Note
2 – Going Concern and Management’s Plans
As
of September 30, 2018, the Company had a working capital deficiency and a stockholders’ deficiency of $8,741,382
and $8,938,147 respectively. During the three and nine months ended September 30, 2018, the Company incurred net losses of $2,925,261
and $8,947,344, 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 September 30, 2018, the Company has received aggregate debt financings of $1,138,980, debt (inclusive of accrued interest)
of $1,303,023 has been exchanged for common stock, and $191,391 of debt (inclusive of accrued interest and prepayment premiums)
has been repaid. As a result, the Company expects to have the cash required to fund its operations through December 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 a note payable with a principal
balance of $7,500 which is past due.
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 nine months ended September
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 nine months ended September 30, 2018, the Company recognized $26,000 and $82,000, respectively,
of revenue related to the Company’s sublicenses. During the three and nine months ended September 30, 2017, the Company
recognized $16,000 and $43,000, 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:
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
Options
|
|
|
3,588,451
|
|
|
|
3,275,700
|
|
Warrants
|
|
|
3,413,403
|
|
|
|
3,644,956
|
|
Convertible notes
|
|
|
2,986,487
|
[1]
|
|
|
509,542
|
|
Total potentially dilutive shares
|
|
|
9,988,341
|
|
|
|
7,430,198
|
|
|
[1]
|
As
of September 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 24,710,731 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
embedded conversion options (“ECOs”) and any related freestanding instruments at their fair values as of the inception
date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating,
non-cash income or expense for each reporting period at each balance sheet date. Conversion options are recorded as a discount
to the host instrument and are amortized as 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 ECOs of convertible notes payable,
warrants and stock options that are classified as derivative liabilities on the unaudited condensed consolidated balance sheets.
The models include subjective input assumptions that can materially affect the fair value estimates. The expected volatility is
estimated based on the actual volatility during the most recent historical period of time equal to the weighted average life of
the instruments.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 2014, the Financial Accounting Standards Board (“FASB”) issued ASU 2014-09. ASU 2014-09 supersedes the revenue
recognition requirements in Accounting Standards Codification (“ASC”) Topic 605 - Revenue Recognition (“ASC
605”) and most industry-specific guidance throughout ASC 605. The FASB has issued numerous updates that provide clarification
on a number of specific issues as well as requiring additional disclosures. The core principle of ASU 2014-09 requires that an
entity recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration
to which the company expects to be entitled in exchange for those goods or services. ASU 2014-09 defines a five-step process to
achieve this core principle and, in doing so, it is possible more judgment and estimates may be required within the revenue recognition
process than required under existing U.S. GAAP including identifying performance obligations in the contract, estimating the amount
of variable consideration to include in the transaction price and allocating the transaction price to each separate performance
obligation. The guidance also requires enhanced disclosures regarding the nature, amount, timing and uncertainty of revenue and
cash flows arising from an entity’s contracts with customers. The guidance may be adopted through either retrospective application
to all periods presented in the financial statements (full retrospective approach) or through a cumulative effect adjustment to
retained earnings at the effective date (modified retrospective approach). The guidance was revised in July 2015 to be effective
for emerging growth companies for annual and interim periods beginning on or after December 15, 2018. The Company expects to adopt
ASU 2014-09 using a modified retrospective approach on January 1, 2019. The Company has completed an analysis and preliminarily
concluded that the adoption of ASU 2014-09 will not have an impact on the Company’s financial statements.
In
May 2017, the FASB issued 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.
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
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.
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 emerging growth companies for interim
and annual reporting periods beginning after December 15, 2019, 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.
In
July 2018, the FASB issued ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements,” (“ASU 2018-11”).
The amendments in ASU 2018-11 related to transition relief on comparative reporting at adoption affect all entities with lease
contracts that choose the additional transition method and separating components of a contract affect only lessors whose lease
contracts qualify for the practical expedient. The amendments in ASU 2018-11 are effective for emerging growth companies for fiscal
years beginning after December 15, 2019, and interim periods within those fiscal years. The Company is currently 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
August 2018, the FASB issued ASU No. 2018-13, “Fair Value Measurement (Topic 820): Disclosure Framework—Changes to
the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”). The amendments in ASU 2018-13 modify the disclosure
requirements associated with fair value measurements based on the concepts in the Concepts Statement, including the consideration
of costs and benefits. The amendments on changes in unrealized gains and losses, the range and weighted average of significant
unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty
should be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption.
All other amendments should be applied retrospectively to all periods presented upon their effective date. The amendments are
effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years.
Early adoption is permitted, including adoption in an interim period. The Company is currently evaluating ASU 2018-13 and its
impact on its condensed consolidated financial statements.
Note
4 – Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities are comprised of the following:
|
|
September 30, 2018
|
|
|
December 31, 2017
|
|
Accrued payroll and other accrued expenses
|
|
$
|
347,680
|
|
|
$
|
350,173
|
|
Accrued research and development expenses
|
|
|
626,175
|
|
|
|
636,175
|
|
Accrued general and administrative expenses
|
|
|
930,482
|
|
|
|
604,308
|
|
Accrued director compensation
|
|
|
432,500
|
|
|
|
282,500
|
|
Deferred rent
|
|
|
39,462
|
|
|
|
50,395
|
|
Total accrued expenses
|
|
|
2,376,299
|
|
|
|
1,923,551
|
|
Less: accrued expenses, current portion
|
|
|
2,376,299
|
|
|
|
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 nine months ended September 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
|
|
|
-
|
|
|
|
3,800,728
|
[2]
|
|
|
128,000
|
|
|
|
-
|
|
|
|
3,928,728
|
|
Exchanges for equity
|
|
|
(95,000
|
)
|
|
|
(1,600,676
|
)
|
|
|
(542,760
|
)
|
|
|
55,673
|
|
|
|
(2,182,763
|
)
|
Conversions to equity
|
|
|
-
|
|
|
|
(105,000
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
(105,000
|
)
|
Repayments
|
|
|
(30,000
|
)
|
|
|
(403,280
|
)
|
|
|
-
|
|
|
|
24,973
|
|
|
|
(408,307
|
)
|
Extinguishment of notes payable
|
|
|
-
|
|
|
|
(407,295
|
)[2]
|
|
|
-
|
|
|
|
-
|
|
|
|
(407,295
|
)
|
Recognition of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,456,892
|
)
|
|
|
(2,456,892
|
)
|
Accretion of interest expense
|
|
|
-
|
|
|
|
7,782
|
|
|
|
177,283
|
|
|
|
242,843
|
|
|
|
427,908
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,884,116
|
|
|
|
1,884,116
|
|
Outstanding, September 30, 2018
|
|
$
|
720,000
|
|
|
$
|
3,322,129
|
[1][3]
|
|
$
|
886,988
|
|
|
$
|
(586,772
|
)
|
|
$
|
4,342,345
|
|
|
[1]
|
As
of September 30, 2018 and December 31, 2017, a portion of convertible notes with an aggregate principal balance of $1,202,693
and $1,777,788, respectively, was currently convertible into shares of common stock at the election of the holder any time
until the balance has been paid in full. As of September 30, 2018 and December 31, 2017, a portion of convertible notes with
an aggregate principal balance of $0 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 that conversion right, the respective holder had the right
to accelerate the conversion of up to $0 and $196,666 of principal into shares of common stock at September 30, 2018 and December
31, 2017, respectively, at the same conversion price.
|
|
|
|
|
[2]
|
During
the nine months ended September 30, 2018, convertible notes in the aggregate principal amount of $407,295 were issued concurrently
with the extinguishment of certain convertible notes payable in the same aggregate principal amount. See below within Note
5 – Notes Payable – Conversions, Exchanges and Other for additional details.
|
|
|
|
|
[3]
|
As
of September 30, 2018, outstanding convertible notes in the aggregate principal amount of $80,000 were past maturity. See
Note 9 – Subsequent Events for details regarding the exchange of such aggregate principal amount. As of September
30, 2018, a portion of convertible notes with an aggregate principal balance of $2,119,436, which are not currently convertible,
will become convertible subsequent to September 30, 2018 into shares of the Company's common stock at the election of the
respective holder.
|
Related
Party Notes
As
of September 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 nine months ended September 30, 2018, the Company partially repaid certain related party notes in the aggregate principal
amount of $30,000.
During
the nine months ended September 30, 2018, the Company and certain related parties agreed to exchange certain notes with an aggregate
principal balance of $95,000 for an aggregate of 76,000 shares of the Company’s common stock at $1.25 per share. The common
stock had an aggregate exchange date value of $114,000 and, as a result, the Company recorded a loss on extinguishment of notes
payable of $19,000.
During
the nine months ended September 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 nine months ended September 30, 2018, the Company issued certain lenders and a consultant convertible notes payable in the
aggregate principal amount of $3,393,433 for aggregate cash proceeds of $2,952,213. The difference of $441,220 was recorded as
follows: (i) $309,285 was recorded as a debt discount and will be amortized over the terms of the respective notes and (ii) $131,935
was immediately recognized as consulting expense in the condensed consolidated financial statements. The convertible notes bear
interest at rates ranging between 6% to 12% per annum payable at maturity with original maturity dates ranging between June 2018
through September 2019. See Note 6 – Commitments and Contingencies for additional details regarding convertible notes issued
in connection with consulting services.
As
of September 30, 2018, convertible notes in the aggregate principal amount of $407,295 were issued concurrently with the extinguishment
of certain convertible notes payable in the same aggregate principal amount. See below within Note 5 – Notes Payable –
Conversions, Exchanges and Other for additional details.
The
above described convertible notes in the aggregate principal amount of $3,800,728 are convertible as follows: (i) $1,351,293 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) $2,262,500 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, (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, and (iv) $170,000 ($131,935 earned as of September 30, 2018) of aggregate principal and the respective interest is convertible
from time to time following the respective issue date at the holder’s election. See Note 6 – Commitments and Contingencies
for additional details regarding convertible notes issued in connection with consulting services.
During
the nine months ended September 30, 2018, convertible note issuances were comprised of (i) $675,000 of convertible notes that
were convertible at 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, (ii) $978,228 of convertible notes that were convertible at 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, (iii)
$350,000 of convertible notes that were convertible at a fixed conversion price of $2.15 per share and (iv) $1,797,500 of convertible
notes that were convertible at 58% of the fair value of the Company’s stock.
In
connection with the issuance of certain convertible notes, the Company issued the lenders an aggregate of 28,333 shares of the
Company’s common stock and the relative fair value of $42,827 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 ECOs of the convertible notes.
Of
the convertible notes issued during the nine months ended September 30, 2018, convertible notes in the aggregate principal amount
of $137,500 have mandatory prepayment terms at the option of the holder (“MPOs”). Convertible notes issued with MPOs
permit the respective holder to demand prepayment of the note, in cash, at a premium of 35% of the then outstanding principal
balance and accrued interest during the period between 150 days to 179 days following the respective issuance date.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Convertible
Notes
- Continued
Issuances
– Continued
Of
the convertible notes issued during the nine months ended September 30, 2018, convertible notes in the aggregate principal amount
of $2,811,500 have prepayment premiums. In the 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. In the event
that the Company prepays a certain note after the 180
th
day period following the issue date and prior to maturity,
the holder is entitled to receive a prepayment premium of 50% on the then outstanding principal balance including accrued interest.
Of
the convertible notes issued during the nine months ended September 30, 2018, convertible notes in the aggregate principal amount
of $1,756,500 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 September
30, 2018, notes with MFN provisions were convertible using MFN conversion terms equal to conversion prices ranging between 58%-65%
of the fair market value of the Company’s stock, as defined.
Conversions,
Exchanges and Other
During
the nine months ended September 30, 2018, the Company and certain lenders exchanged certain convertible notes with bifurcated
ECOs with an aggregate principal balance of $1,600,676 and aggregate accrued interest of $100,503 for an aggregate of 1,579,032
shares of the Company’s common stock at prices ranging from $0.83 to $2.38 per share. The common stock had an aggregate
exchange date value of $3,548,942 and, as a result, the Company recorded a loss on extinguishment of notes payable of $77,132.
As a result of the exchanges, an aggregate of $1,826,304 and $55,673 of the related ECOs and debt discounts were extinguished,
respectively. See Note 8 – Derivative Liabilities for additional details.
During
the nine months ended September 30, 2018, the Company elected to convert certain convertible notes with an aggregate principal
balance of $105,000 and aggregate accrued interest of $5,637 into an aggregate of 97,424 shares of the Company’s common
stock at conversion prices ranging from $0.82 to $2.02 per share.
During
the nine months ended September 30, 2018, the Company repaid an aggregate principal amount of $403,280 of convertible notes payable,
$21,625 of the respective aggregate accrued interest and an aggregate of $81,709 of prepayment premiums. As a result of the repayments,
the Company recorded a loss on extinguishment of notes payable of $106,682 and an aggregate of $24,973 of the related debt discounts
were extinguished.
During
the nine months ended September 30, 2018, the Company and certain lenders agreed to multiple extensions of the maturity dates
of notes payable with an aggregate principal balance of $681,445 from maturity dates ranging between December 2017 to July 2018
to new maturity dates ranging from April 2018 to September 2018. In consideration of the extensions, the Company issued a lender
4,500 shares of the Company’s common stock. The issuance date fair value of the common stock of $9,000 was recorded as debt
discount and is being amortized over the 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.
As of September 30, 2018, there were $80,000 of convertible notes payable past due.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Convertible
Notes
- Continued
Conversions,
Exchanges and Other – Continued
During
the nine months ended September 30, 2018, a lender to the Company acquired three convertible promissory notes issued by the Company
in the aggregate outstanding amount of $407,295 (inclusive of accrued interest of $7,782) from a different lender to the Company.
The Company exchanged the acquired notes for new convertible notes in the aggregate principal amount of $407,295 which accrue
interest at a rate of 8% per annum, payable on the maturity date of August 30, 2019. Additionally, the conversion terms of the
acquired notes were modified such that the new notes are convertible, at the option of holder, into shares of common stock of
the Company at a conversion price equal to the greater of (a) 65% (previously 80%) of fair value of the Company’s common
stock or (b) $0.10 per share (previously $1.00 per share). The ECOs of the notes were subject to sequencing and their issuance
date fair value of $260,377 was accounted for as a derivative liability (See Note 8 – Derivative Liabilities for additional
details). Since the fair value of the new ECO exceeded 10% of the principal amount of the new notes, the note exchanges were accounted
for as extinguishments, and accordingly the Company recognized a net loss on extinguishment of $58,942 in connection with the
derecognition of the net carrying amount of $608,730 of the extinguished debt ($407,295 of aggregate principal and interest and
the derivative liability carrying value of their ECOs of an aggregate of $201,435) and the issuance of the new convertible notes
in the aggregate principal amount $407,295 plus the fair value of the new notes’ ECOs of an aggregate of $260,377.
During
the nine months ended September 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 $2,199,136, of which $1,938,759 was recorded
as a debt discount and is being amortized over the terms of the respective convertible notes and $260,377 was recognized as part
of an extinguishment loss as described above. See Note 8 – Derivative Liabilities for additional details.
During
the nine months ended September 30, 2018 and 2017, the contingently adjustable non-bifurcated, beneficial conversion features
associated with certain convertible notes were resolved and such notes became convertible during the period. The Company estimated
the intrinsic value of the beneficial conversion features 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 nine months ended September 30, 2018 and 2017, the Company recognized $69,394 and $10,596, respectively, related to the beneficial
conversion feature as debt discount which was immediately amortized.
Other
Notes
During
the nine months ended September 30, 2018, the Company issued a lender three-month notes payable in the aggregate principal amount
of $128,000, which bear no interest, for aggregate cash proceeds of $110,000. The $18,000 difference was recorded as debt discount
and is being amortized over the terms of the respective notes. In connection with the issuances of the promissory notes, the Company
issued the lender an aggregate of 6,500 shares of the Company’s common stock. The issuance date fair value of the common
stock of $9,627 was recorded as debt discount and is being amortized over the terms of the respective notes.
During
the nine months ended September 30, 2018, the Company and certain lenders agreed to exchange certain notes with an aggregate principal
balance of $542,760 and aggregate accrued interest of $12,064 for an aggregate of 451,493 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 $677,239 and,
as a result, the Company recorded a loss on extinguishment of notes payable of $122,415.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Other
Notes
- Continued
During
the nine months ended September 30, 2018, the Company and certain lenders agreed to multiple extensions of the maturity dates
of notes payable with an aggregate principal balance of $1,309,747 from maturity dates ranging between December 2017 to October
2018 to new maturity dates ranging from March 2018 to January 2019. In consideration of the extensions, the Company issued certain
lenders an aggregate of 35,000 shares of the Company’s common stock. The aggregate issuance date fair value of the common
stock of $60,000 was recorded as debt discount and is being amortized over the terms 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. As of September 30, 2018, the only note that was past due was a convertible note and is referenced
within Note 5 – Notes Payable – Convertible Notes.
Note
6 –
Commitments
and Contingencies
Consulting
Agreements
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.
On
July 10, 2018, as further amended on August 22, 2018, the Company entered into consulting agreement with a consultant for services
through December 31, 2018. In consideration of the consulting services, the Company issued the consultant convertible notes in
the aggregate principal amount of $170,000 which will be earned and recognized ratably over their respective consulting agreement
term. As of September 30, 2018, the Company has recorded an aggregate $131,935 of marketing and promotion expense for services
rendered with a corresponding credit to notes payable. The notes mature at dates between January 2019 and February 2019 and bear
interest at the rate of 10% per annum, payable at maturity. Pursuant to the notes, the holder has the right, from time to time
following the respective issue date, at its election, to convert all or part of the outstanding and earned principal and accrued
interest into shares of common stock of the Company, at a price 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 notes prior to the maturity date provided the principal is prepaid in full, plus interest, plus a prepayment premium
of 25% on the principal.
In
July 2018, the Company and a consultant agreed to further extend a previously expired consulting agreement from May 2018 to December
2018. In consideration of the extension of the term of the consulting agreement, the Company issued to the consultant an immediately
vested five-year warrant for the purchase of 35,000 shares of common stock of the Company at an exercise price of $4.00 per share.
The aggregate grant date value of the warrant of $43,106 was recognized immediately as stock-based compensation expense which
is reflected as consulting expense in the unaudited condensed consolidated financial statements.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
6 – Commitments and Contingencies – Continued
Scientific
Advisory Services
In
July 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 options vest as follows: (i) 12,500 vest immediately and (ii) 12,500 vest on the one-year anniversary of the grant
date. The option was subject to the Company’s sequencing policy and, as a result, the grant date fair value of the option
of $35,400 was immediately recognized as stock based-compensation expense and recorded as a derivative liability. See Note 8 –
Derivative Liabilities for additional details. In addition, on each one-year anniversary of the agreement date (as long as the
consultant remains engaged), options to purchase 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.
Operating
Lease
Rent
expense amounted to approximately $31,000 and $92,000 for the three and nine months ended September 30, 2018, respectively. Rent
expense amounted to approximately $32,000 and $96,000 for the three and nine months ended September 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 September 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.
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 of the termination of the Senior VP’s
employment by the Company without “cause” or the resignation by the Senior VP 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. See Note 9 – Subsequent Events for details regarding the Senior VP’s resignation.
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 September 30, 2018 and December 31, 2017, the Company accrued approximately $68,000 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 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 September 30, 2018, the Company accrued approximately $178,000 for 2018 bonus
milestones which were probable to be achieved.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
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 nine months ended September 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 nine months ended September 30, 2018, the Company issued an aggregate of 70,000 shares of the Company’s common stock
and five-year immediately vested warrants to purchase an aggregate of 70,000 shares of the Company’s common stock at an
exercise price of $3.50 per share to certain investors for aggregate gross proceeds of $175,000. The warrants had an aggregate
issuance date fair value of $87,300, of which $75,000 was recorded as derivative liabilities in connection with the Company’s
sequencing policy. See Note 8 – Derivative Liabilities for additional details.
Compensatory
Common Stock Issuance
During
the three and nine months ended September 30, 2018, the Company issued 35,000 shares of immediately vested common stock valued
at $52,500 to a consultant for services rendered. During the three and nine months ended September 30, 2017, the Company issued
10,000 shares of immediately vested common stock valued at $20,000 to a consultant for services rendered.
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 consulting agreement extensions.
The
Company recorded stock–based compensation expense of $43,105 and $91,297 for the three and nine months ended September 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 nine months ended September 30, 2017, the Company recorded
stock–based compensation expense of $40,275 and $111,478, respectively, related to stock warrants issued as compensation.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Warrants
– Continued
Warrant
Modifications and Exercises
During
the nine months ended September 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.
During
the nine months ended September 30, 2018, the Company reduced the exercise price and extend the expiration date of a certain warrant
held by an 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. The Company recognized a warrant modification charge of $3,100, 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.
Warrant
Activity Summary
In
applying the Black-Scholes option pricing model to warrants granted or issued, the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Risk free interest rate
|
|
|
2.73% - 2.83
|
%
|
|
|
1.99% - 2.14
|
%
|
|
|
1.92% - 2.83
|
%
|
|
|
1.98% - 2.33
|
%
|
Contractual term (years)
|
|
|
5.00
|
|
|
|
5.00
|
|
|
|
1.98 - 5.00
|
|
|
|
5.00
|
|
Expected volatility
|
|
|
139
|
%
|
|
|
130
|
%
|
|
|
128% - 139
|
%
|
|
|
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 nine months ended September 30, 2018 was approximately
$1.24 and $1.23 per share, respectively. The weighted average estimated fair value of the warrants granted during the three and
nine months ended September 30, 2017 was approximately $1.54 and $1.60 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 nine months ended September 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
|
|
|
191,521
|
|
|
|
3.82
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(207,084
|
)
|
|
|
2.00
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(6,168
|
)
|
|
|
44.92
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2018
|
|
|
3,413,403
|
|
|
$
|
4.33
|
|
|
|
2.1
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2018
|
|
|
3,413,403
|
|
|
$
|
4.33
|
|
|
|
2.1
|
|
|
$
|
-
|
|
The
following table presents information related to stock warrants at September 30, 2018:
Warrants Outstanding
|
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Warrants
|
|
|
In Years
|
|
|
Warrants
|
|
$3.50 - $3.99
|
|
|
70,000
|
|
|
|
4.8
|
|
|
|
70,000
|
|
$4.00 - $4.99
|
|
|
3,024,079
|
|
|
|
2.0
|
|
|
|
3,024,079
|
|
$5.00 - $5.99
|
|
|
195,989
|
|
|
|
2.7
|
|
|
|
195,989
|
|
$6.00 - $7.99
|
|
|
40,000
|
|
|
|
1.8
|
|
|
|
40,000
|
|
$8.00 - $9.99
|
|
|
2,500
|
|
|
|
1.2
|
|
|
|
2,500
|
|
$10.00 - $14.99
|
|
|
40,400
|
|
|
|
1.5
|
|
|
|
40,400
|
|
$15.00 - $19.99
|
|
|
35,435
|
|
|
|
0.9
|
|
|
|
35,435
|
|
$20.00 - $40.00
|
|
|
5,000
|
|
|
|
0.2
|
|
|
|
5,000
|
|
|
|
|
3,413,403
|
|
|
|
2.1
|
|
|
|
3,413,403
|
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Options
In
applying the Black-Scholes option pricing model to stock options granted, the Company used the following assumptions:
|
|
For
the Three Months Ended
|
|
|
For
the Nine Months Ended
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Risk
free interest rate
|
|
|
2.74
|
%
|
|
|
1.78%
- 1.88
|
%
|
|
|
2.44%
- 2.74
|
%
|
|
|
1.77%
- 1.88
|
%
|
Expected
term (years)
|
|
|
5.01
|
|
|
|
6.00
|
|
|
|
5.00
- 9.69
|
|
|
|
5.50
- 6.00
|
|
Expected
volatility
|
|
|
139
|
%
|
|
|
130
|
%
|
|
|
129%
- 139
|
%
|
|
|
120%
- 130
|
%
|
Expected
dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
weighted average estimated fair value of the stock options granted during the three and nine months ended September 30, 2018 was
approximately $1.42 and $2.92 per share, respectively. The weighted average estimated fair value of the stock options granted
during the three and nine months ended September 30, 2017 was approximately $2.54 and $2.75 per share, respectively.
In
January 2018, the Company granted a ten-year option to a consultant of the Company to purchase 10,000 shares of the Company’s
common stock at an exercise price of $3.20 per share. The options 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 option grant provided for vesting based upon the achievement of a certain performance
condition. The grant date value of the option was $1,491,300, which is recognizable to the extent such milestone is deemed probable
to occur. See Note 9 – Subsequent Events for additional details regarding the Senior VP’s resignation.
See
Note 6 - Commitments and Contingencies for details associated with the issuance of a stock option in connection with the Company
entering into an agreement with a consultant to serve as a member of its Scientific Advisory Board.
A
summary of the option activity during the nine months ended September 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
|
|
|
535,000
|
|
|
|
3.32
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(68,751
|
)
|
|
|
4.01
|
|
|
|
|
|
|
|
|
|
Outstanding, September 30, 2018
|
|
|
3,588,451
|
|
|
$
|
4.12
|
|
|
|
7.5
|
|
|
$
|
1,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, September 30, 2018
|
|
|
2,590,627
|
|
|
$
|
4.43
|
|
|
|
6.9
|
|
|
$
|
625
|
|
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 options at September 30, 2018:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
$1.70 - $2.99
|
|
|
218,500
|
|
|
|
8.2
|
|
|
|
77,003
|
|
$3.00 - $3.99
|
|
|
2,127,000
|
|
|
|
8.1
|
|
|
|
1,278,673
|
|
$4.00 - $4.99
|
|
|
1,165,451
|
|
|
|
5.7
|
|
|
|
1,157,451
|
|
$5.00 - $5.99
|
|
|
5,000
|
|
|
|
5.7
|
|
|
|
5,000
|
|
$6.00 - $19.99
|
|
|
37,500
|
|
|
|
5.3
|
|
|
|
37,500
|
|
$20.00 - $30.00
|
|
|
35,000
|
|
|
|
3.5
|
|
|
|
35,000
|
|
|
|
|
3,588,451
|
|
|
|
6.9
|
|
|
|
2,590,627
|
|
The
following table presents information related to stock option expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
For
the
|
|
|
For
the
|
|
|
|
|
|
Remaining
|
|
|
|
Three
Months Ended
|
|
|
Nine
Months Ended
|
|
|
Unrecognized
at
|
|
|
Amortization
|
|
|
|
September
30,
|
|
|
September
30,
|
|
|
September
30,
|
|
|
Period
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
(Years)
|
|
Consulting
|
|
$
|
163,757
|
|
|
$
|
301,622
|
|
|
$
|
669,574
|
|
|
$
|
1,284,781
|
|
|
$
|
400,486
|
|
|
|
0.7
|
|
Research and development
|
|
|
98,148
|
|
|
|
157,960
|
|
|
|
242,586
|
|
|
|
522,883
|
|
|
|
289,070
|
|
|
|
1.5
|
|
General
and administrative
|
|
|
(488,463
|
)
|
|
|
281,785
|
|
|
|
523,089
|
|
|
|
1,145,611
|
|
|
|
1,812,016
|
|
|
|
0.4
|
|
|
|
$
|
(226,558
|
)
|
|
$
|
741,367
|
|
|
$
|
1,435,249
|
|
|
$
|
2,953,275
|
|
|
$
|
2,501,572
|
|
|
|
0.6
|
|
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
|
|
|
2,309,536
|
|
Extinguishment of derivative liabilities in connection with convertible note repayments, conversions and exchanges
|
|
|
(2,027,739
|
)
|
Change in fair value of derivative liabilities
|
|
|
557,274
|
|
Reclassification of derivative liabilities to equity
|
|
|
(105,187
|
)
|
Ending balance as of September 30, 2018
|
|
$
|
949,957
|
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
8 – Derivative Liabilities – Continued
In
applying the Multinomial Lattice and Black-Scholes option pricing models to derivatives issued and outstanding during the nine
months ended September 30, 2018, the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
For the Nine Months Ended
|
|
|
|
September 30,
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Risk free interest rate
|
|
|
1.93% - 2.94
|
%
|
|
|
1.30% - 1.34
|
%
|
|
|
1.22% - 2.94
|
%
|
|
|
1.30% - 1.34
|
%
|
Expected term (years)
|
|
|
0.25 - 5.00
|
|
|
|
0.75 - 0.91
|
|
|
|
0.25 - 5.00
|
|
|
|
0.75 - 0.91
|
|
Expected volatility
|
|
|
120% - 208
|
%
|
|
|
111% - 133
|
%
|
|
|
100% - 208
|
%
|
|
|
111% - 133
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
During
the nine months ended September 30, 2018, the Company recorded new derivative liabilities in the aggregate amount of $2,199,136,
$75,000 and $35,400 related to the ECOs of certain convertible notes payable, warrants and stock options effected by sequencing,
respectively. See Note 5 – Notes Payable – Convertible Notes and Other Notes for additional details. See Note 6 –
Commitments and Contingencies for a stock option issued and deemed to be a derivative liability. See Note 7 – Stockholders’
Deficiency for warrants issued and deemed to be derivative liabilities.
During
the nine months ended September 30, 2018, the Company extinguished an aggregate of $2,027,739 of derivative liabilities in connection
with repayments, conversions 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.
During
the nine months ended September 30, 2018, the Company reclassified an aggregate of $105,187 of derivative liabilities to equity
as a result of a change in the sequencing status.
On
September 30, 2018, the Company recomputed the fair value of ECOs recorded as derivative liabilities to be $760,821. The Company
recorded a loss on the change in fair value of these derivative liabilities of $579,772 and $558,552 for the three and nine months
ended September 30, 2018, respectively.
On
September 30, 2018, the Company recomputed the fair value of the derivative liabilities related to outstanding warrants to be
$152,017. These warrants are either redeemable for cash equal to the Black-Scholes value, as defined, at the election of the warrant
holder upon a fundamental transaction pursuant to the warrant terms or were issued subsequent to the commencement of sequencing.
The Company recorded a loss on the change in fair value of these derivative liabilities of $33,831 during the three months ended
September 30, 2018 and a gain on the change in fair value of these derivative liabilities of $2,997 during the nine months ended
September 30, 2018.
On
September 30, 2018, the Company recomputed the fair value of the derivative liabilities related to an outstanding consultant stock
option to be $37,119. The stock option was issued subsequent to the commencement of sequencing. The Company recorded a loss on
the change in fair value of these derivative liabilities of $1,719 during the three and nine months ended September 30, 2018.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
9 – Subsequent Events
Employment
Agreements
Former
Senior VP
In
October 2018, the Senior VP resigned from the Company (the “Former Senior VP”). The Former Senior VP is entitled to
any accrued unpaid salary and unused vacation days as well as any accrued unpaid bonus that may be payable to him through
his termination date pursuant to his employment agreement. Additionally, the Former Senior VP’s unvested option to purchase
500,000 shares was forfeited as of the termination date.
Executive
Vice President
In
October 2018, the Company entered into an employment agreement with its new Executive Vice President and Chief Strategy Officer
(the “Executive VP”). Pursuant to the employment agreement, in the event of the termination of the Executive VP’s
employment by the Company without cause or the resignation by the Executive VP for good reason (each as defined in the employment
agreement) the Executive VP would be entitled to receive severance in an amount equal to six months of his then annual base salary.
Additionally, in connection with the employment agreement, the Executive VP was granted a ten-year option to purchase up to 500,000
shares of the Company’s common stock at an exercise price of $1.42 per share. The option vests as follows: (i) 100,000 options
vested immediately, (ii) 150,000 options vest upon the earlier of (a) the achievement of a certain performance condition or (b)
the first anniversary of the issuance date, and (iii) 250,000 options vest on the second anniversary of the date of grant. The
grant date value of the option will be recognized over the respective expected vesting period.
Scientific
Advisory Services
In
October 2018, the Company entered into an agreement with a consultant to serve as Chairman of the Disc Committee of its Scientific
Advisory Board (the “Disc Committee Chairman”) and provide advice and guidance in connection with scientific matters
relating to the Company’s business. The agreement will continue until terminated by either party for any reason upon thirty
days written notice. In connection with the agreement, the Company issued the Disc Committee Chairman a ten-year option to purchase
up to 75,000 shares of the Company’s common stock at an exercise price of $1.80 per share. The option vests as follows:
(i) 25,000 vest immediately and (ii) 50,000 vest upon the achievement of certain performance conditions. The grant date value
of the option will be recognized over the respective expected vesting period.
Stock
Options
Subsequent
to September 30, 2018, the Company issued ten-year options to employees, directors and Scientific Advisory Board members of the
Company to purchase an aggregate of 995,000 shares of common stock of the Company at an exercise price of $1.23 per share. The
options vest as follows: (i) 216,667 options vested immediately, (ii) 331,671 options vest on the one-year anniversary of the
respective issuance date, (iii) 331,666 options vest on the two-year anniversary of the respective issuance date, and (iv) 114,996
options vest on the three-year anniversary of the respective issuance date. The grant date value of the options will be recognized
over the respective expected vesting period.
Stock
Warrants
Subsequent
to September 30, 2018, the Company issued to a consultant an immediately vested five-year warrant for the purchase of 75,000 shares
of common stock of the Company at an exercise price of $2.00 per share for services rendered. The aggregate grant date value of
the warrant will be recognized immediately as stock-based compensation expense.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
9 - Subsequent Events – Continued
Notes
Payable
Subsequent
to September 30, 2018, in consideration of consulting services to be performed, the Company issued the consultant a convertible
note in the principal amount of $90,000. The note matures in April 2019 and bears interest at the rate of 10% per annum, payable
at maturity. Pursuant to the note, the holder has the right, at its election, at certain times, to convert all or part of the
outstanding and earned principal and accrued interest into shares of common stock of the Company at a price generally equal to
the lesser of (i) $1.27 per share or (ii) 65% of the fair market value of the Company’s common stock. 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 September 30, 2018, in addition to the convertible note described above, the Company issued convertible promissory notes in
the aggregate principal amount of $1,230,000 for aggregate cash proceeds of $1,138,980. The convertible notes bear
interest at a rate of 12% per annum payable at maturity with original maturity dates ranging between April 2019 to October 2019.
The convertible notes are convertible as follows: (i) $880,000 of aggregate principal and the respective accrued interest is
convertible into shares of the Company's common stock at the election of the holder after the 180th day following the issue date
at a conversion price equal to 58% of the fair value of the Company's common stock and (ii) $350,000 of principal and the respective
accrued interest is convertible into shares of the Company’s common stock at the election of the holder at any time immediately
on or after the issue date until the balance has been paid in full at a conversion price equal to 58% of the fair value of the
Company's common stock. In connection with the issuances of certain convertible promissory notes in the aggregate principal
amount of $635,000, the Company issued to certain lenders an aggregate of 24,916 shares of common stock of the Company. The issuance
date fair value of the common stock will be recorded as a debt discount and will be amortized over the terms of the respective
notes. 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 up to 35%, depending on the note, of the then outstanding
principal balance 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 up to 40%, depending on the note, of the
then outstanding principal balance plus accrued interest. Of the aforementioned note issuances, a certain note in the principal
amount of $55,000 may be redeemed, 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.
Subsequent
to September 30, 2018, the Company and certain lenders agreed to exchange an aggregate principal amount of $1,211,422 and
aggregate accrued interest of $91,601 of certain convertible notes payable for an aggregate of 1,707,181 shares
of the Company’s common stock at prices ranging from $0.59 to $1.01 per share.
Subsequent
to September 30, 2018, the Company repaid an aggregate principal amount of $135,022 of convertible notes payable, $6,749 of the
respective aggregate accrued interest and an aggregate of $49,620 of prepayment premiums.
Item
2: Management’s Discussion and Analysis of Financial Condition and Results of Operations
The
following discussion and analysis of the results of operations and financial condition of BioRestorative Therapies, Inc. (together
with its subsidiary, “BRT”) for the three and nine months ended September 30, 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 September 30, 2018, our accumulated deficit was $60,351,797, our stockholders’ deficiency was $8,938,147 and our working
capital deficiency was $8,741,382. We have historically only generated a modest amount of revenue, and our losses have
principally been operating expenses incurred in research and development, marketing and promotional activities in order to commercialize
our products and services, plus costs associated with meeting the requirements of being a public company. We expect to continue
to incur substantial costs for these activities over at least the next year. These conditions indicate that there is substantial
doubt about our ability to continue as a going concern within one year after the financial statement issuance date.
Based
upon our working capital deficiency as of September 30, 2018, and our forecast for continued operating losses, we require equity
and/or debt financing to continue our operations. As of September 30, 2018, our outstanding debt of $4,929,117, with interest
at rates ranging between 0% and 15% per annum, was due on various dates through September 2019. Subsequent to September 30, 2018,
we have received aggregate debt financings of $1,138,980, debt (inclusive of accrued interest) of $1,303,023 has
been exchanged for common stock, and $191,391 of debt (inclusive of accrued interest and prepayment premiums) has been repaid.
Giving effect to the above actions, we currently have a note payable in the principal amount of $7,500 which is past due. Based
upon our working capital deficiency and outstanding debt, we expect to be able to fund our operations through December 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 September 30, 2018 Compared with Three Months Ended September 30, 2017
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the three months
ended September 30, 2018 and 2017, respectively:
|
|
For The Three Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
26,000
|
|
|
$
|
16,000
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Marketing and promotion
|
|
|
155,161
|
|
|
|
6,988
|
|
Consulting
|
|
|
417,601
|
|
|
|
523,917
|
|
Research and development
|
|
|
357,436
|
|
|
|
490,654
|
|
General and administrative
|
|
|
284,472
|
|
|
|
738,077
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
1,214,670
|
|
|
|
1,759,636
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(1,188,670
|
)
|
|
|
(1,743,636
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(257,298
|
)
|
|
|
(114,202
|
)
|
Amortization of debt discount
|
|
|
(540,488
|
)
|
|
|
(159,977
|
)
|
Loss on extinguishment of notes payable, net
|
|
|
(320,383
|
)
|
|
|
-
|
|
Change in fair value of derivative liabilities
|
|
|
(615,322
|
)
|
|
|
(15,311
|
)
|
Warrant modification expense
|
|
|
(3,100
|
)
|
|
|
(18,962
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(1,736,591
|
)
|
|
|
(308,452
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(2,925,261
|
)
|
|
$
|
(2,052,088
|
)
|
Revenues
For
the three months ended September 30, 2018 and 2017, we generated $26,000 and $16,000, respectively, of royalty revenue in connection
with our sublicense agreement.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the three months ended September 30, 2018, marketing and promotion expenses increased by $148,173, from $6,988 to $155,161 as
compared to the three months ended September 30, 2017. The increase is primarily due to the engagement of a marketing consultant
in 2018 for which there was no similar expense in 2017.
We
expect that marketing and promotion expenses will continue to increase in the future as we increase our marketing activities following
any full commercialization of our products and services.
Consulting
Consulting
expenses consist of consulting fees and stock-based compensation to consultants. For the three months ended September 30, 2018,
consulting expenses decreased by $106,316, or 20%, from $523,917 to $417,601, as compared to the three months ended September
30, 2017. The decrease is primarily due to a reduction of approximately $155,000 of stock-based compensation to consultants in
the three months ended September 30, 2018, partially offset by an increased use of consultants in connection with clinical trials
and strategic planning.
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 (in 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 September 30, 2018, research and development expenses decreased by $133,218, or 27%, from $490,654 to $357,436,
as compared to the three months ended September 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 September 30, 2018, general
and administrative expenses decreased by $453,605, or 61%, from $738,077 to $284,472, as compared to the three months ended September
30, 2017. The decrease is primarily related to a reduction of stock option amortization of approximately $770,000, partially offset
by $88,000 of salary expenses in connection with a new Senior VP, an increase of approximately $167,000 in professional fees related
to legal and financial services rendered and the initiatives associated with raising capital.
We
expect that our general and administrative expenses will increase as we expand our staff, develop our infrastructure and incur
additional costs to support the growth of our business.
Interest
expense
For
the three months ended September 30, 2018, interest expense increased $143,096 or 125%, as compared to the three months ended
September 30, 2017. The increase was due to an increase in interest-bearing short-term borrowings and the amortization of related
cash discounts as compared to the three months ended September 30, 2017.
Amortization
of debt discount
For
the three months ended September 30, 2018, amortization of debt discount increased $380,511, or 238%, as compared to the three
months ended September 30, 2017. The increase was due to the timing of the recognition of debt discount amortization related to
bifurcated embedded conversion options (“ECOs”) of notes and other original issue discount expenses during the three
months ended September 30, 2018.
Loss
on extinguishment of notes payable, net
For
the three months ended September 30, 2018, we recorded a loss on extinguishment of notes payable, net, of $320,383, which is associated
with debt repayments and investors’ exchanges of debt into equity securities. We did not record a gain or loss on extinguishment
of notes payable for the three months ended September 30, 2017.
Change
in fair value of derivative liabilities
For
the three months ended September 30, 2018, we recorded a net loss related to the change in fair value of derivative liabilities
of $615,322, as compared to a net loss of $15,311 for the three months ended September 30, 2017. The increase was primarily due
to increased convertible note issuances with ECOs that were bifurcated because they were deemed to be derivative liabilities (in
some cases, as a result of sequencing).
Warrant
modification expense
During
the three months ended September 30, 2018 and 2017, we recorded expense related to the modification of the expiration dates and
exercise prices of certain outstanding warrants of $3,100 and $18,962, respectively.
Nine
Months Ended September 30, 2018 Compared with Nine Months Ended September 30, 2017
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the nine months ended
September 30, 2018 and 2017, respectively:
|
|
For The Nine Months Ended
|
|
|
|
September 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
82,000
|
|
|
$
|
43,000
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Marketing and promotion
|
|
|
213,715
|
|
|
|
45,111
|
|
Consulting
|
|
|
1,268,485
|
|
|
|
1,863,361
|
|
Research and development
|
|
|
1,137,381
|
|
|
|
1,907,232
|
|
General and administrative
|
|
|
2,932,162
|
|
|
|
3,029,318
|
|
|
|
|
|
|
|
|
|
|
Total Operating Expenses
|
|
|
5,551,743
|
|
|
|
6,845,022
|
|
|
|
|
|
|
|
|
|
|
Loss From Operations
|
|
|
(5,469,743
|
)
|
|
|
(6,802,022
|
)
|
|
|
|
|
|
|
|
|
|
Other Expense
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(648,940
|
)
|
|
|
(307,406
|
)
|
Amortization of debt discount
|
|
|
(1,884,116
|
)
|
|
|
(376,886
|
)
|
Loss on extinguishment of notes payable, net
|
|
|
(384,171
|
)
|
|
|
(59,938
|
)
|
Change in fair value of derivative liabilities
|
|
|
(557,274
|
)
|
|
|
(15,311
|
)
|
Warrant modification expense
|
|
|
(3,100
|
)
|
|
|
(23,462
|
)
|
|
|
|
|
|
|
|
|
|
Total Other Expense
|
|
|
(3,477,601
|
)
|
|
|
(783,003
|
)
|
|
|
|
|
|
|
|
|
|
Net Loss
|
|
$
|
(8,947,344
|
)
|
|
$
|
(7,585,025
|
)
|
Revenues
For
the nine months ended September 30, 2018 and 2017, we generated $82,000 and $43,000, respectively, of royalty revenue in connection
with our sublicense agreement.
Marketing
and promotion
Marketing
and promotion expenses include advertising and promotion, marketing and seminars, meals, entertainment and travel expenses. For
the nine months ended September 30, 2018, marketing and promotion expenses increased by $168,604, or 374%, from $45,111 to $213,715
as compared to the nine months ended September 30, 2017. The increase is primarily due to the engagement of a marketing consultant
in 2018 for which there was no similar expense in 2017.
We
expect that marketing and promotion expenses will continue to increase in the future as we increase our marketing activities following
any full commercialization of our products and services.
Consulting
Consulting
expenses consist of consulting fees and stock-based compensation to consultants. For the nine months ended September 30, 2018,
consulting expenses decreased $594,876, or 32%, from $1,863,361 to $1,268,485, as compared to the nine months ended September
30, 2017. The decrease is primarily due to a reduction of approximately $645,000 of stock-based compensation to consultants in
the nine months ended September 30, 2018, partially offset by an increased use of consultants in connection with clinical trials
and strategic planning.
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 nine months
ended September 30, 2018, research and development expenses decreased by $769,851, or 40%, from $1,907,232 to $1,137,381, as compared
to the nine months ended September 30, 2017. The decrease was primarily a result of a reduction in research and development staffing
costs of approximately $474,000 and a decrease of approximately $280,000 of stock-based compensation expense.
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 nine months ended September 30, 2018, general
and administrative expenses decreased by $97,156, or 3%, from $3,029,318 to $2,932,162, as compared to the nine months ended September
30, 2017. The decrease is primarily related to a reduction of stock option amortization of approximately $622,000, partially offset
by $228,000 of salary expenses in connection with a new Senior VP, an increase of approximately $170,000 in professional fees
related to legal and financial services rendered and the initiatives associated with raising capital and approximately $104,000
related to our Chief Executive Officer’s bonuses in 2018.
We
expect that our general and administrative expenses will increase as we expand our staff, develop our infrastructure and incur
additional costs to support the growth of our business.
Interest
expense
For
the nine months ended September 30, 2018, interest expense increased $341,534, or 111%, as compared to the nine months ended September
30, 2017. The increase was due to an increase in interest-bearing short-term borrowings and the related cash discounts being amortized
as compared to the nine months ended September 30, 2017.
Amortization
of debt discount
For
the nine months ended September 30, 2018, amortization of debt discount increased $1,507,230, or 400%, as compared to the nine
months ended September 30, 2017. The increase was due to the timing of the recognition of debt discount amortization related to
bifurcated ECOs of notes and other original issue discount expenses during the nine months ended September 30, 2018.
Loss
on extinguishment of notes payable, net
For
the nine months ended September 30, 2018, we recorded a loss on extinguishment of notes payable, net, of $384,171, which is associated
with debt repayments and investors’ exchanges of debt into equity securities, as compared to a loss on extinguishment of
notes payable, net, of $59,938 for the nine months ended September 30, 2017.
Change
in fair value of derivative liabilities
For
the nine months ended September 30, 2018, we recorded a net loss related to the change in fair value of derivative liabilities
of $557,274, as compared to the recorded net loss related to the change in fair value of derivative liabilities of $15,311 during
the nine months ended September 30, 2017. The increase was primarily due to increased convertible note issuances with ECOs that
were bifurcated and deemed to be derivative liabilities (in some cases, as a result of sequencing).
Warrant
modification expense
During
the nine months ended September 30, 2018 and 2017, we recorded expense related to the modification of the expiration dates and
exercise prices of certain outstanding warrants of $3,100 and $23,462, respectively.
Liquidity
and Capital Resources
Liquidity
We
measure our liquidity in a number of ways, including the following:
|
|
September
30,
2018
|
|
|
December
31,
2017
|
|
Cash
|
|
$
|
105,374
|
|
|
$
|
451,680
|
|
|
|
|
|
|
|
|
|
|
Working
Capital Deficiency
|
|
$
|
(8,741,382
|
)
|
|
$
|
(7,833,592
|
)
|
|
|
|
|
|
|
|
|
|
Notes
Payable (Gross)
|
|
$
|
4,929,117
|
|
|
$
|
3,999,335
|
|
Availability
of Additional Funds
Based
upon our working capital deficiency and stockholders’ deficiency of $8,741,382 and $8,938,147, respectively, as of
September 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 September 30, 2018, our outstanding debt of $4,929,117, together with interest at rates ranging between 0% and 15% per annum,
was due on various dates through September 2019. Subsequent to September 30, 2018, we have received aggregate debt financings
of $1,138,980, debt (inclusive of accrued interest) of $1,303,023 has been exchanged for common stock, and $191,391
of debt (inclusive of accrued interest and prepayment premiums) has been repaid. Giving effect to the above actions, we currently
have a note payable in the principal amount of $7,500 which is past due. As of the date of filing, our outstanding debt was as
follows:
|
|
Principal
|
|
Maturity Date
|
|
Amount
|
|
Past Due
|
|
$
|
7,500
|
|
QE 12/31/2018
|
|
|
720,000
|
|
QE 3/31/2019
|
|
|
1,540,293
|
|
QE 6/30/2019
|
|
|
1,444,042
|
|
QE 9/30/2019
|
|
|
1,082,933
|
|
QE 12/31/2019
|
|
|
85,000
|
|
|
|
$
|
4,879,768
|
|
Based
upon our working capital deficiency, outstanding debt and forecast for continued operating losses we expect that the cash we currently
have available will fund our operations through December 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 nine months ended September 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 nine months ended September 30, 2018 and 2017 in the amounts
of $3,551,542 and $2,494,088, respectively. The net cash used in operating activities for the nine months ended September 30,
2018 was primarily due to cash used to fund a net loss of $8,947,344, adjusted for non-cash expenses in the aggregate amount of
$5,150,620, plus $245,182 of cash generated by changes in the levels of operating assets and liabilities, primarily as a result
of decreases in accrued interest, expenses and other current liabilities, partially offset by an increase in accounts payable.
The net cash used in operating activities for the nine months ended September 30, 2017 was primarily due to cash used to fund
a net loss of $7,585,025, adjusted for non-cash expenses in the aggregate amount of $3,989,867 plus $1,101,070 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 current liabilities.
Net
Cash Used in Investing Activities
During
the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2018 and 2017 was $3,218,105 and $2,463,000,
respectively.
During the nine months ended
September
30,
2018, $2,628,937 of net proceeds were from debt financings and $589,168 of proceeds were from equity financings (including proceeds
received in connection with the exercise of common stock purchase warrants). During the nine months ended September 30, 2017,
$1,264,000 of net proceeds were from debt financings and other borrowings and $1,199,000 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.
Recently
Issued Accounting Pronouncements
For
a description of our recently issued accounting pronouncements, see Note 3 – Summary of Significant Accounting Policies
in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
Off-Balance
Sheet Arrangements
We
have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital
resources that is material to investors.