Note 2 – Going Concern and Management’s Plans
As of June 30, 2017, the Company had a working capital deficiency
and a stockholders’ deficiency of $6,947,637 and $5,715,044, respectively. During the three and six months ended June 30,
2017, the Company incurred net losses of $2,747,183 and $5,532,937, respectively. These conditions indicate that there is substantial
doubt about the Company’s ability to continue as a going concern within the twelve months from the filing date of this report.
The accompanying unaudited condensed consolidated
financial statements have been prepared in conformity with U.S. GAAP, which contemplate continuation of the Company as a going
concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying amounts of
assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or settlement
values. The unaudited condensed consolidated financial statements do not include any adjustment that might result from the outcome
of this uncertainty.
The Company’s primary source of operating funds since inception
has been equity and debt financings. The Company intends to continue to raise additional capital through debt and equity financings.
There is no assurance that these funds will be sufficient to enable the Company to fully complete its development activities or
attain profitable operations. If the Company is unable to obtain such additional financing on a timely basis or, notwithstanding
any request the Company may make, the Company’s debt holders do not agree to convert their notes into equity or extend the
maturity dates of their notes, the Company may have to curtail its development, marketing and promotional activities, which would
have a material adverse effect on the Company’s business, financial condition and results of operations, and ultimately the
Company could be forced to discontinue its operations and liquidate.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 2 – Going Concern and Management’s Plans –
Continued
Subsequent to June 30, 2017, the Company has
received aggregate debt proceeds of $250,000, debt and accrued interest of $120,963 and $7,006, respectively, has been converted
into or exchanged for common stock, and the due date for the repayment of $1,007,250 of debt has been extended to dates
between October 2017 and February 2018. As a result, the Company expects to have the cash required to fund its operations
through September 2017. While there can be no assurance that it will be successful, the Company is in negotiations to raise
additional capital. As of the filing date of this report, the Company has notes payable with an aggregate principal balance of
$382,500 which are past due. The Company is currently in the process of negotiating extensions or discussing conversions
to equity with respect to these notes. However, there can be no assurance that the Company will be successful in extending or
converting these notes. See Note 8 – Subsequent Events for additional details.
Note 3 – Summary of Significant Accounting Policies
Principles of Consolidation
The unaudited condensed consolidated financial
statements of the Company include the accounts of Cayman and Stem Pearls. All significant intercompany transactions have been
eliminated in the consolidation. As discussed above, Cayman, which had no material assets, liabilities or operations (other than
intercompany balances) and is no longer needed to facilitate certain financings, was dissolved in March 2017.
Use of Estimates
The preparation of financial statements in conformity with U.S.
GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the
periods. The Company’s significant estimates and assumptions include the recoverability and useful lives of long-lived assets,
the fair value of the Company’s stock, stock-based compensation, warrants issued in connection with notes payable and the
valuation allowance related to the Company’s deferred tax assets. Certain of the Company’s estimates, including the
carrying amount of the intangible assets, could be affected by external conditions, including those unique to the Company and general
economic conditions. It is reasonably possible that these external factors could have an effect on the Company’s estimates
and could cause actual results to differ from those estimates.
Concentrations
One license and the related royalties comprised substantially all
of the Company’s revenue during the three and six months ended June 30, 2017. See Revenue Recognition below.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 3 – Summary of Significant Accounting Policies –
Continued
Revenue Recognition
The Company’s policy is to recognize product sales when the
risk of loss and title to the product transfers to the customer, after estimating potential returns. The Company recognizes sublicensing
and royalty revenue when all of the following have occurred: (i) persuasive evidence of an arrangement exists, (ii) the service
is completed without further obligation, (iii) the sales price to the customer is fixed or determinable, and (iv) collectability
is reasonably assured. During the three and six months ended June 30, 2017, the Company did not recognize revenue related to sales
of Stem Pearls skincare products. During the three and six months ended June 30, 2016, the Company recognized revenue related to
sales of Stem Pearls skincare products of $155 and $280, respectively.
In November 2015, the Company and a stem cell treatment company
(“SCTC”) entered into an amendment to a January 27, 2012 license agreement between them. Pursuant to the amendment,
effective November 30, 2015, the Company granted to the SCTC a non-exclusive sublicense to use, and the right to sublicense to
third parties the right to use, in certain locations in the United States, certain intellectual property related to stem cell disc
procedures (that originally was licensed to the Company by the SCTC pursuant to the January 27, 2012 license agreement). In consideration
of the sublicense, the SCTC has agreed to pay the Company royalties on a per disc procedure basis. During the three and six months
ended June 30, 2017, the Company recognized $20,000 and $27,000, respectively, of revenue related to the Company’s sublicense
agreement. During the three and six months ended June 30, 2016, the Company recognized $16,000 and $25,000, respectively, of revenue
related to the Company’s sublicense agreement.
Net Loss Per Common Share
Basic loss per common share is computed by dividing net loss by
the weighted average number of vested common shares outstanding during the period. Diluted earnings per share reflects the potential
dilution that could occur if securities or other instruments to issue common stock were exercised or converted into common stock.
The following securities are excluded from the calculation of weighted
average dilutive common shares because their inclusion would have been anti-dilutive:
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
Options
|
|
|
3,018,700
|
|
|
|
2,160,950
|
|
Warrants
|
|
|
3,592,831
|
|
|
|
2,486,286
|
|
Convertible notes
|
|
|
276,943
|
|
|
|
90,297
|
|
Total potentially dilutive shares
|
|
|
6,888,474
|
|
|
|
4,737,533
|
|
Stock-Based Compensation
The Company measures the cost of services received in exchange for
an award of equity instruments based on the fair value of the award. For employees, the fair value of the award is measured on
the grant date and for non-employees, the fair value of the award is generally re-measured on vesting dates and interim financial
reporting dates until the service period is complete. The fair value amount is then recognized over the period during which services
are required to be provided in exchange for the award, usually the vesting period. 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. 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.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 3 – Summary of Significant Accounting Policies –
Continued
Subsequent Events
The Company evaluates events that have occurred after the balance
sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized
or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements,
except as disclosed.
Recently Issued Accounting Pronouncements
In May 2017, the Financial Accounting Standards Board issued Accounting
Standards Update (“ASU”) No. 2017-09, “Compensation—Stock Compensation (Topic 718)” (“ASU 2017-09”).
ASU 2017-09 provides clarity on the accounting for modifications of stock-based awards. ASU 2017-09 requires adoption on a prospective
basis in the annual and interim periods for our fiscal year ending December 31, 2019 for share-based payment awards modified on
or after the adoption date. The Company is currently evaluating the effect that adopting this new accounting guidance will have
on its consolidated cash flows and related disclosures.
Note 4 – Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities are comprised of
the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
Credit card payable
|
|
$
|
1,369
|
|
|
$
|
1,778
|
|
Accrued payroll
|
|
|
970,748
|
|
|
|
1,105,293
|
|
Accrued research and development expenses
|
|
|
486,177
|
|
|
|
581,175
|
|
Accrued general and administrative expenses
|
|
|
407,681
|
|
|
|
263,468
|
|
Deferred rent
|
|
|
47,629
|
|
|
|
52,945
|
|
Total accrued expenses
|
|
$
|
1,913,604
|
|
|
$
|
2,004,659
|
|
During the six months ended June 30, 2017, the Company received
non-interest bearing advances in the amount of $34,015 from an officer of the Company and repaid an aggregate of $49,015 of non-interest
bearing advances from a director and an officer of the Company.
Effective March 1, 2017, the Company entered into an exchange agreement
with the Chairman of the Company’s Scientific Advisory Board, pursuant to which an aggregate of $175,000 of accrued consulting
fees were exchanged for 58,334 shares of common stock of the Company and, in consideration thereof, the Company issued to such
person an immediately vested five-year warrant for the purchase of 58,334 shares of common stock of the Company at an exercise
price of $4.00 per share. The common stock and warrants had an aggregate grant date value of $211,752 and, as a result, the Company
recorded a loss on settlement of payables of $36,752.
Effective March 1, 2017, the Company entered into exchange agreements
with four non-employee directors of the Company, pursuant to which an aggregate of $265,000 of accrued director fees were exchanged
for an aggregate of 88,334 shares of common stock of the Company and, in consideration thereof, the Company issued to the directors
immediately vested five-year warrants for the purchase of an aggregate of 88,334 shares of common stock of the Company at an exercise
price of $4.00 per share. The aggregate value of the shares and warrants was $320,652, and accordingly the Company recorded a loss
on settlement of payables of $55,652.
See Note 6 – Commitments and Contingencies – Consulting
Agreements for details regarding an additional exchange of accrued consulting fees for shares of common stock and warrants.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 5 – Notes Payable
A summary of the notes payable activity during the six months ended
June 30, 2017 is presented below:
|
|
Related Party
|
|
|
Convertible
|
|
|
Other
|
|
|
Debt
|
|
|
|
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Discount
|
|
|
Total
|
|
Outstanding, December 31, 2016
|
|
$
|
697,500
|
|
|
$
|
390,000
|
[1]
|
|
$
|
1,249,065
|
|
|
$
|
(179,964
|
)
|
|
$
|
2,156,601
|
|
Issuances
|
|
|
-
|
|
|
|
350,000
|
|
|
|
618,000
|
|
|
|
-
|
|
|
|
968,000
|
|
Exchanges for equity
|
|
|
(97,500
|
)
|
|
|
(50,000
|
)
|
|
|
(203,750
|
)
|
|
|
-
|
|
|
|
(351,250
|
)
|
Conversions to equity
|
|
|
-
|
|
|
|
(233,750
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(233,750
|
)
|
Repayments
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
(24,003
|
)
|
|
|
-
|
|
|
|
(74,003
|
)
|
Recognition of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(218,420
|
)
|
|
|
(218,420
|
)
|
Accretion of interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
8,500
|
|
|
|
80,864
|
|
|
|
89,364
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
216,909
|
|
|
|
216,909
|
|
Outstanding, June 30, 2017
|
|
$
|
550,000
|
|
|
$
|
456,250
|
[1]
|
|
$
|
1,647,812
|
|
|
$
|
(100,611
|
)
|
|
$
|
2,553,451
|
|
|
[1]
|
As of June 30, 2017 and December 31, 2016, a designated portion of convertible notes with an aggregate principal balance of $456,250 and $390,000, respectively, was convertible into shares of common stock at the election of the Company near maturity. In the event the Company exercised or exercises that conversion right on a designated portion of such principal balance, the holder had or has the right to accelerate the conversion of up to $343,750 and $296,250 of principal into shares of common stock at June 30, 2017 and December 31, 2016, respectively, at the same conversion price.
|
Related Party Notes
As of June 30, 2017 and December 31, 2016, related party notes consisted
of notes payable issued to certain directors of the Company and the Tuxis Trust (the “Trust”). A director and principal
shareholder of the Company serves as the trustee of Trust, which was established for the benefit of his immediate family.
During the six months ended June 30, 2017, the Company and certain
related party lenders agreed to exchange certain related party notes with an aggregate principal balance of $97,500 and aggregate
accrued interest of $288 into an aggregate of 32,597 shares of common stock and immediately vested five-year warrants to purchase
an aggregate of 32,597 shares of common stock at an exercise price of $4.00 per share. The common stock and warrants had an aggregate
exchange date value of $118,328 and, as a result, the Company recorded a loss on extinguishment of notes payable of $20,540.
During the six months ended June 30, 2017, the Company repaid an
aggregate principal amount of $50,000 of related party notes.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 5 – Notes Payable – Continued
Convertible Notes
During the six months ended June 30, 2017,
the Company issued lenders convertible notes in the aggregate principal amount of $350,000, which bear interest at a rate of 10%
per annum payable at maturity. The convertible notes mature between dates in November 2017 to February 2018. Each payment of principal
and the respective accrued interest is convertible into shares of the Company’s common stock at the election of the Company
during the period beginning five days prior to maturity and ending on the day immediately prior to maturity at a conversion price
equal to between 50% to 60% of the fair market value of the Company’s stock, depending on the particular convertible note;
however, in no event shall the conversion price be less than a price between $0.75 to $1.00 per share, depending on the particular
convertible note. Should the Company elect to convert any of the note principal and respective accrued interest, the holder will
have the right to accelerate the conversion of the remaining outstanding principal and accrued interest of the note at the same
conversion price. The Company will recognize the beneficial conversion feature of the note as debt discount at the time the contingently
adjustable conversion ratio is resolved. In connection with the issuance of these convertible notes, the Company issued a certain
lender 8,000 shares of common stock and a certain other lender a five-year warrant to purchase 7,500 shares of common stock
at an exercise price of $4.00 per share. The aggregate relative fair value of the common stock and warrants of $24,388 was recorded
as an original issue discount and is being amortized over the terms of the respective notes.
During the six months ended June 30, 2017, the Company and a certain
lender agreed to exchange a certain convertible note with a principal balance of $50,000 and accrued interest of $2,712 into 29,280
shares of common stock. The common stock had an exchange date value of $58,560 and, as a result, the Company recorded a loss on
extinguishment of notes payable of $5,848.
During the six months ended June 30, 2017, the Company elected to
convert certain convertible notes with an aggregate principal balance of $233,750 and aggregate accrued interest of $12,384 into
an aggregate of 104,632 shares of common stock at conversion prices ranging from $1.96 to $2.77 per share.
Other Notes
During the six months ended June 30, 2017,
the Company issued lenders other notes in the aggregate principal amount of $618,000 for aggregate gross proceeds of $525,000,
and the difference of $93,000 has been recorded as an original issue discount and will be amortized over the terms of the respective
notes. The other notes bear interest at rates between 0% to 10% per annum payable at maturity. The other notes matured or mature
between dates in May 2017 to December 2017. In connection with the issuance of these other notes, the Company issued a certain
lender 7,353 shares of common stock and certain other lenders five-year warrants to purchase an aggregate of 40,000 shares
of common stock at an exercise price of $4.00 per share. The aggregate relative fair value of the common stock and warrants of
$68,688 was recorded as an original issue discount and is being amortized over the terms of the respective notes.
During the six months ended June 30, 2017, the Company and certain
lenders agreed to exchange certain other notes with an aggregate principal balance of $203,750 and aggregate accrued interest of
$7,114 into an aggregate of 70,205 shares of common stock and immediately vested five-year warrants to purchase an aggregate of
63,205 shares of common stock at an exercise price of $4.00 per share. In addition, in consideration of the exchange by certain
lenders, the Company agreed to extend the expiration dates of certain warrants held by the lenders for the purchase of an aggregate
of 18,000 shares of common stock of the Company at an exercise price of $4.00 per share, from expiration dates ranging from April
27, 2021 to January 31, 2022 to a new expiration date of February 8, 2022. The common stock, warrants, and warrant modification
(which represents the incremental value of the modified warrant as compared to the original warrant value, both valued as of the
modification date) had an aggregate exchange date value of $244,414 and, as a result, the Company recorded a loss on extinguishment
of notes payable of $33,550.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 5 – Notes Payable – Continued
Other Notes
– Continued
During the six months ended June 30, 2017, the Company and certain
lenders agreed to extend other notes with an aggregate principal balance of $572,000, that were near or at maturity, to various
dates through October 2017. In connection with one of the extensions, the Company issued the lender 2,500 shares of common stock.
The issuance date fair value of the common stock of $5,000 has been recorded as a debt discount and is being amortized over the
term of the note. In connection with the extensions, the Company issued certain lenders five-year, immediately vested warrants
to purchase an aggregate of 18,000 shares of common stock at exercise prices ranging between $4.00 to $5.00 per share. The aggregate
grant date fair value of the warrants of $26,940 has been recorded as debt discount and is being amortized over the term of the
note. Additionally, in connection with one of the extensions, the Company incurred an extension fee in the amount $8,500 which
was accreted as interest expense and added to the principal balance of the note.
During the six months ended June 30, 2017, the Company repaid an
aggregate principal amount of $24,003 of other notes.
Note 6 – Commitments and Contingencies
Consulting Agreements
Business Advisory Services
In March 2017, a previously expired
agreement for business advisory services was further amended. Pursuant to the amendment,
the agreement was reinstated effective as of January 1, 2017 and provides for an expiration date of December 31, 2017. 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 25,000 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 $40,763 was recognized immediately as stock-based compensation expense which is reflected as
consulting expense in the unaudited condensed consolidated financial statements. Concurrently, the Company entered into an exchange
agreement with the consultant pursuant to which $30,000 of accrued consulting fees were exchanged for 10,000 shares of common
stock of the Company and, in consideration thereof, the Company issued to the consultant an immediately vested five-year warrant
for the purchase of 10,000 shares of common stock of the Company at an exercise price of $4.00 per share. The aggregate value
of shares and warrant was $36,300, and accordingly the Company recorded a loss on settlement of payables of $6,300.
Operating Lease
Rent expense amounted to approximately $31,000 and $63,000 for the
three and six months ended June 30, 2017, respectively. During the three and six months ended June 30, 2016, the Company recognized
approximately $33,000 and $66,000, respectively, of rent expense.
Litigations, Claims and Assessments
In the normal course of business, the Company
may be involved in legal proceedings, claims and assessments arising in the ordinary course of business, and as of June 30,
2017, none are expected to materially impact the Company’s financial position.
The Company records legal costs associated with loss contingencies
as incurred and accrues for all probable and estimable settlements.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 6 – Commitments and Contingencies – Continued
Employment Agreements
In February 2017 and March 2017, the Company’s Compensation
Committee and Board of Directors, respectively, approved the following associated with performance-based cash bonuses for certain
of the Company’s officers and current employees: (i) new performance-based cash bonuses payable for the year ending December
31, 2017 such that an aggregate of up to $402,500 could be earned for such year pursuant to the satisfaction of such goals; and
(ii) the amendment of the performance-based cash bonuses for the year ended December 31, 2016 such that an aggregate of up to $322,000
could be earned for such year pursuant to the satisfaction of such goals. Also, pursuant to the amendment of the performance-based
cash bonuses, the Company’s officers and certain employees’ achievement date of 2016 milestones was extended from January
31, 2017 to July 31, 2017. As of December 31, 2016, the Company accrued approximately $191,000 for 2016 bonus milestones which
were achieved and approximately $100,000 for 2016 bonus milestones which were probable to be achieved. As of June 30, 2017, the
Company accrued approximately $255,250 for 2016 bonus milestones which were achieved and approximately $199,870 for 2017 bonus
milestones which were probable to be achieved.
Note 7 – Stockholders’ Deficiency
Common Stock and Warrant Offerings
During the six months ended June 30, 2017, the Company issued an
aggregate of 331,335 shares of common stock and five-year immediately vested warrants to purchase an aggregate of 341,335 shares
of common stock at an exercise price of $4.00 to investors for aggregate gross proceeds of $994,000. The warrants had an aggregate
grant date fair value of $553,295.
Warrant Compensation
On April 5, 2017, the Company extended,
a previously expired agreement with a consultant from January 1, 2017 to June 30, 2017. In connection with this
extension, the Company issued a five-year immediately vested warrant to purchase 20,000 shares of common stock at an exercise
price of $4.50 per share. The warrant grant date fair value of $30,440 was recognized immediately as stock-based compensation
expense which is reflected as consulting expense in the unaudited condensed consolidated financial statements.
Warrant and Option Valuation
The Company has computed the fair value of warrants and options
granted using the Black-Scholes option pricing model. Option forfeitures are estimated at the time of valuation and reduce expense
ratably over the vesting period. This estimate will be adjusted periodically based on the extent to which actual option forfeitures
differ, or are expected to differ, from the previous estimate, when it is material. The Company estimated forfeitures related to
option grants at an annual rate ranging from 0% to 5% for options granted during the six months ended June 30, 2017 and 2016. 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.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 7 – Stockholders’ Deficiency
– Continued
Warrant Modification and Exercise
On February 10, 2017, with respect to a warrant
held by an investor, the Company agreed that (i) the conditions to the exercisability of the warrant for tranches to purchase an
aggregate of 35,000 shares were eliminated, such that the entire warrant to purchase 50,000 shares of common stock was exercisable,
and (ii) the exercise price of the warrant was reduced from an exercise price of $30.00 per share to $3.50 per share. Concurrent
with the modification of the warrant, the investor exercised the warrant in full for aggregate gross proceeds to the Company of
$175,000. The Company recognized a warrant modification charge of $4,500 during the six months ended June 30, 2017, which represents
the incremental value of the modified warrants as compared to the original warrants, both valued as of the respective modification
dates which is reflected in warrant modification expense in the unaudited condensed consolidated statement of operations
.
Stock Warrants
In applying the Black-Scholes option pricing model to warrants granted,
the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
Risk free interest rate
|
|
|
1.98% - 2.22
|
%
|
|
|
1.01% - 1.41
|
%
|
|
|
1.98% - 2.33
|
%
|
|
|
0.44% - 1.47
|
%
|
Expected term (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
0.67 - 5.00
|
|
Expected volatility
|
|
|
120
|
%
|
|
|
126
|
%
|
|
|
120% - 132
|
%
|
|
|
124% - 126
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The weighted average estimated fair value of the warrants granted
during the three and six months ended June 30, 2017 was approximately $1.47 and $1.61 per share, respectively. The weighted average
estimated fair value of the warrants granted during the three and six months ended June 30, 2016 was $1.02 and $1.76 per share,
respectively.
The Company recorded stock–based compensation expense of $30,440
and $71,203 during the three and six months ended June 30, 2017, respectively, related to stock warrants issued as compensation,
which is reflected as consulting expense in the unaudited condensed consolidated statements of operations. As of June 30, 2017,
there was no unrecognized stock-based compensation expense related to stock warrants. The Company recorded no stock–based
compensation expense during the three and six months ended June 30, 2016.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 7 – Stockholders’ Deficiency
– Continued
Stock Warrants
- Continued
A summary of the warrant activity during the six months ended June
30, 2017 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding, December 31, 2016
|
|
|
2,953,651
|
|
|
|
$ 5.40
|
[1]
|
|
|
|
|
|
|
|
|
Issued
|
|
|
704,305
|
|
|
|
4.03
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(50,000
|
)
|
|
|
3.50
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(15,125
|
)
|
|
|
30.33
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2017
|
|
|
3,592,831
|
|
|
$
|
4.93
|
|
|
|
3.2
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2017
|
|
|
3,592,831
|
|
|
$
|
4.93
|
|
|
|
3.2
|
|
|
$
|
-
|
|
|
[1]
|
Excludes the impact of a warrant to purchase 35,000 shares of common stock that had an exercise price which was the greater of $30.00 per share or the fair market value of the common stock on the date certain performance criteria are met. Exercisability was subject to satisfaction of certain performance criteria which had not occurred as of December 31, 2016. As discussed above under Warrant Modification and Exercise, on February 10, 2017, the performance criteria were eliminated and the exercise price was reduced to $3.50 per share in consideration of the full exercise of the warrant by the holder.
|
The following table presents information related to stock warrants
at June 30, 2017:
Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Warrants
|
|
|
In Years
|
|
|
Warrants
|
|
$4.00 - $4.99
|
|
2,243,550
|
|
|
3.4
|
|
|
2,243,550
|
|
$5.00 - $5.99
|
|
|
1,184,243
|
|
|
|
3.0
|
|
|
|
1,184,243
|
|
$6.00 - $7.99
|
|
|
40,000
|
|
|
|
3.1
|
|
|
|
40,000
|
|
$8.00 - $9.99
|
|
|
2,500
|
|
|
|
2.4
|
|
|
|
2,500
|
|
$10.00 - $14.99
|
|
|
55,446
|
|
|
|
2.8
|
|
|
|
55,446
|
|
$15.00 - $19.99
|
|
|
38,559
|
|
|
|
2.2
|
|
|
|
38,559
|
|
$20.00 - $80.00
|
|
|
28,533
|
|
|
|
0.7
|
|
|
|
28,533
|
|
|
|
|
3,592,831
|
|
|
|
3.2
|
|
|
|
3,592,831
|
|
Stock Options
On February 14, 2017, the Compensation Committee reduced the exercise
price of outstanding options for the purchase of an aggregate of 1,219,450 shares of common stock of the Company (with exercise
prices ranging between $5.70 and $30.00 per share) to $4.70 per share, which was the closing price for the Company’s common
stock on February 13, 2017, as reported by the OTCQB. The exercise price reduction related to options held by, among others, the
Company’s executive officers and directors. The incremental value of the modified options compared to the original options,
both valued as of the respective modification date, of $430,394 is being recognized over the vesting term of the options.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 7 – Stockholders’ Deficiency – Continued
Stock Options
– Continued
On June 23, 2017, the Company issued ten-year options to an employee
and directors to purchase an aggregate of 850,000 shares of common stock at an exercise price of $3.35 per share. The options vest
as follows: (i) options for the purchase of 283,336 shares vest immediately, (ii) options for the purchase of 283,334 shares vest
on the one year anniversary of the issuance date and (iii) options for the purchase of 283,330 shares vest on the two year anniversary
of the issuance date. The options had an aggregate grant date value of $2,391,900.
A summary of the option activity during the six months ended June
30, 2017 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding, December 31, 2016
|
|
|
2,168,950
|
|
|
|
6.27
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
850,000
|
|
|
|
3.35
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(250
|
)
|
|
|
4.70
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2017
|
|
|
3,018,700
|
|
|
$
|
4.34
|
|
|
|
8.4
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2017
|
|
|
1,721,212
|
|
|
$
|
4.74
|
|
|
|
7.8
|
|
|
$
|
-
|
|
The following table presents information related to stock options
at June 30, 2017:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
$3.10 - $3.99
|
|
|
1,707,000
|
|
|
|
9.3
|
|
|
|
756,342
|
|
$4.00 - $4.99
|
|
|
1,234,200
|
|
|
|
6.8
|
|
|
|
887,370
|
|
$5.00 - $5.99
|
|
|
5,000
|
|
|
|
7.0
|
|
|
|
5,000
|
|
$6.00 - $19.99
|
|
|
37,500
|
|
|
|
6.5
|
|
|
|
37,500
|
|
$20.00 - $30.00
|
|
|
35,000
|
|
|
|
4.7
|
|
|
|
35,000
|
|
|
|
|
3,018,700
|
|
|
|
7.8
|
|
|
|
1,721,212
|
|
The following table presents information related to stock option
expense:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
For the
|
|
|
For the
|
|
|
|
|
|
Average
|
|
|
|
Three Months
|
|
|
Six Months
|
|
|
|
|
|
Remaining
|
|
|
|
Ended
|
|
|
Ended
|
|
|
|
|
|
Amortization
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Unrecognized at
|
|
|
Period
|
|
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
|
June 30, 2017
|
|
|
(Years)
|
|
Consulting
|
|
$
|
714,545
|
|
|
$
|
439,644
|
|
|
$
|
983,159
|
|
|
$
|
543,742
|
|
|
$
|
1,645,293
|
|
|
|
1.6
|
|
Research and development
|
|
|
106,507
|
|
|
|
75,156
|
|
|
|
364,923
|
|
|
|
182,339
|
|
|
|
609,198
|
|
|
|
1.6
|
|
General and administrative
|
|
|
476,226
|
|
|
|
442,450
|
|
|
|
863,826
|
|
|
|
592,163
|
|
|
|
1,194,109
|
|
|
|
1.5
|
|
|
|
$
|
1,297,278
|
|
|
$
|
957,250
|
|
|
$
|
2,211,908
|
|
|
$
|
1,318,244
|
|
|
$
|
3,448,600
|
|
|
|
1.6
|
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARIES
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note 8 – Subsequent Events
Notes Payable
Subsequent to June 30, 2017, the Company issued a director and principal
shareholder of the Company a note in the principal amount of $175,000 (the “$175,000 Loan”), which bears interest at
a rate of 15% per annum payable at maturity. The maturity date of the note is December 1, 2017 (subject to acceleration under certain
circumstances). The Company agreed that the payment of the note is secured by the grant of a security interest in the Company’s
equipment and intellectual property.
Subsequent to June 30, 2017, the Company issued
a note in the principal amount of $83,333 of which $58,333 of principal bears interest at 10% per annum and is convertible into
common stock. In connection with the issuance of the note, the Company received gross proceeds of $75,000, and the difference
of $8,333 has been recorded as an original issue discount and will be amortized over the term of the note. The note is payable
as follows: (i) $25,000 of principal, which bears no interest and is not convertible into common stock, is payable three weeks
from the issuance date, (ii) $11,667 of principal and the respective interest on such principal is payable six months from the
issuance date (the “First Maturity Date”), (iii) $11,667 of principal and the respective interest on such principal
is payable two weeks following the First Maturity Date, (iv) $11,667 of principal and the respective accrued interest on
such principal is payable four weeks following the First Maturity Date, (v) $11,667 of principal and the respective interest
on such principal is payable six weeks following the First Maturity Date, and (vi) $11,667 of principal and the respective
interest on such principal is payable eight weeks following the First Maturity Date. Excluding the $25,000 of principal that is
not convertible into common stock as described above, each payment of principal and the respective accrued interest is convertible
into shares of the Company’s common stock at the election of the Company during the period beginning five days prior to
maturity and ending on the day immediately prior to maturity at a conversion price equal to 50% of the fair market value of the
Company’s stock; however, in no event shall the conversion price be less than $0.75 per share. Should the Company
elect to convert any of the note principal and respective accrued interest, the holder will have the right to accelerate the conversion
of the remaining outstanding principal and accrued interest of the note at the same conversion price. The Company will recognize
the beneficial conversion feature of the note as debt discount at the time the contingently adjustable conversion ratio is resolved.
Subsequent to June 30, 2017, the Company elected
to convert certain convertible notes with an aggregate principal balance of $120,963 and accrued interest of $7,006
into an aggregate of 68,239 shares of common stock at conversion prices ranging from $1.75 to $1.92 per share.
Subsequent to June 30, 2017, the Company and the Trust agreed
to extend the maturity date of a note payable with a principal balance of $500,000 from July 1, 2017 to December 1, 2017 (subject
to acceleration under certain circumstances). In connection with the note extension, the Company increased the effective rate at
which the note bears interest from 10% to 15% effective July 1, 2017. In connection with the $175,000 Loan, the Company agreed
that the payment of the note is secured by the grant of a security interest in the Company’s equipment and intellectual property.
Subsequent to June 30, 2017, the Company and
a lender agreed to extend the maturity dates of notes payable with an aggregate principal balance of $457,250 with maturity dates
ranging from July 3, 2017 through July 4, 2017 to maturity dates ranging from October 1, 2017 through October 2, 2017. In connection
with the note extensions, the Company increased the effective rate at which the notes bear interest from 0% to 8% effective August
2, 2017. Also, in connection with the note extensions, the Company added a conversion feature, pursuant to which each payment
of principal and the respective accrued interest is convertible into shares of the Company’s common stock at the election
of the lender any time immediately until the balance has been paid in full at a conversion price equal to 80% of the fair market
value of the Company’s stock (subject to reduction to 70% under certain circumstances); however, in no event shall
the conversion price be less than $1.00 per share. The Company will recognize the beneficial conversion feature of the note as
debt discount at the time the contingently adjustable conversion ratio is resolved.
Subsequent to June 30, 2017, the Company and
a director of the Company agreed to extend the maturity date of a note payable with a principal balance of $50,000 from
February 2017 to February 2018. In connection with the extension, the Company issued the director five-year, immediately
vested warrants to purchase 5,000 shares of common stock at an exercise price of $4.00 per share.
Note 8 – Subsequent Events – Continued
Warrants
Subsequent to June 30, 2017, the Company issued an immediately vested
five-year warrant to purchase 25,000 shares of common stock at an exercise price of $4.00 per share to a consultant for services
rendered.
Options
Subsequent
to June 30, 2017, the Company issued ten-year options to employees and an advisor to purchase an aggregate of 267,000 shares of
common stock at exercise prices ranging between $2.80 to $3.35 per share. The options vest as follows: (i) options for the purchase
of 89,004 shares vest on the one year anniversary of the issuance date, (ii) options for the purchase of 89,002 shares vest on
the two year anniversary of the issuance date and (iii) options for the purchase of 88,994 shares vest on the three year anniversary
of the issuance date.
Current Liabilities
Subsequent to June 30, 2017, the Company entered into an exchange
agreement with a certain vendor of the Company, pursuant to which $17,697 of accounts payable were exchanged for 8,334 shares of
common stock of the Company. In consideration thereof, the Company issued to the vendor immediately vested five-year warrants for
the purchase of 2,000 shares of common stock of the Company at an exercise price of $4.00 per share.
Item
2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of the results of operations and financial condition of BioRestorative Therapies, Inc. (together
with its subsidiaries, "BRT") for the three and six months ended June 30, 2017 and 2016 should be read in conjunction
with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report
on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to
“us,” “we,” “our,” and similar terms refer to BRT. This Quarterly Report contains forward-looking
statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained
in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us,
or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,”
“will,” “expect,” “believe,” “anticipate,” “project,” “plan,”
“intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended
to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events
and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence
the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include,
but are not limited to, the risks and uncertainties discussed in Item 7 (“Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Factors That May Affect Results and Financial Condition”) of our Annual
Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”)
on March 22, 2017.
Any
one or more of these uncertainties, risks and other influences could materially affect our results of operations and whether forward-looking
statements made by us ultimately prove to be accurate. Our actual results, performance and achievements could differ materially
from those expressed or implied in these forward-looking statements. We undertake no obligation to publicly update or revise any
forward-looking statements, whether from new information, future events or otherwise.
This
Quarterly Report on Form 10-Q includes references to our federally registered trademarks, BioRestorative Therapies, brtxDISC,
ThermoStem and Stem Pearls. This Quarterly Report on Form 10-Q may also include references to trademarks, trade names and service
marks that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Quarterly
Report on Form 10-Q appear without the ®, SM or ™ symbols, and copyrighted content appears without the use of the symbol
©, but the absence of use of these symbols does not reflect upon the validity or enforceability of the intellectual property
owned by us or third parties.
Overview
We
develop therapeutic products and medical therapies using cell and tissue protocols, primarily involving adult (non-embryonic)
stem cells. We are currently pursuing our Disc/Spine Program with our initial therapeutic product being called
BRTX-100
.
We have obtained a license to use technology for adult stem cell treatment of disc and spine conditions, including protruding
and bulging lumbar discs. The technology is an advanced stem cell injection procedure that may offer relief from lower back pain,
buttock and leg pain, and numbness and tingling in the legs and feet. We are also developing our ThermoStem Program. This pre-clinical
program involves the use of brown adipose (fat) in connection with the cell-based treatment of type 2 diabetes and
obesity as well as hypertension, other metabolic disorders and cardiac deficiencies. A United States patent related to the ThermoStem
Program was issued in September 2015, and an Australian patent related to the ThermoStem Program was issued in August 2017.
We
have licensed a patented curved needle device that is a needle system designed to deliver cells and/or other therapeutic products
or materials to the spine and discs. We also offer stem cell derived cosmetic and skin care products.
Our
offices are located in Melville, New York where we have established a laboratory facility in order to increase our capabilities
for the further development of possible cellular-based treatments, products and protocols, stem cell-related intellectual property
and translational research applications.
As
of June 30, 2017, our accumulated deficit was $47,492,735, our stockholders’ deficiency was $5,715,044 and our working capital
deficiency was $6,947,637. We have historically only generated a modest amount of revenue, and our losses have principally been
operating expenses incurred in research and development, marketing and promotional activities in order to commercialize our products
and services, plus costs associated with meeting the requirements of being a public company. We expect to continue to incur substantial
costs for these activities over at least the next year.
Based
upon our working capital deficiency as of June 30, 2017 and our forecast for continued operating losses, we require equity and/or
debt financing to continue our operations. As of June 30, 2017, our outstanding debt of $2,654,062, together with interest
at rates ranging between 0% and 15% per annum, was due on various dates through February 2018. Subsequent to June 30, 2017 and
through the filing date of this report, we have received aggregate debt proceeds of $250,000, debt and accrued interest of $120,963
and $7,006, respectively, has been converted into or exchanged for common stock, and the due date for the repayment of $1,007,250
of debt has been extended from July 2017 to dates between October 2017 and February 2018. Giving effect to the above
actions, we currently have notes payable aggregating $382,500 which are past due. Based upon our working capital deficiency
and outstanding debt, we expect to be able to fund our operations through September 2017. We will require additional funding
to repay our outstanding debt ($2,654,062 as of June 30, 2017) (assuming that no debt is converted into equity) and fund
general operations. We anticipate that we will require approximately $10,000,000 in financing to commence and complete a Phase
2 clinical trial using
BRTX-100
. We anticipate that we will require approximately $30,000,000 in further additional funding
to complete our clinical trials using
BRTX-100
(assuming the receipt of no revenues). We will also require a substantial
amount of additional funding if we determine to establish a manufacturing operation with regard to our Disc/Spine Program (as
opposed to utilizing a third-party manufacturer) and to implement our other programs, including our metabolic ThermoStem Program.
No assurance can be given that the anticipated amounts of required funding are correct or that we will be able to accomplish our
goals within the timeframes projected. In addition, no assurance can be given that we will be able to obtain any required financing
on commercially reasonable terms or otherwise.
We
are currently seeking several different financing alternatives to support our future operations and are currently in the process
of negotiating extensions or discussing conversions to equity with respect to our outstanding indebtedness. If we are unable to
obtain such additional financing on a timely basis or, notwithstanding any request we may make, our debt holders do not agree
to convert their notes into equity or extend the maturity dates of their notes, we may have to curtail our development, marketing
and promotional activities, which would have a material adverse effect on our business, financial condition and results of operations,
and ultimately we could be forced to discontinue our operations and liquidate. See “Liquidity and Capital Resources”
below.
Consolidated
Results of Operations
Three
Months Ended June 30, 2017 Compared with Three Months Ended June 30, 2016
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the three months
ended June 30, 2017 and 2016, respectively:
|
|
For The Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
20,000
|
|
|
$
|
16,155
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
-
|
|
|
|
71
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
20,000
|
|
|
|
16,084
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Marketing and promotion
|
|
|
9,053
|
|
|
|
18,178
|
|
Consulting
|
|
|
875,309
|
|
|
|
550,006
|
|
Research and development
|
|
|
610,725
|
|
|
|
608,688
|
|
General and administrative
|
|
|
1,093,928
|
|
|
|
982,358
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
2,589,015
|
|
|
|
2,159,230
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(2,569,015
|
)
|
|
|
(2,143,146
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(95,403
|
)
|
|
|
(45,008
|
)
|
Amortization of debt discount
|
|
|
(84,167
|
)
|
|
|
(65,448
|
)
|
Gain (loss) on extinguishment of notes payable, net
|
|
|
1,402
|
|
|
|
(4,813
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(178,168
|
)
|
|
|
(115,269
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,747,183
|
)
|
|
$
|
(2,258,415
|
)
|
Revenues
For
the three months ended June 30, 2017, we generated $20,000 of royalty revenue in connection with our sublicense agreement. For
the three months ended June 30, 2016, we generated $16,000 of royalty revenue in connection with our sublicense agreement and
$155 of sales of Stem Pearls skincare products.
Cost
of sales
For
the three months ended June 30, 2017, cost of sales was $0 as compared to $71 for the three months ended June 30, 2016. For the
three months ended June 30, 2016, cost of sales consisted of the costs of the underlying Stem Pearls skincare products.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the three months ended June 30, 2017, marketing and promotion expenses decreased by $9,125, or 50%, from $18,178 to $9,053 as
compared to the three months ended June 30, 2016.
We
expect that marketing and promotion expenses will increase in the future as we increase our marketing activities following full
commercialization of our products and services.
Consulting
Consulting
expenses consist of consulting fees and stock-based compensation to consultants. For the three months ended June 30, 2017, consulting
expenses increased $325,303, or 59%, from $550,006
to $875,309, as compared to the three months ended June 30, 2016.
The increase is primarily due to an approximately $319,000 increase in consultant stock-based compensation expense related to
options granted to directors and an increase of approximately $8,000 in other cash consulting fees.
Research
and development
Research
and development expenses include cash and non-cash compensation of (a) our Vice President of Research and Development; (b) our
Scientific Advisory Board members; (c) our President, Disc/Spine Division (who left the Company on July 24, 2017); and (d) laboratory
staff and costs related to our brown fat and disc/spine initiatives. Research and development expenses are expensed as they are
incurred. For the three months ended June 30, 2017, research and development expenses increased by $2,037, or 0%, from $608,688
to $610,725, as compared to the three months ended June 30, 2016. The increase was primarily a result of approximately $31,000
of stock-based compensation expense related to options granted to our Vice President of Research and Development, our Scientific
Advisory Board members, our President, Disc/Spine Division and laboratory staff, an increase of approximately $22,000 of laboratory
fees due to a ramp up in activities in building of a lab, partially offset by a decrease of approximately $28,000 of medical supplies
in connection with a previous stock up of supplies pending lab development and a decrease of $22,000 related to the reversal of
previously accrued 2016 bonus that is no longer probable to be achieved.
We
expect that our research and development expenses will increase with the continuation of the aforementioned initiatives.
General
and administrative
General
and administrative expenses consist primarily of salaries, bonuses, payroll taxes, severance costs and stock-based compensation
to employees (excluding any cash or non-cash compensation of (a) our Vice President of Research and Development; (b) our President,
Disc/Spine Division; and (c) our laboratory staff) as well as corporate support expenses such as legal and professional fees,
investor relations and occupancy related expenses. For the three months ended June 30, 2017, general and administrative expenses
increased by $111,570, or 11%, from $982,358 to $1,093,928, as compared to the three months ended June 30, 2016. The increase
is primarily related to approximately $34,000 in stock-based compensation to employees and our Chief Executive Officer and an
increase in professional fees of approximately $75,000 related to legal services rendered in connection with patent applications.
We
expect that our general and administrative expenses will increase as we expand our staff, develop our infrastructure and incur
additional costs to support the growth of our business.
Interest
expense
For
the three months ended June 30, 2017, interest expense increased $50,395, or 112%, as compared to the three months ended June
30, 2016. The increase was due to an increase in interest-bearing short-term borrowings as compared to the three months ended
June 30, 2016.
Amortization
of debt discount
For
the three months ended June 30, 2017, amortization of debt discount increased $18,719, or 29%, as compared to the three months
ended June 30, 2016. The increase was primarily due to the timing of the recognition of expense related to the beneficial conversion
features of convertible notes.
Gain
(loss) on extinguishment of notes payable
For
the three months ended June 30, 2017, we recorded a gain on extinguishment of notes payable of $1,402, which is associated with
investors’ exchanges of debt into equity securities, as compared to a loss on extinguishment of notes payable of $4,813
for the three months ended June 30, 2016.
Six
Months Ended June 30, 2017 Compared with Six Months Ended June 30, 2016
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the six months ended
June 30, 2017 and 2016, respectively:
|
|
For The Six Months Ended,
|
|
|
|
June 30,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
27,000
|
|
|
$
|
25,280
|
|
|
|
|
|
|
|
|
|
|
Cost of sales
|
|
|
-
|
|
|
|
81
|
|
|
|
|
|
|
|
|
|
|
Gross Profit
|
|
|
27,000
|
|
|
|
25,199
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Marketing and promotion
|
|
|
38,123
|
|
|
|
40,695
|
|
Consulting
|
|
|
1,339,444
|
|
|
|
834,813
|
|
Research and development
|
|
|
1,416,578
|
|
|
|
1,474,732
|
|
General and administrative
|
|
|
2,291,241
|
|
|
|
1,885,239
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
5,085,386
|
|
|
|
4,235,479
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(5,058,386
|
)
|
|
|
(4,210,280
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(193,204
|
)
|
|
|
(87,848
|
)
|
Amortization of debt discount
|
|
|
(216,909
|
)
|
|
|
(402,469
|
)
|
Gain (loss) on extinguishment of notes payable, net
|
|
|
(59,938
|
)
|
|
|
(16,660
|
)
|
Warrant modification expense
|
|
|
(4,500
|
)
|
|
|
(28,486
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(474,551
|
)
|
|
|
(535,463
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(5,532,937
|
)
|
|
$
|
(4,745,743
|
)
|
Revenues
For
the six months ended June 30, 2017, we generated $27,000 of royalty revenue in connection with our sublicense agreement. For the
six months ended June 30, 2016, we generated $25,000 of royalty revenue in connection with our sublicense agreement and $280 of
sales of Stem Pearls skincare products.
Cost
of sales
For
the six months ended June 30, 2017, cost of sales was $0 as compared to $81 for the six months ended June 30,2016. For the six
months ended June 30, 2016, cost of sales consisted of the costs of the underlying Stem Pearls skincare products.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the six months ended June 30, 2017, marketing and promotion expenses decreased by $2,572, or 6%, from $40,695 to $38,123 as compared
to the six months ended June 30, 2016.
We
expect that marketing and promotion expenses will increase in the future as we increase our marketing activities following full
commercialization of our products and services.
Consulting
Consulting
expenses consist of consulting fees and stock-based compensation to consultants. For the six months ended June 30, 2017, consulting
expenses increased $504,631, or 60%, from $834,813 to $1,339,444, as compared to the six months ended June 30, 2016. The increase
is primarily due to an approximately $474,000 increase in consultant stock-based compensation expense related to options granted
to directors and consultants and a $13,000 increase in other cash consulting fees.
Research
and development
Research
and development expenses include cash and non-cash compensation of (a) our Vice President of Research and Development; (b) our
Scientific Advisory Board members; (c) our President, Disc/Spine Division (who left the Company on July 24, 2017); and (d) laboratory
staff and costs related to our brown fat and disc/spine initiatives. Research and development expenses are expensed as they are
incurred. For the six months ended June 30, 2017, research and development expenses decreased by $58,154, or 4%, from $1,474,732
to $1,416,578, as compared to the six months ended June 30, 2016. The decrease was primarily as a result of an approximately $245,000
decrease in costs related to a third party laboratory associated with the completion of our animal study for our disc/spine initiative,
partially offset by approximately $182,000 of stock-based compensation expense in connection with the repricing of options granted
to our Vice President of Research and Development, our Scientific Advisory Board members, our President, Disc/Spine Division and
laboratory staff.
We
expect that our research and development expenses will increase with the continuation of the aforementioned initiatives.
General
and administrative
General
and administrative expenses consist primarily of salaries, bonuses, payroll taxes, severance costs and stock-based compensation
to employees (excluding any cash or non-cash compensation of (a) our Vice President of Research and Development; (b) our President,
Disc/Spine Division; and (c) our laboratory staff) as well as corporate support expenses such as legal and professional fees,
investor relations and occupancy related expenses. For the six months ended June 30, 2017, general and administrative expenses
increased by $406,002, or 22%, from $1,885,239 to $2,291,241, as compared to the six months ended June 30, 2016. The increase
is primarily related to approximately $272,000 in stock-based compensation to employees and our Chief Executive Officer, and an
increase in professional fees of approximately $88,000 related to legal services rendered in connection with patent applications.
We
expect that our general and administrative expenses will increase as we expand our staff, develop our infrastructure and incur
additional costs to support the growth of our business.
Interest
expense
For
the six months ended June 30, 2017, interest expense increased $105,356, or 120%, as compared to the six months ended June 30,
2016. The increase was due to an increase in interest-bearing short-term borrowings as compared to the six months ended June 30,
2016.
Amortization
of debt discount
For
the six months ended June 30, 2017, amortization of debt discount decreased $185,560, or 46%, as compared to the six months ended
June 30, 2016. The decrease was primarily due to the timing of the recognition of expense related to the beneficial conversion
features of convertible notes.
Loss
on extinguishment of notes payable
For
the six months ended June 30, 2017, we recorded a loss on extinguishment of notes payable of $59,938, which is associated with
investors’ exchanges of debt into equity securities, as compared to a loss on extinguishment of notes payable of $16,660
for the six months ended June 30, 2016.
Warrant
modification expense
During
the six months ended June 30, 2017 and 2016, we recorded expense related to the modification of the exercise prices of certain
outstanding warrants of $4,500 and $28,486, respectively.
Liquidity
and Capital Resources
Liquidity
We
measure our liquidity in a number of ways, including the following:
|
|
June 30, 2017
|
|
|
December 31, 2016
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,891
|
|
|
$
|
31,822
|
|
|
|
|
|
|
|
|
|
|
Working Capital Deficiency
|
|
$
|
(6,947,637
|
)
|
|
$
|
(5,771,460
|
)
|
|
|
|
|
|
|
|
|
|
Notes Payable (Gross)
|
|
$
|
2,654,062
|
|
|
$
|
2,336,565
|
|
Availability
of Additional Funds
Based
upon our working capital deficiency and stockholders’ deficiency of $6,947,637 and $5,715,044, respectively, as of June
30, 2017, we require additional equity and/or debt financing to continue our operations. These conditions raise substantial doubt
about our ability to continue as a going concern within the twelve months from the date of this filing.
As
of June 30, 2017, our outstanding debt of $2,654,062, together with interest at rates ranging between 0% and 15% per annum, was
due on various dates through February 2018. Subsequent to June 30, 2017 and through the filing date of this report, we have received
aggregate debt proceeds of $250,000, debt and accrued interest of $120,963 and $7,006, respectively, has been converted into or
exchanged for common stock, and the due date for the repayment of $1,007,250 of debt has been extended from July 2017 to
dates between October 2017 and February 2018. Giving effect to the above actions, we currently have notes payable aggregating
$382,500 which are past due. As of the date of filing, our outstanding debt was as follows:
|
|
Principal
|
|
Maturity Date
|
|
Amount
|
|
Past Due
|
|
$
|
382,500
|
|
QE 9/30/2017
|
|
|
25,000
|
|
QE 12/31/2017
|
|
|
2,106,850
|
|
QE 3/31/2018
|
|
|
277,083
|
|
|
|
$
|
2,791,433
|
|
Based
upon our working capital deficiency, outstanding debt and forecast for continued operating losses we expect that the cash we currently
have available will fund our operations through September 2017. Thereafter, we will need to raise further capital, through
the sale of additional equity or debt securities, to support our future operations and to repay our debt (unless, if requested,
the debt holders agree to convert their notes into equity or extend the maturity dates of their notes). Our operating needs include
the planned costs to operate our business, including amounts required to fund working capital and capital expenditures. Our future
capital requirements and the adequacy of our available funds will depend on many factors, including our ability to successfully
commercialize our products and services, competing technological and market developments, and the need to enter into collaborations
with other companies or acquire other companies or technologies to enhance or complement our product and service offerings.
We
may be unable to raise sufficient additional capital when we need it or raise capital on favorable terms. Debt financing may require
us to pledge certain assets and enter into covenants that could restrict certain business activities or our ability to incur further
indebtedness, and may contain other terms that are not favorable to our stockholders or us. If we are unable to obtain adequate
funds on reasonable terms, we may be required to significantly curtail or discontinue operations or obtain funds by entering into
financing agreements on unattractive terms.
Our
unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q have been prepared
in conformity with accounting principles generally accepted in the United States of America, which contemplate our continuation
as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The carrying
amounts of assets and liabilities presented in the financial statements do not necessarily purport to represent realizable or
settlement values. The financial statements do not include any adjustment that might result from the outcome of this uncertainty.
During
the six months ended June 30, 2017 and 2016, our sources and uses of cash were as follows:
Net
Cash Used in Operating Activities
We
experienced negative cash flows from operating activities for the six months ended June 30, 2017 and 2016 in the amounts of $1,984,931
and $2,735,405, respectively. The net cash used in operating activities for the six months ended June 30, 2017 was primarily due
to cash used to fund a net loss of $5,532,937, adjusted for non-cash expenses in the aggregate amount of $2,882,013 plus $665,993
of cash generated by changes in the levels of operating assets and liabilities, primarily as a result of increases in accounts
payable, plus accrued interest, expenses and other liabilities. The net cash used in operating activities for the six months ended
June 30, 2016 was primarily due to cash used to fund a net loss of $4,745,743, adjusted for non-cash expenses in the aggregate
amount of $1,933,040, plus $77,298 of cash provided by changes in the levels of operating assets and liabilities, primarily as
a result of an increase in accrued interest, expenses, other current liabilities, and by a decrease in accounts receivables, partially
offset by a decrease in accounts payable.
Net
Cash Used in Investing Activities
During
the six months ended June 30, 2017, there was no net cash used in or provided by investing activities. During the six months ended
June 30, 2016, net cash used in investing activities was $151,200, due to cash used for the purchase of furniture, computer equipment
and medical equipment.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities during the six months ended June 30, 2017 and 2016 was $1,955,000 and $3,236,240, respectively.
During the six months ended
June 30, 2017
,
$
786,000
of net proceeds were from debt financings and other borrowings and $
1,169,000
of proceeds were from equity financings (including proceeds received in connection with
the exercise of common stock purchase warrants). During the six months ended
June 30, 2016
,
$789,970 of net proceeds were from debt financings and other borrowings and $2,446,270 of proceeds were from equity financings
(including proceeds received in connection with the exercise of common stock purchase warrants).
Critical
Accounting Policies and Estimates
There
are no material changes from the critical accounting policies set forth in “Management’s Discussion and Analysis of
Financial Condition and Results of Operations” of our Form 10-K for the year ended December 31, 2016 filed with the Securities
and Exchange Commission on March 22, 2017. Please refer to that document for disclosures regarding the critical accounting policies
related to our business.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.