Note
2 – Going Concern and Management’s Plans
As
of June 30, 2018, the Company had a working capital deficiency and a stockholders’ deficiency of $10,572,121 and
$9,868,013, respectively. During the three and six months ended June 30, 2018, the Company incurred net losses of $3,514,423 and
$6,022,083, respectively. These conditions indicate that there is substantial doubt about the Company’s ability to continue
as a going concern within the next twelve months from the filing date of this report.
The
Company’s primary source of operating funds since inception has been equity and debt financings. The Company intends to
continue to raise additional capital through debt and equity financings. There is no assurance that these funds will be sufficient
to enable the Company to fully complete its development activities or attain profitable operations. If the Company is unable to
obtain such additional financing on a timely basis or, notwithstanding any request the Company may make, the Company’s debt
holders do not agree to convert their notes into equity or extend the maturity dates of their notes, the Company may have to curtail
its development, marketing and promotional activities, which would have a material adverse effect on the Company’s business,
financial condition and results of operations, and ultimately the Company could be forced to discontinue its operations and liquidate.
The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplate
continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities presented in the financial statements do not necessarily purport to
represent realizable or settlement values. The unaudited condensed consolidated financial statements do not include any adjustment
that might result from the outcome of this uncertainty.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
2 – Going Concern and Management’s Plans – Continued
Subsequent
to June 30, 2018, the Company has received aggregate equity financings and debt financings of $150,000 and $210,765, respectively,
debt (inclusive of accrued interest) of $448,220 has been exchanged for common stock, $25,000 of debt (inclusive of accrued
interest) has been repaid, and the due date for the repayment of $908,113 of debt has been extended to dates between August
2018 and January 2019. As a result, the Company expects to have the cash required to fund its operations through September
2018 while it continues to apply efforts to raise additional capital. 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 $1,232,295 which are past due. The Company is currently in the process of negotiating
an extension with respect to this note though there can be no assurance that the Company will be successful. See Note 9 –
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 Stem Pearls. All significant intercompany
transactions have been eliminated in the consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenue and expenses during the periods. The Company’s significant estimates and assumptions
include the recoverability and useful lives of long-lived assets, the fair value of the Company’s stock, stock-based compensation,
warrants issued in connection with notes payable, derivative liabilities and the valuation allowance related to the Company’s
deferred tax assets. Certain of the Company’s estimates, including the carrying amount of the intangible assets, could be
affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible
that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from
those estimates.
Concentrations
One
license and the related royalties comprised all of the Company’s revenue during the three and six months ended June 30,
2018 and 2017. See “Revenue Recognition” below.
Revenue
Recognition
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. In January 2012, the Company and a stem cell treatment company (“SCTC”)
entered into a license agreement pursuant to which the SCTC granted to the Company a license to use certain intellectual property
related to, among other things, stem cell disc procedures. Pursuant to the license agreement, the Company granted to the SCTC
a non-exclusive sublicense to use certain of the licensed intellectual property in one location outside the United States. Pursuant
to an amendment to the license agreement, 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 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. During the three and six months ended June 30, 2018, the Company recognized $37,000 and $56,000, respectively,
of revenue related to the Company’s sublicenses. 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 sublicenses.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Summary of Significant Accounting Policies – Continued
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,
|
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
3,615,119
|
|
|
|
3,018,700
|
|
Warrants
|
|
|
3,318,403
|
|
|
|
3,592,831
|
|
Convertible
notes
|
|
|
2,713,717
|
[1]
|
|
|
276,943
|
|
Total
potentially dilutive shares
|
|
|
9,647,239
|
|
|
|
6,888,474
|
|
|
[1]
|
As
of June 30, 2018, many of the convertible notes had variable conversion prices and the
shares were estimated based on market conditions. Pursuant to the note agreements,
there were 15,771,133 shares of common stock reserved for future note conversions.
|
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.
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
the conversion options and warrants 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 interest
expense 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 embedded conversion options (“ECOs”)
of convertible notes payable and the warrants that are classified as derivative liabilities on the unaudited condensed consolidated
balance sheets. The models include subjective input assumptions that can materially affect the fair value estimates. The expected
volatility is estimated based on the most recent historical period of time equal to the weighted average life of the instruments.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Summary of Significant Accounting Policies – Continued
Sequencing
Policy
Under
ASC 815-40-35, 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, issuance of securities to the Company’s employees or directors are not subject to the sequencing
policy.
Reclassification
Certain
amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no
effect on previously reported net loss.
Subsequent
Events
The
Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based
upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required
adjustment or disclosure in the consolidated financial statements, except as disclosed.
Recently
Issued Accounting Pronouncements
In
May 2017, the Financial Accounting Standards Board (“FASB”) 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 within those annual periods, beginning after December 15, 2017, for share-based payment awards modified
on or after the adoption date. The adoption of this standard did not have a material impact on the Company’s financial statement
disclosures.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718),” (“ASU 2018-07”).
ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.
Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different.
ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based
payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting
for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity
— Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December
15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier
than a company’s adoption date of Topic 606, Revenue from Contracts with Customers. The Company is currently evaluating
ASU 2018-07 and its impact on the unaudited condensed consolidated financial statements.
In
July 2018, the FASB issued ASU No. 2018-09, “Codification Improvements” (“ASU 2018-09”). These amendments
provide clarifications and corrections to certain ASC subtopics including the following: Income Statement - Reporting Comprehensive
Income – Overall (Topic 220-10), Debt - Modifications and Extinguishments (Topic 470-50), Distinguishing Liabilities from
Equity – Overall (Topic 480-10), Compensation - Stock Compensation - Income Taxes (Topic 718-740), Business Combinations
- Income Taxes (Topic 805-740), Derivatives and Hedging – Overall (Topic 815-10), and Fair Value Measurement – Overall
(Topic 820-10). The majority of the amendments in ASU 2018-09 will be effective in annual periods beginning after December 15,
2018. The Company is currently evaluating and assessing the impact this guidance will have on its unaudited condensed consolidated
financial statements.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Summary of Significant Accounting Policies – Continued
Recently
Issued Accounting Pronouncements
- Continued
In
July 2018, the FASB issued ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” (“ASU 2018-10”).
The amendments in ASU 2018-10 provide additional clarification and implementation guidance on certain aspects of the previously
issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”) and have the same effective and transition requirements
as ASU 2016-02. Upon the effective date, ASU 2018-10 will supersede the current lease guidance in ASC Topic 840, Leases. Under
the new guidance, lessees will be required to recognize for all leases, with the exception of short-term leases, a lease liability,
which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis. Concurrently,
lessees will be required to recognize a right-of-use asset, which is an asset that represents the lessee’s right to use,
or control the use of, a specified asset for the lease term. ASU 2018-10 is effective for interim and annual reporting periods
beginning after December 15, 2018, with early adoption permitted. The guidance is required to be applied using a modified retrospective
transition approach for leases existing at, or entered into after, the beginning of the earliest comparative periods presented
in the financial statements. The Company is currently assessing the impact this guidance will have on its unaudited condensed
consolidated financial statements
Note
4 – Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities are comprised of the following:
|
|
June
30,
|
|
|
December
31,
|
|
|
|
2018
|
|
|
2017
|
|
Accrued
payroll and other accrued expenses
|
|
$
|
476,724
|
|
|
$
|
350,173
|
|
Accrued
research and development expenses
|
|
|
603,675
|
|
|
|
636,175
|
|
Accrued
general and administrative expenses
|
|
|
823,630
|
|
|
|
604,308
|
|
Accrued
director compensation
|
|
|
382,500
|
|
|
|
282,500
|
|
Deferred
rent
|
|
|
40,983
|
|
|
|
50,395
|
|
Total
accrued expenses
|
|
|
2,327,512
|
|
|
|
1,923,551
|
|
Less:
accrued expenses, current portion
|
|
|
2,327,512
|
|
|
|
1,885,551
|
|
Accrued
expenses, non-current portion
|
|
$
|
-
|
|
|
$
|
38,000
|
|
See
Note 6 - Commitments and Contingencies for additional details regarding the exchange of accrued consulting fees for common stock
and a warrant.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
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, 2018 is presented below:
|
|
Related
Party
|
|
|
Convertible
|
|
|
Other
|
|
|
Debt
|
|
|
|
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Discount
|
|
|
Total
|
|
Outstanding,
December 31, 2017
|
|
$
|
845,000
|
|
|
$
|
2,029,870
|
[1]
|
|
$
|
1,124,465
|
|
|
$
|
(337,485
|
)
|
|
$
|
3,661,850
|
|
Issuances
|
|
|
-
|
|
|
|
1,566,500
|
|
|
|
58,000
|
|
|
|
-
|
|
|
|
1,624,500
|
|
Exchanges
for equity
|
|
|
-
|
|
|
|
(322,477
|
)
|
|
|
(121,000
|
)
|
|
|
-
|
|
|
|
(443,477
|
)
|
Conversions
to equity
|
|
|
-
|
|
|
|
(50,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(50,000
|
)
|
Repayments
|
|
|
(30,000
|
)
|
|
|
(119,425
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(149,425
|
)
|
Recognition
of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(1,493,336
|
)
|
|
|
(1,493,336
|
)
|
Accretion
of interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
177,283
|
|
|
|
156,142
|
|
|
|
333,425
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,343,628
|
|
|
|
1,343,628
|
|
Extinguishment
of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
6,574
|
|
|
|
6,574
|
|
Outstanding,
June 30, 2018
|
|
$
|
815,000
|
|
|
$
|
3,104,468
|
[1][2]
|
|
$
|
1,238,748
|
[3]
|
|
$
|
(324,477
|
)
|
|
$
|
4,833,739
|
|
|
[1]
|
As
of June 30, 2018 and December 31, 2017, a designated portion of convertible notes with
an aggregate principal balance of $2,086,968 and $1,777,788, respectively, was currently
convertible into shares of common stock at the election of the holder any time immediately
until the balance has been paid in full. As of June 30, 2018 and December 31, 2017, a
designated portion of convertible notes with an aggregate principal balance of $55,000
and $252,082, 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 $36,667 and $196,666 of principal into shares of
common stock at June 30, 2018 and December 31, 2017, respectively, at the same conversion
price. As of June 30, 2018, a designated portion of convertible notes with an aggregate
principal balance of $962,500 is convertible into shares of the Company’s common
stock at the election of the respective holder after the 180th day (which had not occurred
as of June 30, 2018) following the respective issue date until the balance has been paid
in full.
|
|
[2]
|
As
of June 30, 2018, outstanding convertible notes in the aggregate principal amount of
$855,000 were past maturity.
|
|
[3]
|
As
of June 30, 2018, an outstanding note payable in the principal amount of $250,000 was
past maturity.
|
Related
Party Notes
As
of June 30, 2018 and December 31, 2017, 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 director and principal shareholder
of the Company serves as a trustee of Trust, which was established for the benefit of his immediate family.
During
the six months ended June 30, 2018, the Company partially repaid certain related party notes in the aggregate principal amount
of $30,000.
During
the six months ended June 30, 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.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Convertible
Notes
Issuances
During
the six months ended June 30, 2018, the Company issued certain lenders convertible notes payable in the aggregate principal amount
of $1,566,500 for aggregate cash proceeds of $1,429,800. The difference of $136,700 was recorded as a debt discount and will be
amortized over the terms of the respective notes. The convertible notes bear interest at rates ranging between 10% to 12% per
annum payable at maturity with original maturity dates ranging between August 2018 through June 2019.
The
convertible notes are convertible as follows: (i) $549,000 of aggregate principal and the respective interest is convertible into
shares of the Company’s common stock at the election of the respective holder at any time immediately on or after the issue
dates until the respective balances have been paid in full, (ii) $962,500 of aggregate principal and the respective interest is
convertible into shares of the Company’s common stock at the election of the respective holder after the 180th day following
the respective issue date until the balance has been paid in full, and (iii) $55,000 of principal and respective interest is convertible
into shares of the Company’s stock at the election of the Company during the five days prior to maturity and ending on the
day immediately prior to maturity; however, should the Company elect to convert any portion of the $55,000 of note principal and
respective accrued interest, the holder would have the right to accelerate the conversion of the remaining outstanding principal
and accrued interest of the note at the same conversion price.
The
original conversion prices of the convertible notes are equal to (i) a fixed price of $2.00 per share for the first six months
following the respective issue date, thereafter, at a conversion price equal to the greater of (a) 58% of the fair value of the
Company’s stock or (b) $0.10 per share, until the respective note has been paid in full or (ii) the greater of (a) a range
between 50% to 65% of the fair value of the Company’s stock or (b) $0.75 or $1.00 per share, depending on the note.
In
connection with the issuance of certain convertible notes, the Company issued the lenders an aggregate of 20,000 shares of the
Company’s common stock and the relative fair value of $30,604 was recorded as debt discount and is being amortized over
the term of the respective notes. In connection with certain other convertible notes, the Company incurred $6,252 of debt issuance
costs which was recorded as debt discount and is being amortized over the term of the respective notes. See below within Note
5 – Notes Payable – Conversions, Exchanges and Other and Note 8 – Derivative Liabilities for additional details
regarding the embedded conversion options (“ECOs”) of the convertible notes.
Convertible
note issuances in the aggregate principal amount of $137,500 and $1,566,500 have mandatory prepayment terms at the option of the
holder (“MPOs”) and/or prepayment premiums, respectively. 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 and balance and accrued
interest during the period between 150 days to 179 days following the respective issuance date. In such event that the Company
elects to prepay certain notes during the first ninety-day period following the issue date, the respective holder is entitled
to receive a prepayment premium of up to 30%, depending on the note, on the then outstanding principal balance including accrued
interest. In the event that the Company prepays any of the notes during the second ninety-day period following the issue date,
the respective holder is entitled to receive a prepayment premium of up to 40%, depending on the note, on the then outstanding
principal balance including accrued interest.
Convertible
note issuances in the aggregate principal amount of $921,500 have most favored nation (“MFN”) provisions, whereby,
so long as such respective note is outstanding, upon any issuance by the Company of any security with conversion discounts, conversion
lookback periods, floor prices, lookback formulas, and/or prepayment premiums, depending on the note, more favorable to the holder
of such security, then at the respective holder’s option, those more favorable terms shall become a part of the transaction
documents with the holder. As of June 30, 2018, notes with MFN provisions were convertible using MFN conversion terms equal to
conversion prices ranging between 60%-65% of the fair market value of the Company’s stock, as defined, with a conversion
floor price of $1.00 per share (that no longer applies under certain market conditions).
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Convertible
Notes
- Continued
Conversions,
Exchanges and Other
During
the six months ended June 30, 2018, the Company and certain lenders exchanged certain convertible notes with bifurcated ECOs with
an aggregate principal balance of $322,478 and aggregate accrued interest of $25,988 for an aggregate of 216,088 shares of the
Company’s common stock at prices ranging from $1.02 to $2.38 per share. The common stock had an aggregate exchange date
value of $484,335 and, as a result, the Company recorded a loss on extinguishment of notes payable of $28,036. As a result of
the exchanges, an aggregate of $114,407 and $6,574 of the related ECOs and debt discounts were extinguished, respectively. See
Note 8 – Derivative Liabilities for additional details.
During
the six months ended June 30, 2018, the Company elected to convert certain convertible notes with an aggregate principal balance
of $50,000 and aggregate accrued interest of $2,904 into an aggregate of 27,108 shares of the Company’s common stock at
conversion prices ranging from $1.90 to $2.02 per share.
During
the six months ended June 30, 2018, the Company repaid an aggregate principal amount of $119,425 of convertible notes payable
and $9,355 of the respective aggregate accrued interest.
During
the six months ended June 30, 2018, the Company and certain lenders agreed to multiple extensions of the maturity dates of notes
payable with an aggregate principal balance of $495,618 from maturity dates ranging between December 2017 to June 2018 to new
maturity dates ranging from April 2018 to July 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 term of the note. See below within this Note
5 – Notes Payable – Conversions, Exchanges and Other and Note – 8 Derivative Liabilities for additional details
regarding the ECOs of the convertible notes.
During
the six months ended June 30, 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 $1,233,410, which was recorded as a debt discount and
is being amortized over the terms of the respective convertible notes. See Note 8 – Derivative Liabilities for additional
details.
During
the six months ended June 30, 2018 and 2017, the contingently adjustable non-bifurcated, embedded conversion options associated
with certain convertible notes was resolved and such notes became convertible during the period. The Company estimated the intrinsic
value of the ECO based upon the difference between the fair value of the underlying common stock at the commitment date of the
note transaction and the adjusted conversion price embedded in the convertible note. During the six months ended June 30, 2018
and 2017, the Company recognized $21,518 and $407, respectively, related to the beneficial conversion feature as debt discount
which was immediately amortized.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Other
Notes
During
the six months ended June 30, 2018, the Company issued a lender a three-month note payable in the principal amount of $58,000,
which bears no interest, for cash proceeds of $50,000. The $8,000 difference was recorded as a debt discount and is being amortized
over the term of the note. In connection with the issuance of this promissory note, the Company issued the lender 1,500 shares
of the Company’s common stock. The issuance date fair value of the common stock of $2,852 was recorded as debt discount
and is being amortized over the term of the note.
During
the six months ended June 30, 2018, the Company and certain lenders agreed to exchange certain notes with an aggregate principal
balance of $121,000 and aggregate accrued interest of $505 for an aggregate of 104,838 shares of the Company’s common stock
at prices ranging from $1.00 to $1.50 per share. The common stock had an aggregate exchange date value of $157,257 and, as a result,
the Company recorded a loss on extinguishment of notes payable of $35,752.
During
the six months ended June 30, 2018, the Company and certain lenders agreed to extensions of the maturity dates of notes payable
with an aggregate principal balance of $1,180,747 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 25,000 shares of the Company’s common stock. The aggregate issuance date fair value of the common stock of $45,000 was
recorded as debt discount and is being amortized over the term of the respective notes. Additionally, in connection with a certain
extension, the Company increased the stated rate at which the note bears interest, from 0% to 8% per annum, effective June
2018.
Note
6 –
Commitments
and Contingencies
Consulting
Agreements
Business
Advisory Services
In
January 2018, a February 2011 agreement for business advisory services that had expired on December 31, 2017 was further amended.
Pursuant to the amendment, the agreement was reinstated effective as of January 1, 2018 and provides for an expiration date of
December 31, 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 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 unaudited condensed 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.
Operating
Lease
Rent
expense amounted to approximately $31,000 and $61,000 for the three and six months ended June 30, 2018, respectively. Rent expense
amounted to approximately $31,000 and $63,000 for the three and six months ended June 30, 2017, respectively.
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, 2018, none are expected to materially impact the Company’s financial position.
The
Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
6 – Commitments and Contingencies - Continued
Employment
Agreements
In
January 2018, the Company entered into an employment agreement with its new Senior Vice President of Planning and Business Development
(the “Senior VP”). Pursuant to the employment agreement, in the event that (a) the Senior VP’s employment is
terminated by the Company without “cause”, or (b) the Senior VP terminates his employment for “good reason”
(each as defined in the employment agreement), the Senior VP would be entitled to receive severance in an amount equal to three
months of his then annual base salary.
In
March 2018, the Company and its CEO agreed to an extension of the expiration date of his employment agreement from June 30, 2018
to December 31, 2019. In connection with the extension, the CEO is 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 CEO’s then annual base salary per
annum could be earned for such year pursuant to the satisfaction of such goals.
As
of June 30, 2018 and December 31, 2017, the Company accrued approximately $73,000 and $87,000, respectively, for 2016 bonus milestones
which were achieved but remain unpaid. In May 2018, the Company’s Compensation Committee and Board of Directors, respectively,
approved the new performance-based cash bonuses payable for the year ending December 31, 2018 for certain of the Company’s
officers and current employees, such that together with the CEO, an aggregate of up to $400,938 could be earned for 2018 pursuant
to the satisfaction of such goals. As of June 30, 2018, the Company accrued approximately $195,000 for 2018 bonus milestones which
were probable to be achieved.
Note
7 – Stockholders’ Deficiency
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, 2018 and 2017. 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 Offering
During
the six months ended June 30, 2018, the Company issued 10,000 shares of the Company’s common stock and five-year immediately
vested warrants to purchase 10,000 shares of the Company’s common stock at an exercise price of $3.50 per share to an investor
for gross proceeds of $25,000. The warrants had an issuance date fair value of $12,300.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Warrants
Warrant
Compensation
See
Note 6 - Commitments and Contingencies for additional details associated with the issuance of common stock and warrants in connection
with a consulting agreement extension.
The
Company recorded stock–based compensation expense of $0 and $48,192 for the three and six months ended June 30, 2018, respectively,
related to stock warrants issued as compensation, which is reflected as consulting expense in the unaudited condensed consolidated
statements of operations. For the three and six months ended June 30, 2017, the Company recorded stock–based compensation
expense of $30,440 and $71,203, respectively, related to stock warrants issued as compensation.
Warrant
Modifications and Exercises
During
the six months ended June 30, 2018, the Company issued an aggregate of 207,084 shares of the Company’s common stock pursuant
to the exercise of warrants for aggregate gross proceeds of $414,168. The shares were issued pursuant to a warrant repricing program
under which the exercise price for certain outstanding and exercisable warrants for the purchase of shares of common stock of
the Company was reduced to $2.00 per share (reduced from exercise prices ranging from $4.00 to $5.00 per share). The warrants
were exercised over a limited period of time. In connection with the share issuances, the Company issued to the purchasers of
such shares additional two-year warrants for the purchase of an aggregate of 51,771 shares of common stock of the Company at an
exercise price of $4.00 per share. The Company did not recognize a warrant modification charge as there was no incremental value
of the modified warrants and additional warrants issued as compared to the original warrants, both valued as of the respective
modification dates.
Warrant
Activity Summary
In
applying the Black-Scholes option pricing model to warrants granted or issued, the Company used the following assumptions:
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Risk
free interest rate
|
|
|
2.83
|
%
|
|
|
1.98%
- 2.22
|
%
|
|
|
1.92%
- 2.83
|
%
|
|
|
1.98%
- 2.33
|
%
|
Contractual
term (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
1.98
- 5.00
|
|
|
|
5.00
|
|
Expected
volatility
|
|
|
136
|
%
|
|
|
120
|
%
|
|
|
128%
- 136
|
%
|
|
|
120%
- 132
|
%
|
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, 2018 was approximately
$1.23 and $1.22 per share, respectively. 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.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Warrants
- Continued
Warrant
Activity Summary - Continued
A
summary of the warrant activity during the six months ended June 30, 2018 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In
Years
|
|
|
Value
|
|
Outstanding,
December 31, 2017
|
|
|
3,435,134
|
|
|
$
|
4.47
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
96,521
|
|
|
|
3.95
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(207,084
|
)
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(6,168
|
)
|
|
|
44.92
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2018
|
|
|
3,318,403
|
|
|
$
|
4.35
|
|
|
|
2.3
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
June 30, 2018
|
|
|
3,318,403
|
|
|
$
|
4.35
|
|
|
|
2.3
|
|
|
$
|
-
|
|
The
following table presents information related to stock warrants at June 30, 2018:
Warrants
Outstanding
|
|
Warrants
Exercisable
|
|
Exercise
|
|
Outstanding
Number
of
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Exercisable
Number
of
|
|
Price
|
|
Warrants
|
|
|
In
Years
|
|
|
Warrants
|
|
$3.00
- $3.99
|
|
|
10,000
|
|
|
|
4.9
|
|
|
|
10,000
|
|
$4.00
- $4.99
|
|
|
2,989,079
|
|
|
|
2.2
|
|
|
|
2,989,079
|
|
$5.00
- $5.99
|
|
|
195,989
|
|
|
|
3.0
|
|
|
|
195,989
|
|
$6.00
- $7.99
|
|
|
40,000
|
|
|
|
2.1
|
|
|
|
40,000
|
|
$8.00
- $9.99
|
|
|
2,500
|
|
|
|
1.4
|
|
|
|
2,500
|
|
$10.00
- $14.99
|
|
|
40,400
|
|
|
|
1.8
|
|
|
|
40,400
|
|
$15.00
- $19.99
|
|
|
35,435
|
|
|
|
1.2
|
|
|
|
35,435
|
|
$20.00
- $40.00
|
|
|
5,000
|
|
|
|
0.5
|
|
|
|
5,000
|
|
|
|
|
3,318,403
|
|
|
|
2.3
|
|
|
|
3,318,403
|
|
Stock
Options
In
applying the Black-Scholes option pricing model to stock options granted, the Company used the following assumptions:
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Risk
free interest rate
|
|
|
n/a
|
|
|
|
1.77
|
%
|
|
|
2.44%
- 2.45
|
%
|
|
|
1.77
|
%
|
Expected
term (years)
|
|
|
n/a
|
|
|
|
5.50
|
|
|
|
5.47
- 9.69
|
|
|
|
5.50
|
|
Expected
volatility
|
|
|
n/a
|
|
|
|
120
|
%
|
|
|
129
|
%
|
|
|
120
|
%
|
Expected
dividends
|
|
|
n/a
|
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Options
– Continued
The
weighted average estimated fair value of the stock options granted during the six months ended June 30, 2018 was approximately
$2.99 per share. There were no options granted during the three months ended June 30, 2018. The weighted average estimated fair
value of the stock options granted during the three and six months ended June 30, 2017 was approximately $2.81 per share.
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 shares vest ratably over three years on the issuance date anniversaries.
The option had an aggregate grant date value of $33,700. During the three months ended March 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 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 shares vest based upon the achievement of a certain performance condition. As of
June 30, 2018, the achievement of such performance condition is deemed probable to occur and the aggregate grant date value of
the option of $1,491,300 is being amortized over the expected vesting period of the option.
A
summary of the option activity during the six months ended June 30, 2018 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number
of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
In
Years
|
|
|
Value
|
|
Outstanding,
December 31, 2017
|
|
|
3,122,202
|
|
|
$
|
4.25
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
510,000
|
|
|
|
3.40
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(17,083
|
)
|
|
|
3.43
|
|
|
|
|
|
|
|
|
|
Outstanding,
June 30, 2018
|
|
|
3,615,119
|
|
|
$
|
4.13
|
|
|
|
7.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable,
June 30, 2018
|
|
|
2,460,461
|
|
|
$
|
4.47
|
|
|
|
7.0
|
|
|
$
|
-
|
|
The
following table presents information related to stock options at June 30, 2018:
Options
Outstanding
|
|
Options
Exercisable
|
|
Exercise
|
|
Outstanding
Number
of
|
|
|
Weighted
Average
Remaining
Life
|
|
|
Exercisable
Number
of
|
|
Price
|
|
Options
|
|
|
In
Years
|
|
|
Options
|
|
$2.00
- $2.99
|
|
|
193,500
|
|
|
|
-
|
|
|
|
-
|
|
$3.00
- $3.99
|
|
|
2,153,667
|
|
|
|
8.2
|
|
|
|
1,291,173
|
|
$4.00
- $4.99
|
|
|
1,190,452
|
|
|
|
5.7
|
|
|
|
1,091,788
|
|
$5.00
- $5.99
|
|
|
5,000
|
|
|
|
6.0
|
|
|
|
5,000
|
|
$6.00
- $19.99
|
|
|
37,500
|
|
|
|
5.5
|
|
|
|
37,500
|
|
$20.00
- $30.00
|
|
|
35,000
|
|
|
|
3.7
|
|
|
|
35,000
|
|
|
|
|
3,615,119
|
|
|
|
7.0
|
|
|
|
2,460,461
|
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Options
- Continued
The
following table presents information related to stock option expense:
|
|
For
the Three
Months
Ended
|
|
|
For
the Six
Months
Ended
|
|
|
Unrecognized
at
|
|
|
Weighted
Average
Remaining
Amortization
|
|
|
|
June
30,
|
|
|
June
30,
|
|
|
June
30,
|
|
|
Period
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
(Years)
|
|
Consulting
|
|
$
|
241,590
|
|
|
$
|
714,545
|
|
|
$
|
505,817
|
|
|
$
|
983,159
|
|
|
$
|
564,242
|
|
|
|
0.9
|
|
Research
and development
|
|
|
68,593
|
|
|
|
106,507
|
|
|
|
144,438
|
|
|
|
364,923
|
|
|
|
345,267
|
|
|
|
1.7
|
|
General
and administrative
|
|
|
517,004
|
|
|
|
476,226
|
|
|
|
1,011,552
|
|
|
|
863,826
|
|
|
|
1,286,154
|
|
|
|
0.7
|
|
|
|
$
|
827,187
|
|
|
$
|
1,297,278
|
|
|
$
|
1,661,807
|
|
|
$
|
2,211,908
|
|
|
$
|
2,195,663
|
|
|
|
0.9
|
|
Note
8 – Derivative Liabilities
The
following table sets forth a summary of the changes in the fair value of Level 3 derivative liabilities that are measured at fair
value on a recurring basis:
Beginning
balance as of January 1, 2018
|
|
$
|
216,073
|
|
Issuance
of derivative liabilities
|
|
|
1,233,410
|
|
Extinguishment
of derivative liabilities
|
|
|
(114,407
|
)
|
Change
in fair value of derivative liabilities
|
|
|
(58,048
|
)
|
Ending
balance as of June 30, 2018
|
|
$
|
1,277,028
|
|
In
applying the Multinomial Lattice and Black-Scholes option pricing models to derivatives issued and outstanding during the six
months ended June 30, 2018, the Company used the following assumptions:
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
June
30,
|
|
|
June
30,
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
Risk
free interest rate
|
|
|
2.24%
- 2.73
|
%
|
|
|
n/a
|
|
|
|
1.22%
- 2.56
|
%
|
|
|
n/a
|
Expected
term (years)
|
|
|
0.26
- 4.41
|
|
|
|
n/a
|
|
|
|
0.26
- 4.91
|
|
|
|
n/a
|
Expected
volatility
|
|
|
100%
- 164
|
%
|
|
|
n/a
|
|
|
|
100%
- 164
|
%
|
|
|
n/a
|
Expected
dividends
|
|
|
0.00
|
%
|
|
|
n/a
|
|
|
|
0.00
|
%
|
|
|
n/a
|
During
the six months ended June 30, 2018, the Company recorded new derivative liabilities in the aggregate amount of $1,233,410 related
to the ECOs of certain convertible notes payable. See Note 5 – Notes Payable – Convertible Notes and Other Notes for
additional details.
During
the six months ended June 30, 2018, the Company extinguished an aggregate of $114,407 of derivative liabilities in connection
with repayments and exchanges of certain convertible notes payable into shares of the Company’s common stock. See Note 5
– Notes Payable – Convertible Notes and Other Notes for additional details.
On
June 30, 2018, the Company recomputed the fair value of ECOs recorded as derivative liabilities to be $1,233,842. The Company
recorded a loss on the change in fair value of these derivative liabilities of $126,835 for the three months ended June 30, 2018
and a gain on the change in fair value of these derivative liabilities of $21,219 for the six months ended June 30, 2018.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
8 – Derivative Liabilities - Continued
On
June 30, 2018, the Company recomputed the fair value of the derivative liabilities related to outstanding warrants to be $43,186.
These warrants are 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. The Company recorded a gain on the change in fair value of these derivative
liabilities of $20,063 and $36,829 during the three and six months ended June 30, 2018, respectively.
Note
9 – Subsequent Events
Common
Stock and Warrant Offerings
Subsequent
to June 30, 2018, the Company issued an aggregate of 60,000 shares of common stock of the Company and five-year immediately vested
warrants to purchase an aggregate of 60,000 shares of common stock of the Company at an exercise price of $3.50 per share to certain
investors for aggregate gross proceeds of $150,000. In connection with one of the investments, the Company agreed to reduce the
exercise price and extend the expiration date of a certain warrant held by the investor for the purchase of 10,000 shares of common
stock of the Company. The exercise price of the warrant was reduced from an exercise price of $5.00 per share to $4.00 per share
and the expiration date of the warrant was extended from an expiration date in May 2021 to a new expiration date in May 2023.
Notes
Payable
Subsequent
to June 30, 2018, the Company issued certain lenders convertible notes payable in the aggregate principal amount of $185,000 for
aggregate cash proceeds of $150,765. The difference of $34,235 was recorded as a cash debt discount and will be amortized over
the term of the respective notes. The convertible notes bear interest at rates ranging from 10% to 12% per annum payable at maturity
with maturity dates ranging from May 2019 to July 2019. The notes are convertible as follows: (i) $150,000 of aggregate principal
is convertible into shares of the Company’s common stock at the election of the respective holder at any time immediately
on or after the issue dates until the balances have been paid in full and (ii) $35,000 of principal is convertible
into shares of the Company’s common stock at the election of the holder after the 180th day following the respective issue
date until the balance has been paid in full. The conversion prices of the convertible notes are equal to (i) 58% of the fair
value of the Company’s stock, (ii) a fixed price of $2.00 per share for the first six months following the respective issue
date, thereafter, at a conversion price equal to the greater of (a) 58% of the fair value of the Company’s stock or (b)
$0.10 per share, until the respective note has been paid in full or (iii) the lower of (a) 58% of the fair value of the Company’s
stock or (b) $1.65 per share, depending on the note. In the event that the Company elects to prepay any of the respective notes
during the first ninety-day period following the issue date, the holder is entitled to receive a prepayment premium of 25% of
the sum of principal plus accrued interest. In the event that the Company elects to prepay any of the notes during the second
ninety-day period following the issue date, the holder is entitled to receive a prepayment premium ranging from 35% to 40% of
the sum of principal plus accrued interest, depending on the note. In the event the Company elects to prepay a certain note, the
respective holder is entitled to receive a prepayment premium of 50% of the sum of principal plus accrued interest after the 180
th
day the note is in effect. Of the aforementioned note issuances, a certain note may be redeemed for cash at the election
of the holder upon the consummation of a fundamental transaction as defined within the note.
Subsequent
to June 30, 2018, the Company issued a lender a three-month note payable in the principal amount of $70,000, which bears no interest,
for cash proceeds of $60,000. The difference of $10,000 was recorded as a cash debt discount and will be amortized over the term
of the note. In connection with the issuance of this promissory note, the Company issued the lender 5,000 shares of the Company’s
common stock. The issuance date fair value of the common stock will be recorded as debt discount and will be amortized over the
term of the note.
See
Consulting Agreements, hereunder, for details of a note issued in satisfaction of consulting services to be performed.
Subsequent
to June 30, 2018, certain lenders exchanged an aggregate principal amount of $423,288 and aggregate accrued interest of
$24,932 of certain convertible notes payable for an aggregate of 440,055 shares of the Company’s common stock
at prices ranging from $0.92 to $1.31 per share.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
9 – Subsequent Events – Continued
Notes
Payable
- Continued
Subsequent
to June 30, 2018, the Company and certain lenders agreed to extensions of the maturity dates of notes payable with an aggregate
principal balance of $908,113 from maturity dates ranging from October 2017 to July 2018 to new maturity dates ranging from August
2018 to January 2019. In connection with one of the extensions, the Company issued a certain lender 10,000 shares of the Company’s
common stock. The issuance date fair value of the common stock will be recorded as a debt discount and will be amortized over
the term of the respective note. Also in consideration of certain extensions, the Company paid the respective lenders aggregate
fees of $11,900 which will be recorded as interest expense.
Subsequent
to June 30, 2018, the Company paid $24,855 and $145 of principal and accrued interest, respectively, in partial payment of a certain
convertible note.
Consulting
Agreements
Subsequent
to June 30, 2018, the Company entered into a three-month consulting agreement. In consideration of the consulting services to
be performed, the Company issued a note in the principal amount of $90,000. The note matures in January 2019 and bears interest
at the rate of 10% per annum, payable at maturity. Pursuant to the note, the holder has the right, at any time after each of the
one month, two month and three month anniversaries of the issue date, at its election, to convert all or part of one-third of
the outstanding and earned principal and accrued interest into shares of common stock of the Company, at a price equal to the
greater of (a) $0.10 per share, or (b) the lesser of (i) $1.75 per share and (ii) 65% of the fair market value of the Company’s
common stock, as defined. The Company may prepay the note prior to the maturity date provided the principal is prepaid in full,
plus interest, plus a prepayment premium of 25% on the principal.
Subsequent
to June 30, 2018, the Company and a consultant agreed to further extend a previously expired consulting agreement from May 2018
to December 2018. In connection with the amendment, the Company issued to the consultant an immediately vested five-year warrant
for the purchase of 35,000 shares of the Company’s common stock at an exercise price of $4.00 per share.
Scientific
Advisory Services
Subsequent
to June 30, 2018, the Company entered into an agreement with a consultant to serve as a member of its Scientific Advisory Board
and provide advice and guidance in connection with scientific matters relating to the Company’s business. The agreement
will continue until terminated by either party for any reason upon ten days written notice. In connection with the agreement,
the Company issued the advisor a five-year option to purchase up to 25,000 shares of the Company’s common stock at an exercise
price of $1.70 per share. The shares vest as follows: (i) 12,500 shares vest immediately and (ii) 12,500 shares vest on the one-year
anniversary of the grant date. In addition, on each one-year anniversary of the grant date (as long as the consultant is engaged),
options for an additional 5,000 shares are to be granted to the 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. The
grant date value of the options will be amortized over the respective vesting periods.
Item
2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of the results of operations and financial condition of BioRestorative Therapies, Inc. (together
with its subsidiary, “BRT”) for the three and six months ended June 30, 2018 and 2017 should be read in conjunction
with our financial statements and the notes to those financial statements that are included elsewhere in this Quarterly Report
on Form 10-Q. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to
“us,” “we,” “our,” and similar terms refer to BRT. This Quarterly Report contains forward-looking
statements as that term is defined in the federal securities laws. The events described in forward-looking statements contained
in this Quarterly Report may not occur. Generally these statements relate to business plans or strategies, projected or anticipated
benefits or other consequences of our plans or strategies, projected or anticipated benefits from acquisitions to be made by us,
or projections involving anticipated revenues, earnings or other aspects of our operating results. The words “may,”
“will,” “expect,” “believe,” “anticipate,” “project,” “plan,”
“intend,” “estimate,” and “continue,” and their opposites and similar expressions, are intended
to identify forward-looking statements. We caution you that these statements are not guarantees of future performance or events
and are subject to a number of uncertainties, risks and other influences, many of which are beyond our control, which may influence
the accuracy of the statements and the projections upon which the statements are based. Factors that may affect our results include,
but are not limited to, the risks and uncertainties discussed in Item 7 (“Management’s Discussion and Analysis of
Financial Condition and Results of Operations – Factors That May Affect Future Results and Financial Condition”) of
our Annual Report on Form 10-K for the year ended December 31, 2017 filed with the Securities and Exchange Commission (the “SEC”)
on April 2, 2018.
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, BRTX, 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
.
In January 2017 we announced that we had submitted an IND application to the FDA to obtain authorization to commence a Phase 2
clinical trial using our lead cell therapy candidate,
BRTX-100
, to investigate the use of the candidate in treating chronic
lower back pain due to degenerative disc disease related to painful lumbosacral disc disorders. In February 2017, we received
such authorization from the FDA. We intend to commence clinical trial related activities during the second quarter of 2019 (assuming
the receipt of necessary funding). We have obtained a license to use technology for adult stem cell treatment of disc and spine
conditions. 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, an Australian patent related to the ThermoStem Program was issued in August 2017, and a Japanese patent
related to the ThermoStem Program was issued in December 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 or other potential sites.
Our
offices are located in Melville, New York where we have established a laboratory facility in order to increase our capabilities
for the further development of possible cellular-based treatments, products and protocols, stem cell-related intellectual property
and translational research applications.
As
of June 30, 2018, our accumulated deficit was $57,426,536, our stockholders’ deficiency was $9,868,013 and our working capital
deficiency was $10,610,812. We have historically only generated a modest amount of revenue, and our losses have principally been
operating expenses incurred in research and development, marketing and promotional activities in order to commercialize our products
and services, plus costs associated with meeting the requirements of being a public company. We expect to continue to incur substantial
costs for these activities over at least the next year. These conditions indicate that there is substantial doubt about our ability
to continue as a going concern within one year after the financial statement issuance date.
Based
upon our working capital deficiency as of June 30, 2018, and our forecast for continued operating losses, we require equity and/or
debt financing to continue our operations. As of June 30, 2018, our outstanding debt of $5,158,216, with interest at rates ranging
between 0% and 15% per annum, was due on various dates through June 2019. Subsequent to June 30, 2018, we have received aggregate
equity financings and debt financings of $150,000 and $210,765, respectively, debt (inclusive of accrued interest) of $448,220
has been exchanged for common stock, $25,000 of debt (inclusive of accrued interest) has been repaid, and the due date for
the repayment of $908,113 of debt has been extended to dates between August 2018 and January 2019. Giving effect
to the above actions, we currently have notes payable in the aggregate principal amount of $1,232,295 which are past due.
Based upon our working capital deficiency and outstanding debt, we expect to be able to fund our operations through September
2018 while we continue to apply efforts to raise additional capital. We anticipate that we will require approximately $20,000,000
in financing to commence and complete a Phase 2 clinical trial with regard to our Disc/Spine Program. We anticipate that we will
require approximately $45,000,000 in further additional funding to complete our clinical trials using
BRTX-100
(assuming
the receipt of no revenues). We will also require a substantial amount of additional funding if we determine to establish a manufacturing
operation with regard to our Disc/Spine Program (as opposed to utilizing a third party manufacturer) and to implement our other
programs, including our metabolic ThermoStem Program. No assurance can be given that the anticipated amounts of required funding
are correct or that we will be able to accomplish our goals within the timeframes projected. In addition, no assurance can be
given that we will be able to obtain any required financing on commercially reasonable terms or otherwise.
We
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, 2018 Compared with Three Months Ended June 30, 2017
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the three months
ended June 30, 2018 and 2017, respectively:
|
|
For
The Three Months Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
37,000
|
|
|
$
|
20,000
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Marketing
and promotion
|
|
|
17,531
|
|
|
|
9,053
|
|
Consulting
|
|
|
417,954
|
|
|
|
875,309
|
|
Research
and development
|
|
|
372,815
|
|
|
|
610,725
|
|
General
and administrative
|
|
|
1,279,035
|
|
|
|
1,093,928
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
2,087,335
|
|
|
|
2,589,015
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(2,050,335
|
)
|
|
|
(2,569,015
|
)
|
|
|
|
|
|
|
|
|
|
Other
(Expense) Income
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(230,383
|
)
|
|
|
(95,403
|
)
|
Amortization
of debt discount
|
|
|
(1,081,982
|
)
|
|
|
(84,167
|
)
|
(Loss)
gain
on extinguishment of notes payable, net
|
|
|
(44,951
|
)
|
|
|
1,402
|
|
Change
in fair value of derivative liabilities
|
|
|
(106,772
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Total
Other Expense
|
|
|
(1,464,088
|
)
|
|
|
(178,168
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(3,514,423
|
)
|
|
$
|
(2,747,183
|
)
|
Revenues
For
the three months ended June 30, 2018 and 2017, we generated $37,000 and $20,000, respectively, of royalty revenue in connection
with our sublicense agreement.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the three months ended June 30, 2018, marketing and promotion expenses increased by $8,478, or 94%, from $9,053 to $17,531 as
compared to the three months ended June 30, 2017. The increase is primarily due to increased travel activity and associated costs.
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, 2018, consulting
expenses decreased $457,355, or 52%, from $875,309 to $417,954, as compared to the three months ended June 30, 2017. The decrease
is primarily due to approximately $500,000 of immediately vested stock-based compensation to consultants in the three months ended
June 30, 2017.
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 former President, Disc/Spine Division; 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, 2018, research and development expenses decreased by $237,910, or 39%, from $610,725 to $372,815, as compared to
the three months ended June 30, 2017. The decrease was primarily a result of a reduction in research and development staffing.
We
expect that our research and development expenses will increase with the continuation of the aforementioned initiatives.
General
and administrative
General
and administrative expenses consist primarily of salaries, bonuses, payroll taxes and stock-based compensation to employees (excluding
any cash or non-cash compensation of our research and development staff, but including corporate support expenses such as legal
and professional fees, investor relations and occupancy related expenses). For the three months ended June 30, 2018, general and
administrative expenses increased by $185,108, or 17%, from $1,093,928 to $1,279,035, as compared to the three months ended June
30, 2017. The increase is primarily due to the hire of our Senior VP.
We
expect that our general and administrative expenses will continue to 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, 2018, interest expense increased $134,980, or 141%, as compared to the three months ended June
30, 2017. The increase was due to an increase in interest-bearing short-term borrowings as compared to the three months ended
June 30, 2017.
Amortization
of debt discount
For
the three months ended June 30, 2018, amortization of debt discount increased $997,815, or 1186%, as compared to the three months
ended June 30, 2017. The increase was due to the recognition of approximately $731,000 of debt discount amortization related to
bifurcated ECOs of notes that matured during the three months ended June 30, 2018 and approximately $267,000 due to the timing
of the recognition of cash and other original issue discount expense.
(Loss)
gain on extinguishment of notes payable, net
For
the three months ended June 30, 2018, we recorded a loss on extinguishment of notes payable, net, of $44,951, which is associated
with investors’ exchanges of debt into equity securities, as compared to a gain on extinguishment of notes payable of $1,402
for the three months ended June 30, 2017.
Change
in fair value of derivative liabilities
For
the three months ended June 30, 2018, we recorded a net loss related to the change in fair value of derivative liabilities of
$106,772. There were no embedded conversion options or warrants that were classified as derivative liabilities during the three
months ended June 30, 2017.
Six
months Ended June 30, 2018 Compared with Six months Ended June 30, 2017
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the six months ended
June 30, 2018 and 2017, respectively:
|
|
For
The Six Months Ended
|
|
|
|
June
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
56,000
|
|
|
$
|
27,000
|
|
|
|
|
|
|
|
|
|
|
Operating
Expenses
|
|
|
|
|
|
|
|
|
Marketing
and promotion
|
|
|
58,554
|
|
|
|
38,123
|
|
Consulting
|
|
|
850,884
|
|
|
|
1,339,444
|
|
Research
and development
|
|
|
779,945
|
|
|
|
1,416,578
|
|
General
and administrative
|
|
|
2,647,690
|
|
|
|
2,291,241
|
|
|
|
|
|
|
|
|
|
|
Total
Operating Expenses
|
|
|
4,337,073
|
|
|
|
5,085,386
|
|
|
|
|
|
|
|
|
|
|
Loss
From Operations
|
|
|
(4,281,073
|
)
|
|
|
(5,058,386
|
)
|
|
|
|
|
|
|
|
|
|
Other
(Expense) Income
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(391,642
|
)
|
|
|
(193,204
|
)
|
Amortization
of debt discount
|
|
|
(1,343,628
|
)
|
|
|
(216,909
|
)
|
Loss
on extinguishment of notes payable, net
|
|
|
(63,788
|
)
|
|
|
(59,938
|
)
|
Change
in fair value of derivative liabilities
|
|
|
58,048
|
|
|
|
-
|
|
Warrant
modification expense
|
|
|
-
|
|
|
|
(4,500
|
)
|
|
|
|
|
|
|
|
|
|
Total
Other Expense
|
|
|
(1,741,010
|
)
|
|
|
(474,551
|
)
|
|
|
|
|
|
|
|
|
|
Net
Loss
|
|
$
|
(6,022,083
|
)
|
|
$
|
(5,532,937
|
)
|
Revenues
For
the six months ended June 30, 2018 and 2017, we generated $56,000 and $27,000, respectively, of royalty revenue in connection
with our sublicense agreement.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the six months ended June 30, 2018, marketing and promotion expenses increased by $20,431, or 54%, from $38,123 to $58,554 as
compared to the six months ended June 30, 2017. The increase is primarily due to increased travel activity and associated costs.
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, 2018, consulting
expenses decreased $488,560, or 36%, from $1,339,444 to $850,884, as compared to the six months ended June 30, 2017. The decrease
is primarily due to approximately $500,000 of immediately vested stock-based compensation to consultants and approximately $40,000
of cash consulting fees in the six months ended June 30, 2017.
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 former President, Disc/Spine Division; 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, 2018, research and development expenses decreased by $636,633, or 45%, from $1,416,578 to $779,945, as compared
to the six months ended June 30, 2017. The decrease was primarily a result of a reduction in research and development staffing
and a decrease of approximately $98,000 stock-based compensation expense related to a 2017 repricing of options held by employees
for which there was no equal in 2018.
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 and stock-based compensation to employees (excluding
any cash or non-cash compensation of our research and development staff, but including corporate support expenses such as legal
and professional fees, investor relations and occupancy related expenses. For the six months ended June 30, 2018, general and
administrative expenses increased by $356,449, or 16%, from $2,291,241 to $2,647,690, as compared to the six months ended June
30, 2017. The increase is primarily due to the hire of our Senior VP, partially offset by $187,000 of stock-based compensation
expense in connection with the repricing of granted options to employees in 2017.
We
expect that our general and administrative expenses will continue to 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, 2018, interest expense increased $198,438, or 103%, as compared to the six months ended June 30,
2017. The increase was due to an increase in interest-bearing short-term borrowings as compared to the six months ended June 30,
2017.
Amortization
of debt discount
For
the six months ended June 30, 2018, amortization of debt discount increased $1,126,719, or 519%, as compared to the six months
ended June 30, 2017. The increase was due to the recognition of approximately $731,000 of debt discount amortization related to
bifurcated ECOs of convertible notes that matured during the six months ended June 30, 2018 and approximately $397,000 due
to the timing of the recognition of cash and other original issue discount expense.
Loss
on extinguishment of notes payable, net
For
the six months ended June 30, 2018, we recorded a loss on extinguishment of notes payable, net, of $63,788, which is associated
with investors’ exchanges of debt into equity securities, as compared to a loss on extinguishment of notes payable of $59,938
for the six months ended June 30, 2017.
Change
in fair value of derivative liabilities
For
the six months ended June 30, 2018, we recorded a net gain related to the change in fair value of derivative liabilities of $58,048.
There were no embedded conversion options or warrants that were classified as derivative liabilities during the six months ended
June 30, 2017.
Warrant
modification expense
During
the six months ended June 30, 2018 and 2017, we recorded expense related to the modification of the exercise prices of certain
outstanding warrants of $0 and $4,500, respectively.
Liquidity
and Capital Resources
Liquidity
We
measure our liquidity in a number of ways, including the following:
|
|
June
30,
2018
|
|
|
December
31,
2017
|
|
Cash
|
|
$
|
3,529
|
|
|
$
|
451,680
|
|
|
|
|
|
|
|
|
|
|
Working
Capital Deficiency
|
|
$
|
(10,572,121
|
)
|
|
$
|
(7,833,592
|
)
|
|
|
|
|
|
|
|
|
|
Notes
Payable (Gross)
|
|
$
|
5,158,216
|
|
|
$
|
3,999,335
|
|
Availability
of Additional Funds
Based
upon our working capital deficiency and stockholders’ deficiency of $10,572,121 and $9,868,013, respectively, as
of June 30, 2018, we require additional equity and/or debt financing to continue our operations. These conditions raise substantial
doubt about our ability to continue as a going concern within the next twelve months from the date of this filing.
As
of June 30, 2018, our outstanding debt of $5,158,216, together with interest at rates ranging between 0% and 15% per annum, was
due on various dates through June 2019. Subsequent to June 30, 2018, we have received aggregate equity financings and debt financings
of $150,000 and $210,765, respectively, debt (inclusive of accrued interest) of $448,220 has been exchanged for common
stock, $25,000 of debt (inclusive of accrued interest) has been repaid, and the due date for the repayment of $908,113
of debt has been extended to dates between August 2018 and January 2019. Giving effect to the above actions, we currently
have notes payable in the aggregate principal amount of $1,232,295 which are past due. As of the date of filing, our outstanding
debt was as follows:
Maturity
Date
|
|
Principal
Amount
|
|
Past
Due
|
|
$
|
1,232,295
|
|
QE
9/30/2018
|
|
|
179,763
|
|
QE
12/31/2018
|
|
|
1,962,514
|
|
QE
3/31/2019
|
|
|
92
0,500
|
|
QE
6/30/2019
|
|
|
610,000
|
|
QE
9/30/2019
|
|
|
150,000
|
|
|
|
$
|
5,055,072
|
|
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 2018. 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, 2018 and 2017, 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, 2018 and 2017 in the amounts of $2,198,577
and $1,984,928, respectively. The net cash used in operating activities for the six months ended June 30, 2018 was primarily due
to cash used to fund a net loss of $6,022,083, adjusted for non-cash expenses in the aggregate amount of $3,514,416, partially
offset by $309,090 of cash generated by changes in the levels of operating assets and liabilities, primarily as a result of increases
in accrued expenses, partially offset by a decrease in accounts payable. 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 $2,882,012 partially offset by $665,997 of cash generated by changes in the levels of operating assets
and liabilities, primarily as a result of increases in accounts payable and accrued expenses.
Net
Cash Used in Investing Activities
During
the six months ended June 30, 2018, net cash used in investing activities was $12,869, due to cash used for the purchase of office
and computer equipment. During the six months ended June 30, 2017, there was no net cash used in or provided by investing activities.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities during the six months ended June 30, 2018 and 2017 was $1,763,295 and $1,954,997, respectively.
During the six months ended June 30, 2018, $1,324,127 of net proceeds were from debt financings and $439,168 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, 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).
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, 2017 filed with the SEC
on April 2, 2018, except as follows:
We
have 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 our inability to demonstrate we have sufficient authorized 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 authorized but unissued shares, and all future instruments being classified as a derivative liability, with the exception of
instruments related to share-based compensation issued to employees or directors.
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.