrals for submission of pediatric data or full or partial waivers. The Food and Drug Administration Safety and Innovation
Act (“FDASIA”) amended the FDCA to require that a sponsor who is planning to submit a marketing application for a
drug that includes a new active ingredient, new indication, new dosage form, new dosing regimen, or new route of administration
submit an initial Pediatric Study Plan (“PSP”) within 60 days of an end-of-Phase 2 meeting or, if there is no such
meeting, as early as practicable before the initiation of the Phase 3 or Phase 2/3 study. The initial PSP must include an outline
of the pediatric study or studies that the sponsor plans to conduct, including study objectives and design, age groups, relevant
endpoints and statistical approach, or a justification for not including such detailed information, and any request for a deferral
of pediatric assessments or a full or partial waiver of the requirement to provide data from pediatric studies along with supporting
information. The FDA and the sponsor must reach an agreement on the PSP. A sponsor can submit amendments to an agreed-upon initial
PSP at any time if changes to the pediatric plan need to be considered based on data collected from preclinical studies, early
phase clinical trials, and/or other clinical development programs.
Changes
to some of the conditions established in an approved application, including changes in indications, labeling, manufacturing processes
or facilities, require submission and FDA approval of a new NDA or BLA, or an NDA or BLA supplement, before the change can be
implemented. An NDA or BLA supplement for a new indication typically requires clinical data similar to that in the original application,
and the FDA uses the same procedures and actions in reviewing NDA and BLA supplements as it does in reviewing NDAs and BLAs.
Drug
and biological products must also comply with applicable requirements, including monitoring and recordkeeping activities, manufacturing
requirements, reporting to the applicable regulatory authorities of adverse experiences with the product, providing the regulatory
authorities with updated safety and efficacy information, product sampling and distribution requirements, and complying with promotion
and advertising requirements, which include, among others, standards for direct-to-consumer advertising, restrictions on promoting
drugs for uses or in patient populations that are not described in the drug’s approved labeling, or off-label use, limitations
on industry-sponsored scientific and educational activities and requirements for promotional activities involving the internet.
Although physicians may, in their independent professional medical judgment, prescribe legally available drugs for off-label uses,
manufacturers typically may not market or promote such off-label uses. Modifications or enhancements to the product or its labeling,
or changes of the site of manufacture, are often subject to the approval of the FDA and other regulators, who may or may not grant
approval or may include a lengthy review process.
In
the event that the FDA does not regulate our product candidates in the United States solely under the HCT/P regulation, our products
and activities could be regulated as drug or biological products under the FDCA. If regulated as drug or biological products,
we will need to expend significant resources to ensure regulatory compliance. If an IND and NDA or BLA are required for any of
our product candidates, there is no assurance as to whether or when we will receive FDA approval of the product candidate. The
process of designing, conducting, compiling and submitting the non-clinical and clinical studies required for NDA or BLA approval
is time-consuming, expensive and unpredictable. The process can take many years, depending on the product and the FDA’s
requirements.
In
addition, even if a product candidate receives regulatory approval, the approval may be limited to specific disease states, patient
populations and dosages, or might contain significant limitations on use in the form of warnings, precautions or contraindications,
or in the form of onerous risk management plans, restrictions on distribution or use, or post-marketing trial requirements. Further,
even after regulatory approval is obtained, later discovery of previously unknown problems with a product may result in restrictions
on the product, including safety labeling or imposition of a Risk Evaluation and Mitigation Strategy (“REMS”), the
requirement to conduct post-market studies or clinical trials or even complete withdrawal of the product from the market. Delay
in obtaining, or failure to obtain, regulatory approval for our products, or obtaining approval but for significantly limited
use, would harm our business. Further, we cannot predict what adverse governmental regulations may arise from future United States
or foreign governmental action.
If
the FDA determines that we have failed to comply with applicable regulatory requirements, it can impose a variety of enforcement
actions from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance
of approvals, seizure of our products, total or partial shutdown of our production, withdrawal of approvals, and criminal prosecutions.
If any of these events were to occur, it could materially adversely affect us.
FDA
Expedited Review Programs
The
FDA is authorized to expedite the review of NDAs and BLAs in several ways. Under the Fast Track program, the sponsor of a drug
or biologic product candidate may request the FDA to designate the product for a specific indication as a Fast Track product concurrent
with or after the filing of the IND. Drug and biologic products are eligible for Fast Track designation if they are intended to
treat a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition.
Fast Track designation applies to the combination of the product candidate and the specific indication for which it is being studied.
In
addition to other benefits, such as the ability to have greater interactions with the FDA, the FDA may initiate review of sections
of a Fast Track NDA or BLA before the application is complete, a process known as rolling review.
Any
product submitted to the FDA for marketing, including under a Fast Track program, may also be eligible for the following other
types of FDA programs intended to expedite development and review:
●
Breakthrough therapy designation. To qualify for the breakthrough therapy program, product candidates must be intended to treat
a serious or life-threatening disease or condition, and preliminary clinical evidence must indicate that such product candidates
may demonstrate substantial improvement on one or more clinically significant endpoints over existing therapies. The FDA will
seek to ensure the sponsor of a breakthrough therapy product candidate receives intensive guidance on an efficient drug development
program, intensive involvement of senior managers and experienced staff on a proactive, collaborative and cross-disciplinary review,
and rolling review.
●
Priority review. A product candidate is eligible for priority review if it treats a serious condition and, if approved, it would
be a significant improvement in the safety or effectiveness of the treatment, diagnosis or prevention of a serious condition compared
to marketed products. The FDA aims to complete its review of priority review applications within six months as opposed to ten
months for standard review.
●
Accelerated approval. Drug or biologic products studied for their safety and effectiveness in treating serious or life-threatening
illnesses and that provide meaningful therapeutic benefit over existing treatments may receive accelerated approval. Accelerated
approval means that a product candidate may be approved on the basis of adequate and well-controlled clinical trials establishing
that the product candidate has an effect on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on
the basis of an effect on a clinical endpoint other than survival or irreversible morbidity or mortality or other clinical benefit,
taking into account the severity, rarity and prevalence of the condition and the availability or lack of alternative treatments.
As a condition of approval, the FDA may require that a sponsor of a drug or biologic product candidate receiving accelerated approval
perform adequate and well-controlled post-marketing clinical trials. In addition, the FDA currently requires as a condition for
accelerated approval pre-approval of promotional materials.
Fast
Track designation, breakthrough therapy designation, priority review and accelerated approval do not change the standards for
approval but may expedite the development or approval process.
Further,
with the passage of the 21st Century Cures Act (the “Cures Act”) in December 2016, Congress authorized the FDA to
accelerate review and approval of products designated as regenerative advanced therapies. A product is eligible for this designation
if it is a regenerative medicine advanced therapy (“RMAT”) (which may include a cell therapy) that is intended to
treat, modify, reverse or cure a serious or life-threatening disease or condition, and preliminary clinical evidence indicates
that the drug has the potential to address unmet medical needs for such disease or condition. The benefits of a RMAT designation
include early interactions with the FDA to expedite development and review, benefits available to breakthrough therapies, potential
eligibility for priority review and accelerated approval based on surrogate or intermediate endpoints.
Medical
Device Regulation
The
FDA also has broad authority over the regulation of medical devices marketed for sale in the United States. The FDA regulates
the research, clinical testing, manufacturing, safety, labeling, storage, recordkeeping, premarket clearance or approval, promotion,
distribution, and production of medical devices. The FDA also regulates the export of medical devices manufactured in the United
States to international markets.
Under
the FDCA, medical devices are classified into one of three classes, Class I, Class II, or Class III, depending upon the degree
of risk associated with the medical device and the extent of control needed to ensure safety and effectiveness. Class I devices
are subject to the lowest degree of regulatory scrutiny because they are considered low risk devices and need only comply with
the FDA’s General Controls. The General Controls include compliance with the registration, listing, adverse event reporting
requirements, and applicable portions of the Quality System Regulation as well as the general misbranding and adulteration prohibitions.
Class
II devices are subject to the General Controls as well as certain Special Controls such as 510(k) premarket notification. Class
III devices are subject to the highest degree of regulatory scrutiny and typically include life supporting and life sustaining
devices and implants. They are subject to the General Controls and Special Controls that include a premarket approval application
(“PMA”). “New” devices are automatically regulated as Class III devices unless they are shown to be low
risk, in which case they may be subject to de novo review to be moved to Class I or Class II. Clinical research of an investigational
device is subject to the FDA’s Investigational Device Exemption (“IDE”) regulations. Nonsignificant risk devices
are subject to abbreviated requirements that do not require a submission to the FDA but must have Institutional Review Board (IRB)
approval and comply with other requirements pertaining to informed consent, labeling, recordkeeping, reporting, and monitoring.
Significant risk devices require the submission of an IDE application to the FDA and the FDA’s approval of the IDE application.
The
FDA premarket clearance and approval process can be lengthy, expensive and uncertain. It generally takes three to twelve months
from submission to obtain 510(k) premarket clearance, although it may take longer. Approval of a PMA could take one to four years,
or more, from the time the application is submitted and there is no guarantee of ultimate clearance or approval. Securing FDA
clearances and approvals may require the submission of extensive clinical data and supporting information to the FDA. Additionally,
the FDA actively enforces regulations prohibiting marketing and promotion of devices for indications or uses that have not been
cleared or approved by the FDA. In addition, modifications or enhancements of products that could affect the safety or effectiveness
or effect a major change in the intended use of a device that was either cleared through the 510(k) process or approved through
the PMA process may require further FDA review through new 510(k) or PMA submissions.
In
the event we develop processes, products or services which qualify as medical devices subject to FDA regulation, we intend to
comply with such regulations. If the FDA determines that our products are regulated as medical devices and we have failed to comply
with applicable regulatory requirements, it can impose a variety of enforcement actions from public warning letters, application
integrity proceedings, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance of approvals,
seizure of our products, total or partial shutdown of our production, withdrawal of approvals, and criminal prosecutions. If any
of these events were to occur, it could materially adversely affect us.
Current
Good Manufacturing Practices and other FDA Regulations of Cellular Therapy Products
Products
that fall outside of the HCT/P regulations and are regulated as drugs, biological products, or devices must comply with applicable
cGMP regulations. These cGMPs and related quality standards are designed to ensure the products that are processed at a facility
meet the FDA’s applicable requirements for identity, strength, quality, sterility, purity, and safety. In the event that
our domestic United States operations are subject to the FDA’s drug, biological product, or device regulations, we intend
to comply with the applicable cGMPs and quality regulations.
If
the FDA determines that we have failed to comply with applicable regulatory requirements, it can impose a variety of enforcement
actions from public warning letters, fines, injunctions, consent decrees and civil penalties to suspension or delayed issuance
of approvals, seizure of our products, total or partial shutdown of our production, withdrawal of approvals, and criminal prosecutions.
If any of these events were to occur, it could materially adversely affect us.
Promotion
of Foreign-Based Cellular Therapy Treatment— “Medical Tourism”
We
may establish, or license technology to third parties in connection with their establishment of, adult stem cell therapy facilities
outside the United States. We also intend to work with hospitals and physicians to make the stem cell-based therapies available
for patients who travel outside the United States for treatment. “Medical tourism” is defined as the practice of traveling
across international borders to obtain health care.
The
Federal Trade Commission (the “FTC”) has the authority to regulate and police advertising of medical treatments, procedures,
and regimens in the United States under the Federal Trade Commission Act, or the FTCA. The FTC has regulatory authority to prevent
unfair and deceptive practices and false advertising. Specifically, the FTC requires advertisers and promoters to have a reasonable
basis to substantiate and support claims. The FTC has many enforcement powers, one of which is the power to order disgorgement
by promoters deemed in violation of the FTCA of any profits made from the promoted business and can order injunctions from further
violative promotion. Advertising that we may utilize in connection with our medical tourism operations will be subject to FTC
regulatory authority, and we intend to comply with such regulatory régime. Similar laws and requirements are likely to
exist in other countries and we intend to comply with such requirements.
Federal
Regulation of Clinical Laboratories
Congress
passed the Clinical Laboratory Improvement Amendments, or CLIA, in 1988, which provided the Centers for Medicare and Medicaid
Services (“CMS”) authority over all laboratory testing, except research, that is performed on humans in the United
States. The Division of Laboratory Services, within the Survey and Certification Group, under the Center for Medicaid and State
Operations (“CMSO”) has the responsibility for implementing the CLIA program.
The
CLIA program is designed to establish quality laboratory testing by ensuring the accuracy, reliability, and timeliness of patient
test results. Under CLIA, a laboratory is a facility that does laboratory testing on specimens derived from humans and used to
provide information for the diagnosis, prevention, treatment of disease, or impairment of, or assessment of health. Laboratories
that handle stem cells and other biologic matter are, therefore, included under the CLIA program. Under the CLIA program, laboratories
must be certified by the government, satisfy governmental quality and personnel standards, undergo proficiency testing, be subject
to inspections, and pay fees. To the extent that our business activities require CLIA certification, we intend to obtain and maintain
such certification. If we are subject to CLIA, the failure to comply with CLIA standards could result in suspension, revocation,
or limitation of a laboratory’s CLIA certificate. In addition, fines or criminal penalties could also be levied. If any
of these events were to occur, it could impact our business operations.
Health
Insurance Portability and Accountability Act—Protection of Patient Health Information
We
may be subject to data privacy and security regulation by both the federal government and the states in which we conduct our business.
The Health Insurance Portability Act of 1996 (“HIPAA”), as amended by the Health Information Technology for Economic
and Clinical Health Act (“HITECH”) and their respective implementing regulations, including the Final Omnibus Rule
published on January 25, 2013, imposes specified requirements relating to the privacy, security and transmission of individually
identifiable health information on certain types of individuals and organizations. In addition, certain state laws govern the
privacy and security of health information in certain circumstances, many of which differ from each other and from HIPAA in significant
ways and may not have the same effect, thus complicating compliance efforts. Further, we may need to also comply with additional
federal or state privacy laws and regulations that may apply to certain diagnoses, such as HIV/AIDS, to the extent that they apply
to us.
The
Department of Health and Human Services (“HHS”), through its Office for Civil Rights, investigates breach reports
and determines whether administrative or technical modifications are required and whether civil or criminal sanctions should be
imposed. Companies failing to comply with HIPAA and the implementing regulations may also be subject to civil money penalties
or in the case of knowing violations, potential criminal penalties, including monetary fines, imprisonment, or both. In some cases,
the State Attorneys General may seek enforcement and appropriate sanctions in federal court.
Other
Applicable U.S. Laws
In
addition to the above-described regulation by United States federal and state government, the following are other federal and
state laws and regulations that could directly or indirectly affect our ability to operate the business:
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state
and local licensure, registration, and regulation of the development of pharmaceuticals and biologics;
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state
and local licensure of medical professionals;
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state
statutes and regulations related to the corporate practice of medicine;
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laws
and regulations administered by U.S. Customs and Border Protection related to the importation of biological material into
the United States;
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other
laws and regulations administered by the FDA;
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other
laws and regulations administered by HHS;
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state
and local laws and regulations governing human subject research and clinical trials;
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the
federal physician self-referral prohibition, also known as Stark Law, and any state equivalents to Stark Law;
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the
federal False Claims Act (“FCA”);
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the
federal Anti-Kickback Statute (“AKS”) and any state equivalent statutes and regulations;
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federal
and state coverage and reimbursement laws and regulations;
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state
and local laws and regulations for the disposal and handling of medical waste and biohazardous material;
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Occupational
Safety and Health Administration (“OSHA”) regulations and requirements;
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the
Intermediate Sanctions rules of the IRS providing for potential financial sanctions with respect to “excess benefit
transactions” with tax-exempt organizations;
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the
Physician Payments Sunshine Act (in the event that our products are classified as drugs, biologics, devices or medical supplies
and are reimbursed by Medicare, Medicaid or the Children’s Health Insurance Program);
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state
and other federal laws addressing the privacy of health information; and
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state
and foreign law equivalents of each of the above federal laws, such as anti-kickback and false claims laws which may apply
to items or services reimbursed by any third-party payer, including commercial insurers, state laws that require pharmaceutical
companies to comply with the pharmaceutical industry’s voluntary compliance guidelines and the relevant compliance guidance
promulgated by the federal government or otherwise restrict payments that may be made to healthcare professionals and other
potential referral sources, state laws that require drug manufacturers to report information related to payments and other
transfers of value to physicians and other healthcare professionals or marketing expenditures, and state laws governing the
privacy and security of health information in certain circumstances, many of which differ from each other in significant ways
and may not have the same effect, thus complicating compliance efforts.
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Violation
of any of the laws described above or any other governmental laws and regulations may result in penalties, including civil and
criminal penalties, damages, fines, the curtailment or restructuring of operations, the exclusion from participation in federal
and state healthcare programs and imprisonment. Furthermore, efforts to ensure that business activities and business arrangements
comply with applicable healthcare laws and regulations can be costly for manufacturers of branded prescription products.
Foreign
Government Regulation
In
general, we will need to comply with the government regulations of each individual country in which our therapy centers are located
and products are to be distributed and sold. These regulations vary in complexity and can be as stringent, and on occasion even
more stringent, than FDA regulations in the United States. Due to the fact that there are new and emerging cell therapy regulations
that have recently been drafted and/or implemented in various countries around the world, the application and subsequent implementation
of these new and emerging regulations have little to no precedence. Therefore, the level of complexity and stringency is not always
precisely understood for each country, creating greater uncertainty for the international regulatory process. Furthermore, government
regulations can change with little to no notice and may result in up-regulation of our product(s), thereby creating a greater
regulatory burden for our cell processing technology products. We have not yet thoroughly explored the applicable laws and regulations
that we will need to comply with in foreign jurisdictions. It is possible that we may not be permitted to expand our business
into one or more foreign jurisdictions.
We
do not have any definitive plans or arrangements with respect to the establishment by us of stem cell therapy clinics in any country.
We intend to explore any such opportunities as they arise.
Offices
Our
principal executive offices are located at 40 Marcus Drive, Suite One, Melville, New York, and our telephone number is (631) 760-8100.
Our website is www.biorestorative.com. Our internet website and the information contained therein or connected thereto are not
intended to be incorporated by reference into this Annual Report.
Employees
We
currently have six employees, all of whom are full-time employees. We believe that our employee relations are good.
Not
applicable. See, however, Item 7 (“Management’s Discussion and Analysis of Financial Condition and Results of Operations
- Factors That May Affect Future Results and Financial Condition”).
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ITEM
1B.
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UNRESOLVED
STAFF COMMENTS.
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Not
applicable.
Our
principal executive offices and laboratory are located at 40 Marcus Drive, Suite One, Melville, New York. We occupy 6,800 square
feet of space at the premises pursuant to a lease that expires in December 2024. The lease provides for an annual base rental
during the five year period ending in December 2024 ranging between $153,748 and $173,060. Our premises are suitable and adequate
for our current operations.
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ITEM
3.
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LEGAL
PROCEEDINGS.
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Not
applicable. See, however, Item 1 (“Business – Business Development – Chapter 11 Reorganization”) for a
discussion of a voluntary petition filed by us in March 2020 commencing a case under chapter 11 of title 11 of the U.S. Code in
the United States Bankruptcy Court for the Eastern District of New York. The Amended Joint Plan of Reorganization filed in connection
with the proceeding became effective on November 16, 2020.
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ITEM
4.
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MINE
SAFETY DISCLOSURES.
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Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Note
1 – organization and business operations
Corporate
History
BioRestorative
Therapies, Inc. has one wholly-owned subsidiary, Stem Pearls, LLC (“Stem Pearls”). BioRestorative Therapies, Inc.
and its subsidiary are referred to collectively as “BRT” or the “Company”.
On
March 20, 2020 (the “Petition Date”), the Company filed a voluntary petition commencing a case (the “Chapter
11 Case”) under chapter 11 of title 11 of the U.S. Code in the United States Bankruptcy Court for the Eastern District of
New York (the “Bankruptcy Court”).
On
August 7, 2020 the Company and Auctus Fund, LLC (“Auctus”), the Company’s largest unsecured creditor and a stockholder
as of the Petition Date, filed an Amended Joint Plan of Reorganization (the “Plan”) and on October 30, 2020, the Bankruptcy
Court entered an order (the “Confirmation Order”) confirming the Plan, as amended. Amendments to the Plan are reflected
in the Confirmation Order. On November 16, 2020 (the “Effective Date”), the Plan became effective. See Note 13 –
Subsequent Events for additional information.
Business
Operations
BRT
develops therapeutic products and medical therapies using cell and tissue protocols, primarily involving adult stem cells. BRT’s
website is at www.biorestorative.com. BRT is currently developing a Disc/Spine Program referred to as “brtxDISC”.
Its lead cell therapy candidate, BRTX-100, is a product formulated from autologous (or a person’s own) cultured mesenchymal
stem cells collected from the patient’s bone marrow. The product is intended to be used for the non-surgical treatment of
painful lumbosacral disc disorders or as a complimentary therapeutic to a surgical procedure. BRT is also engaging in research
efforts with respect to a platform technology utilizing brown adipose (fat) for therapeutic purposes to treat type 2 diabetes,
obesity and other metabolic disorders and has labeled this initiative its ThermoStem Program. Further, BRT has licensed a patented
curved needle device that is a needle system designed to deliver cells and/or other therapeutic products or material to the spine
and discs or other potential sites.
NOTE
2 – LIQUIDITY
The
accompanying consolidated financial statements have been prepared on the basis that the Company will continue as a going
concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At
December 31, 2018, the Company had a working capital deficiency and a stockholders’ deficiency of $9,073,901 and
$8,641,038, respectively. During the year ended December 31, 2018 the Company incurred a net loss of $12,517,803. These
conditions indicate that there was substantial doubt about the Company’s ability to continue as a going concern within
one year after the financial statement issuance date for the year ended December 31, 2018. At December 31, 2019, the Company had a significant accumulated
deficit of approximately $78,570,000 and working capital deficiency of approximately $13,652,000. For the year
ended December 31, 2019, the Company had a loss from operations of approximately $8,432,000 and negative cash flows from
operations of approximately $6,919,000. The Company’s operating activities consume the majority of its cash resources.
The Company anticipates that it will continue to incur operating losses as it executes its development plans for 2021, as
well as other potential strategic and business development initiatives. In addition, the Company has had and expects to have
negative cash flows from operations, at least into the near future. The Company has previously funded, and plans to continue
funding, these losses primarily through additional infusions of cash from equity and debt financing.
The
Company believes the following has been able to mitigate the above factors with regards to its ability to continue as a going
concern: (i) as part of its Chapter 11 reorganization approximately $14,700,000 in outstanding debt and other liabilities were
exchanged for (a) shares of common stock, (b) new convertible notes or (c) new convertible notes and warrants to purchase shares
of common stock; (ii) the Company secured DIP financing during its Chapter 11 Case in the amount of $1,189,413 as well as an aggregate
amount of $3,848,548 in debt financing from Auctus and others as part of the Company’s Chapter 11 reorganization, to sustain
operations; (iii) the Company obtained equity and debt financing in the aggregate amount of $451,762 subsequent to December 31,
2019 and prior to the commencement of the Chapter 11 reorganization case; and (iv) pursuant to the plan of reorganization, Auctus
is required to loan to the Company, as needed and subject to the Company becoming current in its SEC reporting obligations, an
additional amount equal to $3,500,000, less the amount of Auctus’ DIP financing ($1,226,901, inclusive of accrued interest)
and its DIP costs. As a result of the above, the Company has sufficient cash to fund operations for the twelve months subsequent
to the filing date. In addition, the Company is seeking further funding to commence and complete a Phase 2 clinical study of the
use of BRTX-100.
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 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.
NOTE
3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying audited consolidated financial statements have been prepared in accordance with GAAP. The summary of significant
accounting policies presented below is designed to assist in understanding the Company’s consolidated financial statements.
Such consolidated financial statements and accompanying notes are the representations of Company’s management, who is responsible
for their integrity and objectivity.
Principles
of Consolidation
These
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary Stem Pearls. Intercompany
accounts and transactions have been eliminated upon consolidation.
Use
of Estimates
The
preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions
that affect the reported amounts of assets, liabilities, equity-based transactions, revenue and expenses and disclosure of contingent
liabilities at the date of the consolidated financial statements. The Company bases its estimates and assumptions on historical
experience, known or expected trends and various other assumptions that it believes to be reasonable. As future events and their
effects cannot be determined with precision, actual results could differ from these estimates which may cause the Company’s
future results to be affected.
Concentrations
The
royalties related to the Company’s sublicense comprised all of the Company’s revenue during the years ended December
31, 2019 and 2018. See “Revenue” below.
During
the years ended December 31, 2019 and 2018, 30% and 23.1% of the Company’s debt financings were from one lender.
Revenue
The
Company accounts for revenue in accordance with ASC Topic 606, Revenue from Contracts with Customers, which the Company adopted
beginning on January 1, 2019, utilizing the modified retrospective method. The approach was applied to contracts that were in
process as of January 1, 2019. Prior to January 1, 2019, the Company accounted for revenue under ASC Topic 605, Revenue Recognition,
and recognized revenue when the following criteria have been met: (1) persuasive evidence of an arrangement exists; (2) delivery
has occurred or services have been rendered; (3) the price is fixed and determinable; and (4) collectability is reasonably assured.
The adoption of ASC Topic 606 did not have an impact on the Company’s reported revenue or contracts in process at January
1, 2019. The reported results for the fiscal year 2019 reflect the application of ASC Topic 606.
The
Company derives 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 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’s contracted transaction price is allocated to each distinct performance obligation and recognized as revenue when,
or as, the performance obligation is satisfied. The Company’s contracts have a single performance obligation which is not
separately identifiable from other promises in the contracts and is, therefore, not distinct. The Company’s performance
obligation is satisfied upon the transfer of risk of loss to the customer. 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 years ended December 31, 2019 and 2018, the Company recognized $130,000 and $111,000, respectively, of revenue related to
the Company’s sublicenses.
Practical
Expedients
As
part of ASC Topic 606, the Company has adopted several practical expedients including:
●
|
Significant
Financing Component – the Company does not adjust the promised amount of consideration for the effects of a significant
financing component since the Company expects, at contract inception, that the period between when the Company transfers a
promised good or service to the customer and when the customer pays for that good or service will be one year or less.
|
●
|
Unsatisfied
Performance Obligations – all performance obligations related to contracts with a duration for less than one year, the
Company has elected to apply the optional exemption provided in ASC Topic 60 and therefore, is not required to disclose the
aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially satisfied at
the end of the reporting period.
|
●
|
Right
to Invoice – the Company has a right to consideration from a customer in an amount that corresponds directly with the
value to the customer of the Company’s performance completed to date the Company may recognize revenue in the amount
to which the entity has a right to invoice.
|
Contract
Modifications
There
were no contract modifications during the years ended December 31, 2019 and 2018. Contract modifications are not routine in the
performance of the Company’s contracts.
Cash
The
Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
There were no cash equivalents as of December 31, 2019 or 2018.
Accounts
Receivable
Accounts
receivable are reported at their outstanding unpaid principal balances net of allowances for doubtful accounts. The Company periodically
assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for allowances
for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and
any other factors considered appropriate. The Company writes off accounts receivable against the allowance for doubtful accounts
when a balance is determined to be uncollectible. The Company did not record an allowance for doubtful accounts as of December
31, 2019 and 2018, respectively.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is computed using straight-line method over the estimated useful lives of the
related assets, generally three to fifteen years. Expenditures that enhance the useful lives of the assets are capitalized and
depreciated. Computer equipment costs are capitalized, as incurred, and depreciated on a straight-line basis over a range of 3
– 5 years.
Leasehold
improvements are amortized over the lesser of (i) the useful life of the asset, or (ii) the remaining lease term. Maintenance
and repairs are charged to expense as incurred. The Company capitalizes cost attributable to the betterment of property and equipment
when such betterment extends the useful life of the assets. At the time of retirement or other disposition of property and equipment,
the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected
in operations.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, including definite-lived intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing
the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation
is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by
other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values,
depending on the nature of the assets. For the years ended December 31, 2019 and 2018, we
determined that there was no impairment charge for our intangible assets.
Intangible
Assets
The
Company records its intangible assets at cost in accordance with Accounting Standards Codification (“ASC”) 350, Intangibles
– Goodwill and Other. Definite lived intangible assets are amortized over their estimated useful life using the straight-line
method, which is determined by identifying the period over which the cash flows from the asset are expected to be generated.
Advertising
and Marketing Costs
The
Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $321,280 and $352,204
for the years ended December 31, 2019 and 2018, respectively, and are recorded in marketing and promotion on the statement of
operations.
Fair
Value Measurements
As
defined in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement
framework applies at both initial and subsequent measurement.
Level
1:
|
Quoted
prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those
in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on
an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities
and listed equities.
|
Level
2:
|
Pricing
inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for
commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the
full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions
are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity
swaps, interest rate swaps, options and collars.
|
|
|
Level
3:
|
Pricing
inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with
internally developed methodologies that result in management’s best estimate of fair value.
|
See
Note 9 – Derivative Liabilities for additional details regarding the valuation technique and assumptions used in valuing
Level 3 inputs.
Fair
Value of Financial Instruments
The
carrying value of cash, accounts receivable, accounts payable and accrued expenses, and other current liabilities approximate
their fair values based on the short-term maturity of these instruments. The carrying amount of notes approximate the estimated
fair value for these financial instruments as management believes that such notes constitute substantially all of the Company’s
debt and interest payable on the notes approximates the Company’s incremental borrowing rate.
Net
Loss per Common Share
Net
loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the
year. All vested outstanding options and warrants are considered potential common stock. The dilutive effect, if any, of stock
options and warrants are calculated using the treasury stock method. All outstanding convertible notes are considered common stock
at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of
common stock equivalents is anti-dilutive with respect to losses, options, warrants, and convertible notes have been excluded
from the Company’s computation of net loss per common share for the years ended December 31, 2019 and 2018.
The
following table summarizes the securities that were excluded from the diluted per share calculation because the effect of including
these potential shares was antidilutive due to the Company’s net loss position even though the exercise price could be less
than the average market price of the common shares:
|
|
Year Ended December 31,
|
|
|
|
2019
|
|
|
2018
|
|
|
|
|
|
|
|
|
Options
|
|
|
4,879,617
|
|
|
|
4,703,785
|
|
Warrants
|
|
|
8,379,177
|
|
|
|
3,483,403
|
|
Convertible notes
|
|
|
501,549,663
|
(1)
|
|
|
9,200,062
|
(1)
|
Total
|
|
|
514,808,457
|
|
|
|
17,387,250
|
|
|
(1)
|
As
of December 31, 2019 and 2018, many of the convertible notes had variable conversion prices and the shares issuable were estimated
based on the market conditions. Pursuant to the note agreements, there were 225,023,100 and 57,019,880 shares of common stock
reserved for future note conversions as of December 31, 2019 and 2018, respectively.
|
Stock-Based
Compensation
The
Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement
and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the
statements of operations.
For
stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date
fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires
management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent
with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject
to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation
expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which
is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant
and revised.
Pursuant
to ASU 2018-07 Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting,
the Company accounts for stock options issued to non-employees for their services in accordance ASC 718. The Company uses valuation
methods and assumptions to value the stock options that are in line with the process for valuing employee stock options noted
above.
Since
the shares underlying the Company’s 2010 Equity Participation Plan (the “Plan”) are registered, the Company
estimates the fair value of the awards granted under the Plan based on the market value of its freely tradable common stock as
reported on the OTCQB market. On February 3, 2020, the Company was advised by OTC Markets Group that, based upon the closing bid
price of the Company’s common stock being less than $0.001 per share for five consecutive trading days, the Company’s
common stock was moved from the OTCQB Market to the Pink Market effective at market open on February 10, 2020. The fair value
of the Company’s restricted equity instruments was estimated by management based on observations of the cash sales prices
of both restricted shares and freely tradable shares. Awards granted to directors are treated on the same basis as awards granted
to employees. Upon the exercise of an option or warrant, the Company issues new shares of common stock out of its authorized shares.
Convertible Instruments
The Company bifurcates
conversion options from their host instruments and accounts for them as free standing derivative financial instruments according
to certain criteria. The criteria include circumstances in which (a) the economic characteristics and risks of the embedded derivative
instrument are not clearly and closely related to the economic characteristics and risks of the host contract, (b) the hybrid
instrument that embodies both the embedded derivative instrument and the host contract is not re-measured at fair value under
otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings as they occur and
(c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative instrument.
An exception to this rule is when the host instrument is deemed to be conventional.
When the Company has
determined that the embedded conversion options should not be bifurcated from their host instruments, the Company records, when
necessary, discounts to convertible notes for the intrinsic value of conversion options embedded in debt instruments (the beneficial
conversion feature) based upon the differences between the fair value of the underlying common stock at the commitment date of
the note transaction and the effective conversion price embedded in the note. Debt discounts under these arrangements are amortized
over the term of the related debt to their stated date of redemption.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets, including
tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The
Company utilizes ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for
the expected future tax consequences of events that have been included in the consolidated financial statements or tax returns.
The Company accounts for income taxes using the asset and liability method to compute the differences between the tax basis of
assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is recorded
when it is “more likely-than-not” that a deferred tax assets will not be realized.
For
uncertain tax positions that meet a “more likely than not” threshold, the Company recognizes the benefit of uncertain
tax positions in the consolidated financial statements. The Company’s practice is to recognize interest and penalties, if
any, related to uncertain tax positions in income tax expense in the consolidated statements of operations.
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 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 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.
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.
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The standard requires all leases that have a term of over
12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use asset
initially measured at the present value of amounts expected to be paid over the term. Recognition of the costs of these leases
on the income statement will be dependent upon their classification as either an operating or a financing lease. Costs of an operating
lease will continue to be recognized as a single operating expense on a straight-line basis over the lease term. Costs for a financing
lease will be disaggregated and recognized as both an operating expense (for the amortization of the right-of-use asset) and interest
expense (for interest on the lease liability). This standard, which the Company adopted on January 1, 2019, was applied on a modified
retrospective basis to leases existing at, or entered into after, the beginning of the earliest comparative period presented in
the financial statements. The adoption of ASU 2016 - 02 did not have a material impact on the Company’s financial statements
and related disclosures.
A
lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period
of time in exchange for consideration. On January 1, 2019, the Company adopted ASC 842 and it primarily affected the accounting
treatment for operating lease agreements in which the Company is the lessee.
In
accordance with ASC 842, Leases, the Company recognized a right-of-use (“ROU”) asset and corresponding lease
liability on its balance sheets for its office space lease agreement. See Note 12 for further discussion, including the impact
on the Company’s financial statements and related disclosures.
ROU
assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for
minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend
or terminate the lease if it is reasonably certain that the Company will exercise that option.
Leases
in which the Company is the lessee are comprised of office rental. All of the leases are classified as operating leases. The Company
has a lease agreement for office space with a remaining term of five years as of December 31, 2019.
Recent
Accounting Pronouncements
In
January 2017, FASB issued Accounting Standards Update (ASU) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying
the Test for Goodwill Impairment, which eliminated the calculation of implied goodwill fair value. Instead, companies will record
an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value. This guidance
simplifies the accounting as compared to prior GAAP. The guidance is effective for fiscal years beginning after December 15, 2019.
The Company does not expect the implementation of this new pronouncement to have a material impact on its consolidated financial
statements.
In
June 2018, the FASB issued ASU 2018-07, “Compensation—Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.” This guidance simplifies the accounting for non-employee share-based payment transactions.
The amendments specify that ASC 718 applies to all share-based payment transactions in which a grantor acquires goods and services
to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The standard is effective for
fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted, but
no earlier than an entity’s adoption date of Topic 606, “Revenue from Contracts with Customers.” This standard,
adopted as of January 1, 2019, had no material impact on the Company’s consolidated financial statements for the year ended
December 31, 2019.
All
other newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the
Company.
NOTE
4 – PROPERTY AND EQUIPMENT
Property
and equipment consists of the following:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Medical equipment
|
|
$
|
352,133
|
|
|
$
|
345,963
|
|
Furniture and fixtures
|
|
|
123,487
|
|
|
|
120,925
|
|
Computer software and equipment
|
|
|
107,648
|
|
|
|
80,748
|
|
Office equipment
|
|
|
12,979
|
|
|
|
12,979
|
|
Leasehold improvements
|
|
|
304,661
|
|
|
|
304,661
|
|
|
|
|
900,908
|
|
|
|
865,276
|
|
Less: accumulated depreciation
|
|
|
(832,506
|
)
|
|
|
(690,041
|
)
|
Property and equipment, net
|
|
$
|
68,402
|
|
|
$
|
175,235
|
|
Total
depreciation expense for the years ended December 31, 2019 and 2018 was $142,465 and $165,481, respectively. Depreciation expense
is reflected in general and administrative expenses and research and development expenses in the consolidated statement of operations.
NOTE
5 – INTANGIBLE ASSETS
The
Company is a party to a license agreement with the SCTC (as amended) (the “SCTC Agreement”). Pursuant to the SCTC
Agreement, the Company obtained, among other things, a worldwide, exclusive, royalty-bearing license from the SCTC to utilize
or sublicense a certain medical device patent for the administration of specific cells and/or cell products to the disc and/or
spine (and other parts of the body) and a worldwide (excluding Asia and Argentina), exclusive, royalty-bearing license to utilize
or sublicense a certain method for culturing cells. Pursuant to the license agreement with the SCTC, unless certain performance
milestones had been or are satisfied, the Company would have been required to pay to the SCTC $150,000 by April 2017 and an additional
$250,000 by April 2019 in order to maintain its exclusive rights with regard to the disc/spine technology. In February 2017, the
Company received authorization from the Food and Drug Administration (the “FDA”) to proceed with a Phase 2 clinical
trial. Based upon such authorization, the Company has satisfied a performance milestone such that the Company was not required
to pay to the SCTC a minimum amount of $150,000 by April 2017 to retain exclusive rights with regard to the disc/spine technology.
In addition, the Company believes that it has until February 2022 to complete the Phase 2 clinical trial in order to satisfy the
final performance milestone such that the Company was not required to pay the additional $250,000 by April 2019 pursuant to the
SCTC Agreement to maintain its exclusive rights.
Intangible
assets consist of the following:
|
|
Patents and Trademarks
|
|
|
Licenses
|
|
|
Accumulated Amortization
|
|
|
Total
|
|
Balance as of January 1, 2018
|
|
$
|
3,676
|
|
|
$
|
1,301,500
|
|
|
$
|
(416,226
|
)
|
|
$
|
888,950
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,891
|
)
|
|
|
(74,891
|
)
|
Balance as of December 31, 2018
|
|
|
3,676
|
|
|
|
1,301,500
|
|
|
|
(491,117
|
)
|
|
|
814,059
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,895
|
)
|
|
|
(74,895
|
)
|
Balance as of December 31, 2019
|
|
$
|
3,676
|
|
|
$
|
1,301,500
|
|
|
$
|
(566,012
|
)
|
|
$
|
739,164
|
|
Weighted average remaining amortization period at December 31, 2019 (in years)
|
|
|
1.0
|
|
|
|
9.9
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets consists of the following:
|
|
Patents and Trademarks
|
|
|
Licenses
|
|
|
Accumulated Amortization
|
|
Balance as of January 1, 2018
|
|
$
|
2,576
|
|
|
$
|
413,650
|
|
|
$
|
416,226
|
|
Amortization expense
|
|
|
368
|
|
|
|
74,523
|
|
|
|
74,891
|
|
Balance as of December 31, 2018
|
|
|
2,944
|
|
|
|
488,173
|
|
|
|
491,117
|
|
Amortization expense
|
|
|
368
|
|
|
|
74,527
|
|
|
|
74,895
|
|
Balance as of December 31, 2019
|
|
$
|
3,312
|
|
|
$
|
562,700
|
|
|
$
|
566,012
|
|
NOTE
6 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of:
|
|
December 31, 2019
|
|
|
December 31, 2018
|
|
|
|
|
|
|
|
|
Accrued payroll
|
|
$
|
152,308
|
|
|
$
|
91,560
|
|
Accrued research and development expenses
|
|
|
806,175
|
|
|
|
646,175
|
|
Accrued general and administrative expenses
|
|
|
1,392,743
|
|
|
|
1,084,831
|
|
Accrued director compensation
|
|
|
557,500
|
|
|
|
482,500
|
|
Deferred rent
|
|
|
12,438
|
|
|
|
33,610
|
|
Total accrued expenses
|
|
|
2,921,164
|
|
|
|
2,338,676
|
|
Less: accrued expenses, current portion
|
|
|
2,921,164
|
|
|
|
2,302,176
|
|
Accrued expenses, non-current portion
|
|
$
|
-
|
|
|
$
|
36,500
|
|
Note
7 – NOTES PAYABLE
A
summary of the notes payable activity during the years ended December 31, 2019 and 2018 is presented below:
|
|
Related Party Notes
|
|
|
Convertible Notes
|
|
|
Other Notes
|
|
|
Debt Discount
|
|
|
Total
|
|
Outstanding, December 31, 2017
|
|
$
|
845,000
|
|
|
$
|
2,029,870
|
|
|
$
|
1,124,465
|
|
|
$
|
(337,485
|
)
|
|
$
|
3,661,850
|
|
Issuances
|
|
|
-
|
|
|
|
6,357,286
|
|
|
|
128,000
|
|
|
|
-
|
|
|
|
6,485,286
|
|
Exchanges for equity
|
|
|
(95,000
|
)
|
|
|
(2,739,926
|
)
|
|
|
(1,047,247
|
)
|
|
|
681,281
|
|
|
|
(3,200,892
|
)
|
Conversions to equity
|
|
|
-
|
|
|
|
(105,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(105,000
|
)
|
Repayments
|
|
|
(30,000
|
)
|
|
|
(833,302
|
)
|
|
|
-
|
|
|
|
61,001
|
|
|
|
(802,301
|
)
|
Extinguishment of notes payable
|
|
|
-
|
|
|
|
(407,295
|
)
|
|
|
(318,493
|
)
|
|
|
-
|
|
|
|
(725,788
|
)
|
Recognition of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(4,077,234
|
)
|
|
|
(4,077,234
|
)
|
Accretion of debt discount
|
|
|
-
|
|
|
|
7,782
|
|
|
|
245,776
|
|
|
|
370,483
|
|
|
|
624,041
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,289,591
|
|
|
|
2,289,591
|
|
Outstanding, December 31, 2018
|
|
|
720,000
|
|
|
|
4,309,415
|
|
|
|
132,501
|
|
|
|
(1,012,363
|
)
|
|
|
4,149,553
|
|
Issuances
|
|
|
635,000
|
|
|
|
9,913,339
|
|
|
|
340,000
|
|
|
|
-
|
|
|
|
10,888,339
|
|
Exchanges for equity
|
|
|
-
|
|
|
|
(2,637,323
|
)
|
|
|
-
|
|
|
|
634,525
|
|
|
|
(2,002,798
|
)
|
Repayments
|
|
|
(70,000
|
)
|
|
|
(4,817,105
|
)
|
|
|
(7,500
|
)
|
|
|
428,939
|
|
|
|
(4,465,666
|
)
|
Extinguishment of notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
(148,014
|
)
|
|
|
6,196
|
|
|
|
(141,818
|
)
|
Recognition of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(5,523,830
|
)
|
|
|
(5,523,830
|
)
|
Accretion of interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
548,026
|
|
|
|
548,026
|
|
Accrued interest reclassified to notes payable principal
|
|
|
-
|
|
|
|
-
|
|
|
|
23,013
|
|
|
|
-
|
|
|
|
23,013
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
3,671,087
|
|
|
|
3,671,087
|
|
Outstanding, December 31, 2019
|
|
$
|
1,285,000
|
|
|
$
|
6,768,326
|
|
|
$
|
340,000
|
|
|
$
|
(1,247,420
|
)
|
|
$
|
7,145,906
|
|
Related
Party Notes
As
of December 31, 2019 and 2018, related party notes consisted of notes payable issued to certain directors of the Company, family
members of an officer of the Company, and the Tuxis Trust (the “Trust”). A former director and principal stockholder
of the Company (the “Director/Principal Stockholder”) serves as a trustee of the Trust, which was established for
the benefit of his immediate family.
During
the year ended December 31, 2018, the Company, the Trust and the Director/Principal Stockholder agreed to extend the maturity
dates of the above notes payable with an aggregate principal balance of $675,000, that were near maturity, to December 31,
2019 (subject to acceleration in the event the Company received certain financing proceeds). In consideration of one of the
note extensions, the Company reduced the exercise prices for an aggregate of 844,444 previously issued five-year warrants to
purchase the Company’s common stock from an exercise price of $4.00 per share to a reduced exercise price of $1.50 per
share. The incremental modification expense of $244,889 has been recorded as debt discount and is being amortized over the
extended term of the respective note. See Note 8 – Stockholders’ Deficit for additional details regarding the
warrant modification. Subsequent to December 31, 2019, pursuant to the Bankruptcy (See Note 13 – Subsequent Events),
$689,726 of principal and interest was exchanged for 68,972,600 shares of the Company’s common stock and $309,301 of
principal and interest was exchanged for a secured convertible note.
During
the year ended December 31, 2018, the Company and certain related parties agreed to extend the maturity dates of notes
payable with an aggregate principal balance of $140,000 from maturity dates ranging between August 2016 to February 2018 to new
maturity dates ranging from July 2018 to December 2018. As of December 31, 2018, a certain related party note in the outstanding
principal amount of $45,000 was past maturity.
During
the year ended December 31, 2018, the Company and certain related parties agreed to exchange certain notes with an aggregate principal
balance of $97,500 for an aggregate of 76,000 shares of the Company’s common stock. The common stock had an aggregate
exchange date value of $114,000 and, as a result, the Company recorded a loss on extinguishment of notes payable of $19,000.
During
the year ended December 31, 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 $635,000, which bore interest at the
rate of 12% - 15% per annum and provided for original maturity dates between July 2019 and May 2020.
During
the year ended December 31, 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
would 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 shares of common stock and warrants, as described below, in connection with a public offering of the Company’s
securities (a “Public Offering”). The exchange price for the indebtedness was to 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 was to 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 was to 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. As a result of the Company’s
Chapter 11 reorganization, the exchange did not occur.
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 year ended December 31, 2019, the Company, a then director of the Company, and 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, would be exchanged
for shares of common stock and warrants, as described below, in connection with a Public Offering. The exchange price for the
indebtedness was to 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 was to 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”) bore 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 was to be 125% of the Director/Trust Exchange Price and the term of the warrants was to 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 was to be reduced from
between $1.50 and $4.00 per share to $0.75 per share and the expiration dates of such warrants was to be extended from between
December 2019 and March 2022 to December 2023. The exchange agreements were submitted for approval by the stockholders of the
Company, which was obtained in August 2019. As a result of the Company’s Chapter 11 reorganization the exchange did not
occur.
As
of December 31, 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 for the purchase
of a number of shares equal to the number of shares issued upon the conversion of the principal amounts of the notes.
During
the years ended December 31, 2019 and 2018, the Company partially repaid certain related party notes in the aggregate principal
amount of $70,000 and $30,000, respectively.
Convertible
Notes
Issuances
During
the year ended December 31, 2018, the Company issued certain lenders and a consultant convertible notes payable in the aggregate
principal amount of $5,631,498 for aggregate cash proceeds of $4,947,475. The difference of $684,025 was recorded as follows:
(i) $424,023 was recorded as a debt discount and will be amortized over the terms of the respective notes and (ii) $260,000 was
recognized as consulting expense in the consolidated financial statements for services performed during the period. See Note 10
– Commitments and Contingencies for additional details regarding convertible notes issued in connection with consulting
services. The convertible notes bore interest at rates ranging between 6% and 15% per annum payable at maturity with original
maturity dates ranging between June 2018 through December 2019. In connection with the issuance of certain convertible notes,
the Company issued the lenders an aggregate of 53,249 shares of the Company’s common stock and the relative fair value of
$60,925 was recorded as debt discount and is being amortized over the terms of the respective notes. See below within Note 7 –
Notes Payable – Conversions, Exchanges and Other and Note 9 – Derivative Liabilities for additional details regarding
the ECOs of the convertible notes.
During
the year ended December 31, 2018, convertible notes in the aggregate principal amount of $725,788 were issued concurrently with
the extinguishment of certain convertible and other notes payable in the same aggregate principal amount. See below within Note
7 – Notes Payable – Conversions, Exchanges and Other for additional details.
During
the year ended December 31, 2019, the Company issued certain lenders convertible notes payable in the aggregate principal amount
of $9,765,325 for aggregate cash proceeds of $9,086,353. The difference of $678,973 was recorded as a debt discount and will be
amortized over the terms of the respective notes. The convertible notes bore interest at rates ranging between 8% to 15% per annum
payable at maturity with original maturity dates ranging between July 2019 through December 2020. In connection with the issuance
of certain convertible notes, the Company issued the lenders an aggregate of 78,873 shares of the Company’s common stock
and the relative fair value of $61,220 was recorded as debt discount and is being amortized over the terms of the respective notes.
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 7 – Notes Payable – Convertible Notes
– Conversions, Exchanges and Other and Note 9 – Derivative Liabilities for additional details regarding the ECOs of
the convertible notes.
During
the year ended December 31, 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 7 – Notes Payable
– Convertible Notes – Conversions, Exchanges and Other for additional details.
Embedded
Conversion Options and Note Provisions
As
of December 31, 2018, outstanding convertible notes in the aggregate principal amount of $2,374,415 were convertible into shares
of common stock of the Company as follows: (i) $920,000 of aggregate convertible notes were convertible at a fixed price ranging
from $1.00 to $2.00 per share for the first six months following the respective issue date, 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, (ii) $350,000 of convertible notes were convertible at a fixed conversion price of $2.15 per share, (iii) $100,000 of convertible
notes were convertible at the greater of (a) 60% of the fair value of the Company’s stock or (b) $1.00 per share, (iv) $904,415
of aggregate convertible notes were convertible at a range of 58% to 65% of the fair value of the Company’s stock (subject
to adjustment), depending on the note, and (v) $100,000 of convertible notes 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. 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 Note 7 – Notes Payable – Convertible Notes-Conversions,
Exchanges and Other and Note 9 – Derivative Liabilities for additional details regarding the embedded conversion options
of the convertible notes.
As
of December 31, 2018, a portion of convertible notes with an aggregate principal balance of $1,935,000, which were not yet convertible,
became convertible into shares of the Company’s common stock subsequent to December 31, 2018, as follows: (i) $1,835,000
of aggregate convertible notes generally became convertible at a conversion price equal to 58% of the fair value of the Company’s
stock, subject to adjustment, until the respective note had been paid in full and (ii) $100,000 of convertible notes became convertible
at the greater of (a) 58% of the fair value of the Company’s stock or (b) $1.50 per share.
As
of December 31, 2018, outstanding convertible notes in the aggregate principal amount of $69,978 had mandatory prepayment terms
at the option of the holder (“MPOs”). Convertible notes issued with MPOs permit the respective holder to demand prepayment
of the note, in cash, at a premium of 35% of the then outstanding principal balance and accrued interest during the period between
150 days to 179 days following the respective issuance date.
As of December 31, 2018,
outstanding convertible notes in the aggregate principal amount of $2,798,493 had prepayment premiums, whereby, in the event that
the Company elected to prepay certain notes during the first ninety-day period following the issue date, the respective holder
was entitled to receive a prepayment premium of up to 35%, depending on the note, on the then outstanding principal balance including
accrued interest. In the event that the Company prepaid any of the notes during the second ninety-day period following the issue
date, the respective holder was entitled to receive a prepayment premium of up to 40%, depending on the note, on the then outstanding
principal balance including accrued interest. In the event that the Company prepaid a certain note after the 180th
day period following the issue date and prior to maturity, the holder was entitled to receive a prepayment premium
of 50% on the then outstanding principal balance including accrued interest.
As
of December 31, 2018, outstanding convertible notes in the aggregate principal amount of $1,849,978 had most favored nation (“MFN”)
provisions, whereby, so long as such respective note was 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 would become a part of the transaction documents with the holder. As of December 31, 2018, 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 year ended December 31, 2018, 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 $3,631,702, of which $3,181,376 was recorded as a debt
discount and is being amortized over the terms of the respective convertible notes and $450,326 was recognized as part of an extinguishment
loss as described below. See Note 9 – Derivative Liabilities for additional details.
As
of December 31, 2019, outstanding convertible notes in the aggregate principal amount of $6,006,576 were convertible into shares
of common stock of the Company as follows: (i) $2,243,750 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 had been paid in full, (ii) $2,872,826 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)
$890,000 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 $340,000 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
of its securities whereby the conversion price was to 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 7 – Notes Payable – Convertible Notes – Embedded Conversion Options
and Note Provisions and Note 9 – Derivative Liabilities for additional details regarding the ECOs of the convertible notes.
As
of December 31, 2019, a portion of convertible notes with an aggregate principal balance of $1,271,750, which were not yet convertible,
became convertible into shares of the Company’s common stock subsequent to December 31, 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 had been paid in
full.
As
of December 31, 2019, outstanding convertible notes in the aggregate principal amount of $3,537,438 had prepayment premiums, whereby,
in the event that the Company elected to prepay certain notes during the one hundred eighty-day period following the issue date,
the respective holder was entitled to receive a prepayment premium of up to 135%, depending on the note, on the then outstanding
principal balance including accrued interest.
As
of December 31, 2019, outstanding convertible notes in the aggregate principal amount of $4,626,874 had most favored nation (“MFN”)
provisions, whereby, so long as such respective note was 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 were to become a part of the transaction documents with the holder. As of December 31, 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 year ended December 31, 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 $5,331,147, of which $4,771,974 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. As of December 31, 2019, outstanding notes totaling $3,289,111 were in default. See Note 9 – Derivative
Liabilities for additional details.
Conversions,
Exchanges and Other
During the year ended
December 31, 2018, the Company and certain lenders exchanged certain convertible notes with bifurcated ECOs with an aggregate
net carrying amount of $5,144,063 (including an aggregate of $2,058,645 of principal net of debt discount, $166,022 of accrued
interest and $2,919,396 related to the separated ECOs accounted for as derivative liabilities) for an aggregate of 3,734,664 shares
of the Company’s common stock at conversion prices ranging from $0.28 to $2.38 per share. The common stock had an aggregate
exchange date value of $5,846,809 and, as a result, the Company recorded a loss on extinguishment of notes payable of $702,746.
See Note 9 – Derivative Liabilities for additional details.
During the year ended
December 31, 2018, the Company elected to convert certain convertible notes with an aggregate principal balance of $105,000 and
aggregate accrued interest of $5,636 into an aggregate of 97,424 shares of the Company’s common stock at conversion prices
ranging from $0.82 to $2.02 per share.
During
the year ended December 31, 2018, the Company repaid an aggregate principal amount of $833,302 of convertible notes payable, $44,787
of the respective aggregate accrued interest and an aggregate of $238,808 of prepayment premiums. As a result of the repayments,
the Company recorded a loss on extinguishment of notes payable of $299,809 and an aggregate of $61,001 of the related debt discounts
were extinguished.
During
the year ended December 31, 2018, the Company and certain lenders agreed to multiple extensions of the maturity dates of notes
payable with an aggregate principal balance of $681,445 from maturity dates ranging between December 2017 to July 2018 to new
maturity dates ranging from April 2018 to September 2018. In consideration of the extensions, the Company issued a lender 4,500
shares of the Company’s common stock. The issuance date fair value of the common stock of $9,000 was recorded as debt discount
and is being amortized over the remaining term of the note. See below within this Note 7 – Notes Payable – Conversions,
Exchanges and Other and Note – 9 Derivative Liabilities for additional details regarding the ECOs of the convertible notes.
As of December 31, 2018, there were no convertible notes payable past due.
During the year ended
December 31, 2018, certain lenders to the Company acquired other promissory notes issued by the Company in the aggregate outstanding
amount of $725,788 (inclusive of accreted interest of $76,272) from different lenders to the Company. The Company exchanged the
acquired notes for new convertible notes in the aggregate principal amount of $725,788 which accrued interest at rates
ranging between 8% to 12% per annum, payable on the respective maturity date ranging between August 2019 and November 2019. The
ECOs of the notes were subject to sequencing and their issuance date fair value of $450,326 was accounted for as derivative liabilities
(see Note 9 – Derivative Liabilities for additional details). Since the fair value of the new ECOs exceeded 10% of the respective
principal amounts of the new notes, the note exchanges were accounted for as extinguishments, and accordingly the Company recognized
a net loss on extinguishment of $248,891 in connection with the derecognition of the net carrying amount of $927,223 of the extinguished
debt ($725,788 of aggregate principal and interest and the derivative liability carrying value of their ECOs of an aggregate of
$201,435) and the issuance of the new convertible notes in the aggregate principal amount $725,788 plus the fair value of the
new notes’ ECOs of an aggregate of $450,326.
During the year ended
December 31, 2019, the Company and certain lenders exchanged certain convertible notes with bifurcated ECOs with an aggregate
net carrying amount of $5,328,918 (including an aggregate of $2,631,595 of principal less debt discount of $634,525,
$181,912 of accrued interest and $3,230,780 related to the separated ECOs accounted for as derivative liabilities) for an
aggregate of 54,464,158 shares of the Company’s common stock at conversion prices ranging from $0.01 to $0.43 per share.
The common stock had an aggregate exchange date value of $6,230,102 and, as a result, the Company recorded a loss on extinguishment
of notes payable of $508,743. See Note 9 – Derivative Liabilities for additional details.
During
the year ended December 31, 2019, the Company repaid an aggregate principal amount of $4,894,604 of convertible notes payable,
$267,997 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 year ended December 31, 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 accrued 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 9 –
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 year ended December 31, 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
was to 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.
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. As of December 31, 2019, all notes are in default.
Other
Notes
Issuances
During the year ended
December 31, 2018, the Company issued a lender three-month notes payable in the aggregate principal amount of $128,000, which
bore no interest, for aggregate cash proceeds of $110,000. The $18,000 difference was recorded as debt discount and was
amortized over the terms of the respective notes. In connection with the issuances of the promissory notes, the Company issued
the lender an aggregate of 6,500 shares of the Company’s common stock. The issuance date fair value of the common stock
of $9,627 was recorded as debt discount and was amortized over the terms of the respective notes.
During
the year ended December 31, 2019, the Company issued certain lenders notes payable in the aggregate principal amount of $340,000.
The notes bore interest at 15% per annum payable at maturity with original maturity dates ranging between November 2019 through
November 2020. As of December 31, 2019, all notes were in default.
Exchange
and Other
During
the year ended December 31, 2018, the Company and certain lenders agreed to exchange certain notes with an aggregate principal
balance of $1,047,247 and aggregate accrued interest of $61,802 for an aggregate of 1,221,250 shares of the Company’s common
stock at exchange prices ranging from $0.72 to $1.50 per share. The common stock had an aggregate exchange date value of $1,254,557
and, as a result, the Company recorded a loss on extinguishment of notes payable of $145,508.
During the year ended
December 31, 2018, the Company and certain lenders agreed to multiple extensions of the maturity dates of notes payable with an
aggregate principal balance of $1,309,747 from maturity dates ranging between December 2017 to October 2018 to new maturity dates
ranging from March 2018 to January 2019. In consideration of the extensions, the Company issued certain lenders an aggregate of
35,000 shares of the Company’s common stock. The aggregate issuance date fair value of the common stock of $60,000 was recorded
as debt discount and was amortized over the remaining terms of the respective notes. Additionally, in connection with a
certain extension, the Company increased the stated rate at which the note bore interest, from 0% to 8% per annum, effective June
2018. Furthermore, in connection with certain of the extensions, the Company accreted an aggregate of $177,286 as interest expense
to the principal balance of the respective note. As of December 31, 2018, principal of $7,500 of a certain other note payable
was past due.
During
the year ended December 31, 2018, a convertible promissory note in the principal amount of $318,493 was issued concurrently with
the extinguishment of a certain other note payable in the same principal amount. See above within Note 7 – Notes Payable
– Conversions, Exchanges and Other for additional details.
During
the year ended December 31, 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 was amortized over the remaining term of
the note.
During
the year ended December 31, 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 7 – Notes Payable
– Convertible Notes – Conversions, Exchanges and Other for additional details.
During
the year ended December 31, 2019, the Company partially repaid a certain promissory note in the principal amount of $7,500.
Chapter
11 Reorganization
Subsequent to December
31, 2019, pursuant to the Bankruptcy (See Note 13 – Subsequent Events), the holders of the above notes received, for any
outstanding principal and interest at the date of the Company’s Chapter 11 petition, 1,049,726,797 shares of the
Company’s common stock, with such shares subject to leak-out restrictions prohibiting the holder from selling, without the
consent of the Company, more than 33% of the issued shares during each of the three initial 30 day periods following the Effective
Date.
Note
8 - Stockholders’ DEFICIT
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 stockholder 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 stockholder approval. In May 2019,
such stockholder approval was obtained.
In
March 2019, the Board of Directors determined to submit to the Company’s stockholders 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 was 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 stockholders for their approval
a proposal to authorize the Board of Directors, in the event the reverse stock split proposal was approved by the stockholders,
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 stockholders approved the foregoing
proposals.
On
November 13, 2019 the Board of Directors and stockholders approved 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. As of the date of this filing the reverse stock split has not been effected.
Subsequent to December
31, 2019 and pursuant to the Chapter 11 plan of reorganization the Company filed a Certificate of Amendment to its
Certificate of Incorporation pursuant to which, among other things, the number of shares of common stock authorized to be issued
by the Company has been increased to 300,000,000,000 and the par value of the shares of its common stock has been
reduced to $0.0001 per share. The effect of the change in par value has been reflected in the statement of changes in stockholders’
equity for the years ended December 31, 2019 and 2018.
Compensatory
Common Stock Issuance
During
the year ended December 31, 2019, the Company issued 75,000 shares of immediately vested shares of common stock value at $30,000
to a consultant for services rendered.
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 year ended December 31, 2018, the Company issued an aggregate of 70,000 shares of common stock of the Company and five-year
immediately vested warrants to purchase an aggregate of 70,000 shares of common stock of the Company at an exercise price of $3.50
per share to investors for aggregate gross proceeds of $175,000. The warrants had an aggregate grant date fair value of $87,300.
During
the year ended December 31, 2019, the Company issued an aggregate of 5,663,301 shares of common stock of the Company, five-year
immediately vested warrants to purchase an aggregate of 4,611,746 shares of common stock of the Company at exercise prices ranging
from $0.20 per share to $1.00 per share and one-year immediately vested warrants to purchase an aggregate of 1,051,555 shares
of common stock of the Company at an exercise price of $0.70 per share to certain investors for aggregate gross proceeds of $1,658,500.
The warrants had an aggregate grant date fair value of $1,240,165. The warrants were subject to the Company’s sequencing
policy and, as a result, were initially recorded as derivative liabilities. See Note 9 – Derivative Liabilities for additional
details.
During
the year ended December 31, 2019, the Company issued five-year immediately vested warrants to purchase an aggregate of 395,000
shares of the Company’s common stock in association with the issuance of certain convertible debt. The warrants have exercise
prices ranging from $0.35 per share to $1.00 per share. The warrants had an aggregate grant date fair value of $116,200. The warrants
were subject to the Company’s sequencing policy and, as a result, were initially recorded as derivative liabilities. See
Note 9 – Derivative Liabilities for additional details.
During
the year ended December 31, 2019, the Company and a warrant holder agreed to reduce the exercise prices of an aggregate of 2,111,111
outstanding warrants previously issued with original exercise prices of $0.70 and $0.85 per share to an exercise price of $0.15
per share and extend expiration dates of such outstanding warrants from dates between February 2020 and May 2020 to new expiration
dates between February 2024 and May 2024. See Note 9 – Derivative Liabilities for additional details. As a result, the Company
recorded a decrease in the derivative liability of $233,333 for the 3,333,333 warrants remaining under the Company’s sequencing
policy.
Warrant
Compensation
See
Note 10 – 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 $56,000 and $137,956 for the years ended December 31, 2019 and 2018,
respectively, related to stock warrants issued as compensation, which is reflected as consulting expense in the consolidated statements
of operations.
Warrant
Activity Summary
In
applying the Black-Scholes option pricing model to warrants granted or issued, the Company used the following assumptions:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk free interest rate
|
|
|
1.38%
- 2.62
|
%
|
|
|
1.92%
- 2.91
|
%
|
Contractual term (years)
|
|
|
1.00
- 5.00
|
|
|
|
1.98
- 5.00
|
|
Expected volatility
|
|
|
140%
- 167
|
%
|
|
|
128%
- 141
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
weighted average estimated fair value of the warrants granted during the years ended December 31, 2019 and 2018 was approximately
$0.23 and $1.06 per share, respectively.
A
summary of the warrant activity during the years ended December 31, 2019 and 2018 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding, January 1, 2018
|
|
|
3,435,134
|
|
|
$
|
4.47
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
266,521
|
|
|
|
3.31
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(207,084
|
)
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(11,168
|
)
|
|
|
42.72
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
3,483,403
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
6,162,301
|
|
|
|
0.44
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(1,266,527
|
)
|
|
|
5.41
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
8,379,177
|
|
|
$
|
1.43
|
|
|
|
3.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
8,379,177
|
|
|
$
|
1.43
|
|
|
|
3.3
|
|
|
$
|
-
|
|
The
following table presents information related to stock warrants at December 31, 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
|
|
|
6,162,301
|
|
|
|
3.7
|
|
|
|
6,162,301
|
|
$2.00 - $2.99
|
|
|
75,000
|
|
|
|
3.8
|
|
|
|
75,000
|
|
$3.00 - $3.99
|
|
|
70,000
|
|
|
|
3.5
|
|
|
|
70,000
|
|
$4.00 - $4.99
|
|
|
1,813,997
|
|
|
|
1.6
|
|
|
|
1,813,997
|
|
$5.00 - $5.99
|
|
|
182,667
|
|
|
|
1.5
|
|
|
|
182,667
|
|
$6.00 - $7.99
|
|
|
40,000
|
|
|
|
0.6
|
|
|
|
40,000
|
|
$10.00 - $15.00
|
|
|
35,212
|
|
|
|
0.4
|
|
|
|
35,212
|
|
|
|
|
8,379,177
|
|
|
|
3.3
|
|
|
|
8,379,177
|
|
Stock
Options
In
applying the Black-Scholes option pricing model to stock options granted, the Company used the following assumptions:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk free interest rate
|
|
|
1.47%
- 2.72
|
%
|
|
|
2.44%
- 3.15
|
%
|
Expected term (years)
|
|
|
10.00
|
|
|
|
5.00
– 10.00
|
|
Expected volatility
|
|
|
133%
- 140
|
%
|
|
|
129%
- 141
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
weighted average estimated fair value of the stock options granted during the years ended December 31, 2019 and 2018, was approximately
$0.36 and $1.60 per share, respectively.
In
January 2018, the Company granted a ten-year option to a consultant of the Company to purchase 10,000 shares of the Company’s
common stock at an exercise price of $3.20 per share. The option was to vest ratably over three years on the issuance date anniversaries.
The option had an aggregate grant date value of $33,700. During the year ended December 31, 2018, the option was forfeited in
connection with the consultant’s termination and accordingly, no expense related to the option was recognized.
In
January 2018, the Company granted the former Senior VP a ten-year option to purchase 500,000 shares of the Company’s common
stock at an exercise price of $3.40 per share. The option grant provided for vesting based upon the achievement of a certain performance
condition. The grant date value of the option was $1,491,300, which was recognizable to the extent such milestone was deemed probable
to occur. See Note 10 – Commitments and Contingencies for additional details regarding the former Senior VP’s resignation
and termination of the option.
In
October 2018, the Company issued ten-year options to employees and directors of the Company to purchase an aggregate of 885,000
shares of common stock at an exercise price of $1.23 per share. The options vest as follows: (i) options for the purchase of 216,667
shares vested immediately, (ii) options for the purchase of 295,002 shares vest on the one-year anniversary of the issuance date,
(iii) options for the purchase of 295,000 shares vest on the two-year anniversary of the issuance date and (iv) options for the
purchase of 78,331 shares vest on the three-year anniversary of the issuance date. The options had an aggregate grant date value
of $943,100 which is being amortized over the vesting term of the respective options.
In
October 2018 and December 2018, the Company entered into agreements with certain members of its Scientific Advisory Board to provide
advice and guidance in connection with scientific matters relating to the Company’s business. In connection with the agreements,
the Company issued the advisors ten-year options to purchase up to an aggregate 110,000 shares of the Company’s common stock
at an exercise price of $1.23 per share. The options vest ratably over three years on the issuance date anniversaries. The options
had an aggregate grant date value of $125,800. The Company recognizes the fair value of the options as consulting expenses over
the respective vesting terms of the options. The options were subject to the Company’s sequencing policy and, as a result,
were recorded as derivative liabilities. See Note 9 – Derivative Liabilities for additional details.
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 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 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 consolidated statements of operations.
A
summary of the option activity during the years ended December 31, 2019 and 2018 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding, January 1, 2018
|
|
|
3,122,202
|
|
|
$
|
4.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,180,000
|
|
|
|
1.81
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(598,417
|
)
|
|
|
3.50
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2018
|
|
|
4,703,785
|
|
|
$
|
3.21
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
245,000
|
|
|
|
0.36
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(69,168
|
)
|
|
|
2.79
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2019
|
|
|
4,879,617
|
|
|
$
|
0.99
|
|
|
|
7.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2019
|
|
|
4,044,959
|
|
|
$
|
1.04
|
|
|
|
6.8
|
|
|
$
|
-
|
|
The
following table presents information related to stock options at December 31, 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
|
|
|
|
9.7
|
|
|
|
175,000
|
|
$0.75 - $0.99
|
|
|
4,623,367
|
|
|
|
6.8
|
|
|
|
3,788,708
|
|
$1.00 - $5.99
|
|
|
8,750
|
|
|
|
2.6
|
|
|
|
8,750
|
|
$6.00 - $19.99
|
|
|
37,500
|
|
|
|
4.0
|
|
|
|
37,500
|
|
$20.00 - $30.00
|
|
|
35,000
|
|
|
|
2.2
|
|
|
|
35,000
|
|
|
|
|
4,879,617
|
|
|
|
6.8
|
|
|
|
4,044,958
|
|
The
following table presents information related to stock option expense:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
|
|
|
Remaining
|
|
|
|
For the Years Ended
|
|
|
Unrecognized at
|
|
|
Amortization
|
|
|
|
December 31,
|
|
|
December 31,
|
|
|
Period
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
(Years)
|
|
Consulting
|
|
$
|
539,690
|
|
|
$
|
965,916
|
|
|
$
|
113,370
|
|
|
|
0.8
|
|
Research and development
|
|
|
417,838
|
|
|
|
340,471
|
|
|
|
263,783
|
|
|
|
1.4
|
|
General and administrative
|
|
|
670,995
|
|
|
|
902,542
|
|
|
|
411,765
|
|
|
|
0.9
|
|
|
|
$
|
1,628,523
|
|
|
$
|
2,208,929
|
|
|
$
|
794,918
|
|
|
|
1.1
|
|
Note
9 – 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, 2018
|
|
$
|
216,073
|
|
Issuance of derivative liabilities
|
|
|
3,875,231
|
|
Extinguishment of derivative liabilities in connection with convertible note repayments and exchanges
|
|
|
(3,120,833
|
)
|
Change in fair value of derivative liabilities
|
|
|
229,323
|
|
Reclassification of derivative liabilities to equity
|
|
|
(105,187
|
)
|
Beginning balance as of December 31, 2018
|
|
$
|
1,094,607
|
|
Issuance of derivative liabilities
|
|
|
6,650,667
|
|
Extinguishment of derivative liabilities in connection with convertible note repayments and exchanges
|
|
|
(3,230,779
|
)
|
Change in fair value of derivative liabilities
|
|
|
(788,970
|
)
|
Reclassification of derivative liabilities to equity
|
|
|
(2,809,566
|
)
|
Ending balance as of December 31, 2019
|
|
$
|
915,959
|
|
In
applying the Multinomial Lattice and Black-Scholes option pricing models to derivatives issued and outstanding during the years
ended December 31, 2019 and 2018, the Company used the following assumptions:
|
|
For the Years Ended
|
|
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk free interest rate
|
|
|
1.54%
- 2.16
|
%
|
|
|
1.22%
- 2.94
|
%
|
Expected term (years)
|
|
|
0.08
– 5.00
|
|
|
|
0.01
– 5.00
|
|
Expected volatility
|
|
|
91%
- 133
|
%
|
|
|
100%
- 208
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
During
the year ended December 31, 2018, the Company recorded new derivative liabilities in the aggregate amounts of $3,631,705, $121,657
and $121,869 related to the ECOs of certain convertible notes payable, warrants and stock options subject to sequencing, respectively.
See Note 7 – Notes Payable – Convertible Notes and Other Notes for additional details. See Note 10 – Commitments
and Contingencies for a stock option issued and deemed to be a derivative liability. See Note 8 – Stockholders’ Deficit
for warrants issued and deemed to be derivative liabilities.
During
the year ended December 31, 2018, the Company extinguished an aggregate of $3,120,833 of derivative liabilities in connection
with repayments and exchanges of certain convertible notes payable into shares of the Company’s common stock. See Note 7
– Notes Payable – Convertible Notes and Other Notes for additional details.
During
the year ended December 31, 2018, the Company reclassified an aggregate of $105,187 of derivative liabilities to equity as a result
of a change in the sequencing status.
On
December 31, 2018, the Company recomputed the fair value of ECOs recorded as derivative liabilities to be $852,454. The Company
recorded a loss on the change in fair value of these derivative liabilities of $310,710 for the year ended December 31, 2018.
On
December 31, 2018, the Company recomputed the fair value of the derivative liabilities related to outstanding warrants to be $120,284.
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 $81,387 for the year ended December 31,
2018.
On
December 31, 2018, the Company recomputed the fair value of the derivative liabilities related to outstanding consultant stock
options to be $121,869. The stock options were issued subsequent to the commencement of sequencing and the fair value of the options
are being recorded in consulting expenses in the consolidated statements of operations over the respective expected vesting period
with a corresponding credit to derivative liabilities. See Note 8 – Stockholders’ Deficit -Stock Options for additional
details.
During
the year ended December 31, 2019, the Company recorded new derivative liabilities in the aggregate amounts of $5,331,147 and $1,400,365
related to the ECOs of certain convertible notes payable and warrants subject to sequencing, respectively. See Note 7 –
Notes Payable – Convertible Notes for additional details. See Note 10 – Commitments and Contingencies and Note 8 –
Stockholders’ Deficit for warrants issued and deemed to be derivative liabilities.
During
the year ended December 31, 2019, the Company extinguished an aggregate of $3,230,780 of derivative liabilities in connection
with repayments and exchanges of certain convertible notes payable into shares of the Company’s common stock. See Note 7
– Notes Payable – Convertible Notes for additional details.
During
the year ended December 31, 2019, the Company reclassified an aggregate of $2,809,566 of derivative liabilities to equity as a
result of a change in the sequencing status.
On
December 31, 2019, the Company recomputed the fair value of ECOs recorded as derivative liabilities to be $962,042. The Company
recorded a gain on the change in fair value of these derivative liabilities of $118,600 for the year ended December 31, 2019.
On
December 31, 2019, the Company recomputed the fair value of the derivative liabilities related to outstanding warrants to be $34,762.
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 $670,370 for the year ended December 31,
2019.
NOTE
10 – COMMITMENTS AND CONTINGENCIES
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 provided 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. Rent expense for the Melville office was $40,988 and $122,739 for the years ended
December 31, 2019 and 2018, respectively. See Note 12 – Leases for additional detail.
Consulting
Agreements
During
each of the years ended December 31, 2019 and 2018, the Company recorded cash consulting fee expense of $180,000 related to a
business advisory agreement. In January 2018, the term of the business advisory agreement was extended to December 31, 2018. In
consideration of the extension of the term of the business advisory agreement, the Company issued to the consultant an immediately
vested five-year warrant for the purchase of 30,000 shares of common stock of the Company at an exercise price of $4.00 per share.
The aggregate grant date value of the warrant of $48,192 was recognized immediately as stock-based compensation expense which
is reflected as consulting expense in the consolidated financial statements. Concurrently, the Company and the consultant agreed
to exchange $38,000 of accrued consulting fees for 19,000 shares of common stock of the Company and a two-year warrant for the
purchase of 4,750 shares of common stock of the Company at an exercise price of $4.00 per share, whose combined value is consistent
with the carrying value of the liabilities being satisfied.
In
January 2019, an agreement for business advisory services that had expired on December 31, 2018 was further extended and provided
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 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 9 –
Derivative Liabilities for additional details.
On
July 10, 2018, as further amended on August 22, 2018 and October 25, 2018, the Company entered into a consulting agreement with
a consultant for services through March 31, 2019. In consideration of the consulting services, the Company issued the consultant
convertible notes in the aggregate principal amount of $260,000 which were earned and recognized ratably over their respective
consulting agreement term. During the year ended December 31, 2018, the Company recorded an aggregate $260,000 of marketing and
promotion expense for services rendered with a corresponding credit to notes payable. The notes matured on dates between January
2019 and April 2019 and bore interest at the rate of 10% per annum, payable at maturity. Pursuant to the notes, the holder had
the right, from time to time following the respective issue date, at its election, to convert all or part of the outstanding and
earned principal and accrued interest into shares of common stock of the Company, at a price generally equal to the lesser of
(i) $1.27 or $1.75 per share, depending on the note, and (ii) 65% of the fair market value of the Company’s common stock,
as defined. The Company had the right to prepay the notes prior to the maturity date provided the principal was prepaid in full,
plus interest, plus a prepayment premium of 25% on the principal.
In
July 2018, the Company and a consultant agreed to further extend a previously expired consulting agreement from May 2018 to December
2018. In consideration of the extension of the term of the consulting agreement, the Company issued to the consultant an immediately
vested five-year warrant for the purchase of 35,000 shares of common stock of the Company at an exercise price of $4.00 per share.
The aggregate grant date value of the warrant of $43,106 was recognized immediately as stock-based compensation expense which
is reflected as consulting expense in the consolidated financial statements.
Scientific
Advisory Services
In
July 2018 and December 2018, the Company entered into agreements with certain consultants to serve as members of its Scientific
Advisory Board and provide advice and guidance in connection with scientific matters relating to the Company’s business.
The agreements provide that they will continue until terminated by either the Company or the respective party for any reason upon
ten days written notice. In connection with the agreements, the Company issued the advisors five-year and ten-year options to
purchase up to an aggregate 100,000 shares of the Company’s common stock at exercise prices ranging between $1.25 to $1.70
per share. The options vest as follows: (i) an aggregate 50,000 options vested immediately and (ii) an aggregate 50,000 options
vested on the one-year anniversary of the grant date. The options had an aggregate grant date value of $92,100 which was
amortized over the vesting term of the respective options. The options were subject to the Company’s sequencing policy and,
as a result, were recorded as derivative liabilities. In addition, the agreements provide that, on each one-year anniversary of
the respective agreement date (as long as the consultant remains engaged), options to purchase an additional 5,000 shares are
to be granted to the respective consultant which shall be exercisable for a period of five years from the respective dates of
grant at exercise prices equal to the fair market value of the Company’s common stock.
In
October 2018, the Company entered into an agreement with a consultant to serve as Chairman of the Disc Advisory Committee of its
Scientific Advisory Board (the “Disc Committee Chairman”) and provide advice and guidance in connection with scientific
matters relating to the Company’s business. The agreement provides that it will continue until terminated by either party
for any reason upon thirty days written notice. In connection with the agreement, the Company issued the Disc Committee Chairman
a ten-year option to purchase up to 75,000 shares of the Company’s common stock at an exercise price of $1.80 per share.
The option vests as follows: (i) 25,000 options vested immediately and (ii) 50,000 options vest upon the achievement of certain
performance conditions. The option had a grant date value of $129,800 which is being recognized over the respective expected vesting
period. The option was subject to the Company’s sequencing policy and, as a result, was recorded as a derivative liability.
Litigation,
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 December 31, 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.
Employment
Agreements
Former
Chief Executive Officer
The Company and Mark Weinreb, its former Chief
Executive Officer (“ Former CEO”) were parties to an employment agreement that, as amended, was to expire on December
31, 2019. Pursuant to the employment agreement, as amended, in the event that (a) the Former CEO’s employment was terminated
by the Company without cause, or (b) the Former CEO terminated his employment for “good reason” (each as defined in
the employment agreement), or (c) the term of the Former CEO’s employment agreement was not extended beyond December 31,
2019 and within three months of such expiration date, his employment was terminated by the Company without “cause”
or the Former CEO terminated his employment for any reason, the Former CEO was to be entitled to receive severance in an amount
equal to his then annual base salary and certain benefits, plus $100,000 (in lieu of bonus). Further, in the event that the Former
CEO’s employment was terminated by the Company without cause, or the Former CEO terminated his employment for “good
reason”, following a “change in control” (as defined in the employment agreement), the Former CEO would be entitled
to receive severance in an amount equal to one and one-half times his then annual base salary and certain benefits, plus $300,000
(in lieu of bonus). Additionally, as part of the amended employment agreement, the Former CEO was entitled to new performance-based
cash bonuses payable for the years ending December 31, 2018 and 2019, such that an aggregate of up to 50% of the Former CEO’s
then annual base salary per annum could be earned for such year pursuant to the satisfaction of such goals. The Former CEO
resigned his employment with the Company on November 16, 2020, the effective date of the Chapter 11 reorganization.
Based upon such termination of employment, the Former CEO was entitled to receive his severance of $400,000 and certain benefits
plus $100,000, and the option accelerations as discussed above. The severance amount was generally considered an unsecured claim
in the Company’s Chapter 11 Case and the Former CEO received shares of the Company’s common stock in
exchange for such claim in a manner consistent with other unsecured creditors.
Former
Senior Vice President
In
January 2018, the Company entered into an employment agreement with its then Senior Vice President of Planning and Business Development
(the “Former Senior VP”). In October 2018, the Former Senior VP resigned from the Company. The Former Senior VP was
entitled to any accrued unpaid salary and unused vacation days that was payable to him through his termination date pursuant to
his employment agreement. As of December 31, 2018, the Company paid such liability due to the Former Senior VP. Additionally,
the Former Senior VP’s unvested option to purchase 500,000 shares was forfeited as of the termination date. See Note 8 –
Stockholders’ Deficit – Stock Options for additional details.
Former
Executive Vice President
In
October 2018, the Company entered into an employment agreement with its then Executive Vice President and Chief Strategy Officer
(the “Former Executive VP”). Pursuant to the employment agreement, in the event of the termination of the Former
Executive VP’s employment by the Company without “cause” or the resignation by the Former Executive VP for “good
reason” (each as defined in the employment agreement), the Former Executive VP was to be entitled to receive severance
in an amount equal to six months of his then annual base salary. Additionally, in connection with the employment agreement, the
Former Executive VP was granted a ten-year option to purchase up to 500,000 shares of the Company’s common stock at an exercise
price of $1.42 per share. The option was to vest as follows: (i) 100,000 options vested immediately, (ii) 150,000 options vested
upon the earlier of (a) the achievement of a certain performance condition or (b) the first anniversary of the date of grant,
and (iii) 250,000 options were to vest on the second anniversary of the date of grant. The option had a grant date value of $677,200
which is being recognized over the respective expected vesting period. The Former Executive Vice President held such position
until February 2020 at which time he was terminated.
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 December 31, 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 $26,910
for 2019 cash bonuses as of December 31, 2019 which were probable to be achieved.
NOTE
11 – INCOME TAXES
The Company identified
its federal and New York tax returns as its “major” tax jurisdictions. The period its income tax returns are
subject to examination for these jurisdictions is 2017 through 2020. The Company believes its income tax filing
positions and deductions will be sustained on audit, and it does not anticipate any adjustments that would result in a material
change to its financial position. Therefore, no liabilities for uncertain tax positions have been recorded.
At December 31, 2019
and 2018, the Company had approximately $29,900,000 and $16,900,000, respectively, of federal and state net operating
losses that may be available to offset future taxable income. As a result of the Tax Cuts and Jobs Act of 2017
(the “Tax Act”), certain future carryforwards do not expire. At December 31, 2019 approximately
$8,000,000 of federal net operating losses will expire from 2029 to 2037 and approximately $21,900,000 have no
expiration. In accordance with Section 382 of the Internal Revenue Code, the usage of the Company’s net operating loss carryforwards
are subject to annual limitations due to several greater than 50% ownership changes. The Section 382 limitations resulted in approximately
$28,200,000 of federal NOLs not being realizable as of December 31, 2018 and the cumulative reversal of approximately $9,600,000
of net operating loss deferred tax assets.
The Company has not
performed a formal analysis for the year ended December 31, 2019, but it believes its ability to use such net operating
losses and tax credit carryforwards in the future is subject to annual limitations due to change of control provisions
under Sections 382 and 383 of the Internal Revenue Code, which will significantly impact its ability to realize these deferred
tax assets.
The
Company’s net deferred tax assets, liabilities and valuation allowance as of December 31, 2019 and 2018 are summarized as
follows:
|
|
December 31,
|
|
|
|
2019
|
|
|
2018
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
7,800,000
|
|
|
$
|
4,401,000
|
|
Stock-based compensation
|
|
|
3,880,000
|
|
|
|
3,433,000
|
|
Research & development tax credits
|
|
|
358,000
|
|
|
|
358,000
|
|
Other
|
|
|
-
|
|
|
|
7,000
|
|
Total deferred tax assets
|
|
|
12,038,000
|
|
|
|
8,199,000
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Intangible assets
|
|
|
(26,000
|
)
|
|
|
(19,000
|
)
|
Other
|
|
|
-
|
|
|
|
(2,000
|
)
|
Total deferred tax liabilities
|
|
|
(26,000
|
)
|
|
|
(21,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
12,012,000
|
|
|
|
8,178,000
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
$
|
(12,012,000
|
)
|
|
$
|
(8,178,000
|
)
|
|
|
|
|
|
|
|
|
|
Deferred tax asset, net of valuation allowance
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
$
|
(3,834,000
|
)
|
|
$
|
2,790,000
|
|
The income tax provision
(benefit) as of December 31, 2019 and 2018 consists of the following:
|
|
December 31,
|
|
|
|
2020
|
|
|
2019
|
|
Federal:
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred
|
|
|
3,325,054
|
|
|
|
(2,253,000
|
)
|
|
|
|
|
|
|
|
|
|
State and local:
|
|
|
|
|
|
|
|
|
Current
|
|
|
-
|
|
|
|
-
|
|
Deferred
|
|
|
508,946
|
|
|
|
(537,000
|
)
|
|
|
|
3,834,000
|
|
|
|
(2,790,000
|
)
|
Change in valuation allowance
|
|
|
(3,834,000
|
)
|
|
|
2,790,000
|
|
Income tax provision (benefit)
|
|
$
|
-
|
|
|
$
|
-
|
|
A
reconciliation of the statutory federal income tax benefit to actual tax benefit for the years ended December 31, 2019 and 2018
is as follows:
|
|
2019
|
|
|
2018
|
|
Federal statutory blended income tax rates
|
|
|
(21
|
)%
|
|
|
(21
|
)%
|
State statutory income tax rate, net of federal benefit
|
|
|
(5
|
)
|
|
|
(5
|
)
|
Permanent differences
|
|
|
0.1
|
|
|
|
3.8
|
|
True-ups and other
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
Change in valuation allowance
|
|
|
26.2
|
|
|
|
22.3
|
|
Effective tax rate
|
|
|
-
|
%
|
|
|
-
|
%
|
As
of the date of this filing, the Company has not filed its 2019 federal and state corporate income tax returns. The Company expects
to file these documents as soon as practicable.
The
Tax Act was enacted on December 22, 2017. The Tax Act reduces the US federal corporate tax rate from 35% to 21% and will require
the Company to re-measure certain deferred tax assets and liabilities based on the rates at which they are anticipated to reverse
in the future, which is generally 21%. The Company adopted the new rate as it relates to the calculations of deferred tax amounts
as of December 31, 2018.
NOTE
12 – LEASES
Prior
to January 1, 2019, the Company accounted for leases in accordance with ASC 840, Leases.
With the adoption of ASC 842, operating lease agreements are required to be recognized on the balance sheet as ROU assets and
corresponding lease liabilities.
On
August 1, 2019, the Company recognized ROU assets and lease liabilities of $638,246. The Company elected to not recognize ROU
assets and lease liabilities arising from short-term office leases (leases with initial terms of twelve months or less, which
are deemed immaterial) on the balance sheets. On June 1, 2019, the Company exercised its right to extend its existing lease of
office space for an additional five years.
When
measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its
estimated incremental borrowing rate at August 1, 2019. The weighted average incremental borrowing rate applied was 12%.
The
following table presents net lease cost and other supplemental lease information:
|
|
Year
Ended December 31, 2019
|
|
Lease cost
|
|
|
|
|
Operating lease cost (cost resulting from lease payments)
|
|
$
|
62,192
|
|
Short term lease cost
|
|
|
-
|
|
Sublease income
|
|
|
-
|
|
Net lease cost
|
|
$
|
62,192
|
|
|
|
|
|
|
Operating lease – operating cash flows (fixed payments)
|
|
$
|
62,192
|
|
Operating lease – operating cash flows (liability reduction)
|
|
$
|
30,891
|
|
Non-current leases – right of use assets
|
|
$
|
589,894
|
|
Current liabilities – operating lease liabilities
|
|
$
|
85,465
|
|
Non-current liabilities – operating lease liabilities
|
|
$
|
521,891
|
|
Future
minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the year ended
December 31, 2019:
Fiscal Year
|
|
Operating Leases
|
|
2020
|
|
$
|
153,748
|
|
2021
|
|
|
158,372
|
|
2022
|
|
|
163,132
|
|
2023
|
|
|
168,028
|
|
2024
|
|
|
173,060
|
|
Total future minimum lease payments
|
|
|
816,340
|
|
Amount representing interest
|
|
|
(208,985
|
)
|
Present value of net future minimum lease payments
|
|
$
|
607,355
|
|
NOTE
13 – SUBSEQUENT EVENTS
Chapter
11 Reorganization
On
March 20, 2020 (the “Petition Date”), the Company filed a voluntary petition commencing a case under chapter 11 of
title 11 of the U.S. Code in the United States Bankruptcy Court for the Eastern District of New York (the “Bankruptcy Court”).
On
August 7, 2020, the Company and Auctus, our largest unsecured creditor and a stockholder as of the Petition Date, filed an Amended
Joint Plan of Reorganization (the “Plan”) and on October 30, 2020, the Bankruptcy Court entered an order (the “Confirmation
Order”) confirming the Plan, as amended. Amendments to the Plan are reflected in the Confirmation Order. On November 16,
2020 (the “Effective Date”), the Plan became effective.
The
material features of the Plan, as amended and confirmed by the Confirmation Order, are as follows:
|
i.
|
Treatment
of the financing to the Company by Auctus of up to $7,000,000 which Auctus has provided or committed to provide consisting
of the debtor-in-possession loans made to the Company by Auctus during the Chapter 11 Case (the “DIP Funding”)
and additional funding as described below.
|
|
ii.
|
Auctus
has provided $3,500,000 in funding to the Company (the “Initial Auctus Funding”) and is to provide, subject to
certain conditions, additional funding to the Company, as needed, in an amount equal to $3,500,000, less the sum of the debtor-in-possession
loans made to the Company by Auctus during the Chapter 11 Case (inclusive of accrued interest) (approximately $1,227,000 as
of the Effective Date) and the costs incurred by Auctus as the debtor-in-possession lender (the “DIP Costs”).
In addition, four other persons and entitles (collectively, the “Other Lenders”) who held allowed general unsecured
claims provided funding to the Company in the aggregate amount of approximately $348,000 (the “Other Funding”
and together with the Initial Auctus Funding, the “Funding”). In consideration of the Funding, the Company has
issued the following:
|
|
a.
|
Secured
convertible notes of the Company (each, a “Secured Convertible Note”) in the principal amount equal to the Funding;
the payment of the Secured Convertible Notes is secured by the grant of a security interest in substantially all of the Company’s
assets; the Secured Convertible Notes have the following features:
|
|
●
|
Maturity
date of three years following the Effective Date;
|
|
●
|
Interest
at the rate of 7% per annum;
|
|
●
|
The
right of the holder to convert the indebtedness into shares of common stock of the Company at a price equal to the volume
weighted average price for the common stock over the five trading days immediately preceding the conversion; and
|
|
1.
|
Mandatory
conversion of all indebtedness at such time as the common stock is listed on the Nasdaq Capital Market or another senior exchange
on the same terms as provided to investors in connection with a public offering undertaken in connection with such listing;
|
|
b.
|
Warrants
(each, a “Class A Warrant”) to purchase a number of shares of common stock equal to the amount of the Funding
provided divided by $0.0005 (a total of 7,000,000,000 Class A Warrants in consideration of the Initial Auctus Funding and
a total of approximately 697,000,000 Class A Warrants in the aggregate in consideration of the Other Funding), such Class
A Warrants having an exercise price of $0.0005 per share; and
|
|
c.
|
Warrants
(each, a “Class B Warrant” and together with the Class A Warrants, the “Plan Warrants”) to purchase
a number of shares of common stock equal to the Funding provided divided by $0.001 (a total of 3,500,000,000 Class B Warrants
in consideration of the Initial Auctus Funding and a total of approximately 348,500,000 Class B Warrants in the aggregate
in consideration of the Other Funding), such Class B Warrants having an exercise price of $0.001 per share.
|
|
iii.
|
The
obligation to Auctus with respect to the DIP Funding has been exchanged for the following:
|
|
a.
|
A
Secured Convertible Note in the principal amount of approximately $1,349,591 (110% of the DIP Funding);
|
|
b.
|
A
Class A Warrant to purchase 2,453,802,480 shares of common stock; and
|
|
c.
|
A
Class B Warrant to purchase 1,226,901,240 shares of common stock (as to which 382,226,703 shares of common stock have
been exercised on a net exercise basis, pursuant to the terms of the Class B Warrant, with respect to the issuance of 361,176,200
shares of common stock).
|
In
addition, Auctus shall be entitled to receive a Secured Convertible Note, a Class A Warrant and a Class B Warrant in exchange
for its allowed DIP Costs and allowed Plan costs in a manner in which the DIP Funding was treated.
|
iv.
|
The
claim arising from the secured promissory notes of the Company, dated February 20, 2020 and February 26, 2020, in the original
principal amounts of $320,200.49 and $33,561.50, respectively, issued to John Desmarais (“Desmarais”) (collectively,
the “Desmarais Notes”), is being treated as an allowed secured claim in the aggregate amount of $490,698.81 and
is being exchanged for a Secured Convertible Note in such amount.
|
|
v.
|
The
claim arising from the promissory note issued in June 2016 by the Company to Desmarais in the original principal amount of
$175,000 is being treated as an allowed general unsecured claim in the amount of $245,191.78 and is being satisfied and exchanged
for 24,519,200 shares of common stock.
|
|
vi.
|
The
claim arising from the promissory note issued in June 2016 by the Company to Tuxis Trust, an entity related to Desmarais,
in the original principal amount of $500,000 is being treated as follows:
|
|
a.
|
$444,534.43
is being treated as an allowed general unsecured claim in
such amount and exchanged for 44,453,400 shares of common stock; and
|
|
b.
|
$309,301.19
is being treated as an allowed secured claim in such amount and exchanged for a Secured Convertible Note in such amount.
|
|
vii.
|
Holders
of allowed general unsecured claims (other than Auctus and the Other Lenders) received an aggregate of 1,049,726,797
shares of common stock (in book entry form) in exchange for approximately $10,497,268 in outstanding accounts payable
and convertible debt (including accrued interest), with such shares being subject to a leak-out restriction prohibiting each
holder from selling, without consent of the Company, more than 33% of its shares during each of the three initial 30 day periods
following the Effective Date.
|
|
viii.
|
Auctus
and the Other Lenders have been issued, in respect of their allowed general unsecured claims ($3,261,819 in the case of Auctus
and an aggregate of approximately $382,400 in the case of the Other Lenders), a convertible promissory note of the Company
(each, an “Unsecured Convertible Note”) in the allowed amount of the claim, which Unsecured Convertible Notes
have the following material features:
|
|
a.
|
Maturity
date of three years from the Effective Date;
|
|
b.
|
Interest
at the rate of 5% per annum;
|
|
c.
|
The
right of the holder to convert the indebtedness into shares of common stock at a price equal to the volume weighted average
for the common stock over the five trading days immediately preceding the conversion;
|
|
d.
|
Mandatory
conversion of all outstanding indebtedness at such time as the common stock listed on the Nasdaq Capital Market or another
senior exchange on the same terms as provided to investors in connection with a public offering undertaken in connection with
such listing; and
|
|
e.
|
A
leak-out restriction prohibiting each holder from selling, without the consent of the Company, more than 16.6% of the underlying
shares received upon conversion during each of the six initial 30 day periods following the Effective Date.
|
|
ix.
|
The
issuance of (a) the shares of common stock and the Unsecured Convertible Notes to the holders of allowed general unsecured
claims and (b) the Secured Convertible Notes and Plan Warrants to Auctus in exchange for the DIP Funding and any common stock
into which those Secured Convertible Notes and those Plan Warrants may be converted is exempt from the registration requirements
of the Securities Act of 1933, as amended, pursuant to the Bankruptcy Code Section 1145. Such securities shall be freely transferrable
subject to Section 1145(b)(i) of the Bankruptcy Code.
|
Pursuant
to the Plan, on the Effective Date, the Company filed a Certificate of Amendment to its Certificate of Incorporation pursuant
to which, among other things, the number of shares of common stock authorized to be issued by the Company has been increased to
300,000,000,000 and the par value of the shares of common stock has been reduced to $0.0001 per share.
Debtor-in-Possession
Financing
In
connection with the Chapter 11 Case, the Company received debtor-in-possession loans of $1,189,413 in the aggregate from Auctus.
The
proceeds from the DIP Funding were used (a) for working capital and other general purposes of the Company; (b) United States Trustee
fees; (c) Bankruptcy Court approved professional fees and other administrative expenses arising in the Chapter 11 Case; and (d)
interest, fees, costs and expenses incurred in connection with the DIP Funding, including professional fees.
The
maturity date of the DIP Funding was to be the earliest to occur of (a) July 6, 2020; (b) ten days following entry of an order
confirming a chapter 11 plan in the Chapter 11 Case; (c) ten days following the entry of an order approving the sale of the Company
or the Company’s assets; or (d) the occurrence of an event of default under the promissory note evidencing the DIP Funding
(the “DIP Note”) following any applicable grace or cure periods.
Interest
on the outstanding principal amount of the DIP Note was to be payable in arrears on the maturity date at the rate of 8% per annum.
Upon the occurrence and during the continuance of an event of default, all obligations under the DIP Note were to bear interest
at a rate equal to the then current rate plus an additional 2% per annum.
As
discussed above, pursuant to the Plan, the obligation to Auctus with respect to the DIP Funding has been exchanged for a Second
Convertible Note.
Common
Stock and Warrant Offering
On
January 10, 2020, the Company issued 1,000,000 shares of the Company’s common stock and a five-year immediately vested warrant
for the purchase of 1,000,000 shares of the Company’s common stock with an exercise price of $0.015 per share to a certain
investor for gross proceeds of $10,000.
Convertible
Notes
Subsequent
to December 31, 2019, and prior to the Petition Date, the Company issued a convertible promissory note in the principal
amount of $88,000. The convertible note bore interest at a rate of 10% per annum, payable at maturity, with an
original maturity date of January 13, 2021. The note and the accrued interest were convertible at the
election of the holder at any time at a conversion price of 61% of the lowest daily volume weighted average price from
the previous twenty days before conversion.
Subsequent
to December 31, 2019, and prior to the Petition Date, the Company issued promissory notes in the aggregate principal amount of
$353,762 to Desmarais, as discussed above in this Note 13 under “Chapter 11 Reorganization.” The notes provided for
the payment of the principal amount, together with interest at the rate of 12% per annum, upon demand by Desmarais on or after
March 10, 2020. The payment of the notes was secured by the grant of a security interest in substantially all of the Company’s
assets. As discussed above in this Note 13 under “Chapter 11 Reorganization”, the notes were exchanged for Secured
Convertible Notes pursuant to the Plan.
Subsequent to December
31, 2019 and prior to the Petition Date, certain lenders exchanged an aggregate principal amount of $861,557 and aggregate
accrued interest of $135,418 of certain convertible notes payable for an aggregate 1,515,799,750 shares of the Company’s
common stock at exchange prices ranging between $0.0001 and $0.01 per share. In addition, prior to the Petition Date, certain
lenders intended to exchange outstanding debt (inclusive of accrued interest) for shares of the Company’s common stock;
however, the Company did not have sufficient shares authorized or reserved to effect the exchanges. As such,
the outstanding debt was exchanged as part of the Plan at a rate of 100 shares for each dollar of the allowable claim at
the Effective Date.
Subsequent to December
31, 2019 and the Petition Date, a certain lender exchanged a principal amount of $118,397 and accrued interest of $1,151 of a
convertible note for 11,123,856 shares of the Company’s common stock at an exchange price of $0.011 per share.
Appointment
or Departure of Directors and Certain Officers
On
January 10, 2020, Desmarais and Charles S. Ryan resigned as directors of the Company.
On
March 16, 2020, the Company and Mark Weinreb, its Chief Executive Officer, entered into an agreement (the “Weinreb Agreement”)
pursuant to which, among other matters, the term of his employment agreement with the Company was extended to the earlier of (i)
September 30, 2020 or (ii) the effective date of a plan of liquidation of the Company.
On
November 16, 2020, as contemplated by the Plan, Mr. Weinreb, A. Jeffrey Radov, Paul Jude Tonna and Robert B. Catell resigned as
directors of the Company and Mr. Weinreb resigned as the Company’s President, Chief Executive Officer and Chairman of the
Board.
Effective as of the Effective
Date, as contemplated by the Plan, Lance Alstodt was elected President, Chief Executive Officer, Chairman of the Board and a director
of the Company and Francisco Silva, the Company’s Vice President, Research and Development, was elected a director
of the Company.
Litigation
Coventry
Enterprises, LLC
On
February 11, 2020, pursuant to an Order to Show Cause of the United States District Court of the Eastern District of New York
(the “Court”), in the matter of Coventry Enterprises, LLC vs. BioRestorative Therapies, Inc., pending the hearing
of the plaintiff’s application for a preliminary injunction, the Court issued a temporary restraining order enjoining the
Company from issuing any additional shares of stock except for purposes of fulfilling the plaintiff’s share reserve requests
or conversion requests until such reserve requests were fulfilled and enjoining the Company from reserving authorized shares for
any other party until the plaintiff’s reserve requests were fulfilled. Pursuant to a hearing held on February 13, 2020,
the temporary restraining order with regard to the Company issuing shares of common stock was not continued.
On
March 11, 2020, the Court ordered that the Company (i) convene and hold a special meeting, by no later than March 18, 2020, of
the Board of Directors of the Company (the “Board”), for approval of certain changes to the shares of the Company,
as set forth below; (ii) approve a reverse split and/or a stock consolidation, solely of the Company’s outstanding shares,
at a ratio of 1,000 to 1, (iii) approve of the continuation of the Company’s then total authorized shares of common stock
at 2,000,000,000 shares; and (iv) to call a special meeting of stockholders of the Company, within ten days of the special meeting
of the Board and by not later than March 25, 2020, to approve the foregoing. On March 18, 2020, the Board considered the matter,
and, based upon the Court order, determined to approve the foregoing items, including the 1,000 to 1 reverse split, subject to
the Company having available funds to effectuate such items. As discussed above in this Note 13 under “Chapter 11 Reorganization,”
on March 20, 2020, the Company filed a petition commencing its Chapter 1 Case. As of the date of this report, the Company has
not effected the reverse split.
Contingencies
Subsequent to December
31, 2019 and prior to the Petition Date, certain lenders requested to exchange a portion of their outstanding convertible note
principal and accrued interest for shares of the Company’s common stock. As of the Petition Date these shares had yet to
be issued to the lenders; however, the shares of the Company’s common stock issued for unsecured claims as part of the Plan
to the certain lenders represented the aggregate unsecured claims less the principal and accrued interest that was represented
in the uneffected exchanges. The Company believes that there may be a potential contingency related to the non-issued shares that
would be settled in shares of the Company’s common stock and not monetary compensation.