NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE
1 – NATURE OF THE ORGANIZATION AND BUSINESS
Corporate
History
BioRestorative
Therapies, Inc. has one wholly-owned subsidiary, Stem Pearls, LLC (“Stem Pearls”). BioRestorative Therapies, Inc.
and its subsidiary are referred to collectively as “BRT” or the “Company”.
On
March 20, 2020 (the “Petition Date”), the Company filed a voluntary petition commencing a case (the “Chapter
11 Case”) under chapter 11 of title 11 of the U.S. Code in the United States Bankruptcy Court for the Eastern District of
New York (the “Bankruptcy Court”).
On
August 7, 2020 the Company and Auctus Fund, LLC (“Auctus”), the Company’s largest unsecured creditor and a stockholder
as of the Petition Date, filed an Amended Joint Plan of Reorganization (the “Plan”) and on October 30, 2020, the Bankruptcy
Court entered an order (the “Confirmation Order”) confirming the Plan, as amended. Amendments to the Plan are reflected
in the Confirmation Order. On November 16, 2020 (the “Effective Date”), the Plan became effective. See Note 10 –
Subsequent Events for additional information.
Nature
of the Business
BRT
develops therapeutic products and medical therapies using cell and tissue protocols, primarily involving adult stem cells. BRT’s
website is at www.biorestorative.com. BRT is currently developing a Disc/Spine Program referred to as “brtxDISC”.
Its lead cell therapy candidate, BRTX-100, is a product formulated from autologous (or a person’s own) cultured mesenchymal
stem cells collected from the patient’s bone marrow. The product is intended to be used for the non-surgical treatment of
painful lumbosacral disc disorders or as a complimentary therapeutic to a surgical procedure. BRT is also engaging in research
efforts with respect to a platform technology utilizing brown adipose (fat) for therapeutic purposes to treat type 2 diabetes,
obesity and other metabolic disorders and has labeled this initiative its ThermoStem Program. Further, BRT has licensed a patented
curved needle device that is a needle system designed to deliver cells and/or other therapeutic products or material to the spine
and discs or other potential sites.
Liquidity
The
accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue
as a going concern, which contemplates realization of assets and satisfying liabilities in the normal course of business. At June
30, 2020, the Company had an accumulated deficit of approximately $83,245,000 and working capital deficiency of approximately
$15,237,000, which includes liabilities subject to compromise. For the six months ended June 30, 2020, the Company had
a loss from operations of approximately $1,281,000 and negative cash flows from operations of approximately $869,000. The Company’s
operating activities consume the majority of its cash resources. The Company anticipates that it will continue to incur operating
losses as it executes its development plans for 2021, as well as other potential strategic and business development initiatives.
In addition, the Company has had and expects to have negative cash flows from operations, at least into the near future. The Company
has previously funded, and plans to continue funding, these losses primarily through current cash on hand received subsequent
to quarter end and additional infusions of cash from equity and debt financing.
The
Company believes the following has been able to mitigate the above factors with regards to its ability to continue as a going
concern: (i) as part of its Chapter 11 reorganization approximately $14,700,000 in outstanding debt and other liabilities were
exchanged for (a) shares of common stock, (b) new convertible notes or (c) new convertible notes and warrants to purchase shares
of common stock; (ii) the Company secured DIP financing during its Chapter 11 Case in the amount of $1,189,413, of which $713,000
was received prior to June 30, 2020, as well as an aggregate amount of $3,848,548 in debt financing from Auctus and others as
part of the Company’s Chapter 11 reorganization, to sustain operations; and (iii) pursuant to the plan of reorganization,
Auctus is required to loan to the Company, as needed and subject to the Company becoming current in its SEC reporting obligations,
an additional amount equal to $3,500,000, less the amount of Auctus’ DIP financing ($1,226,901, inclusive of accrued interest)
and its DIP costs. As a result of the above, the Company believes it has sufficient cash to fund operations for the twelve months
subsequent to the filing date. In addition, the Company is seeking further funding to commence and complete a Phase 2 clinical
study of the use of BRTX-100.
There
is no assurance that these funds will be sufficient to enable the Company to fully complete its development activities or attain
profitable operations. If the Company is unable to obtain such additional financing on a timely basis the Company may have to
curtail its development, marketing and promotional activities, which would have a material adverse effect on the Company’s
business, financial condition and results of operations, and ultimately the Company could be forced to discontinue its operations
and liquidate.
The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting principles
generally accepted in the United States of America (“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 unaudited condensed consolidated financial statements do not necessarily purport to represent
realizable or settlement values. The accompanying unaudited condensed consolidated financial statements do not include any adjustments
that might be necessary should the Company be unable to continue as a going concern.
NOTE
2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial information as of and for the three and six months ended June 30, 2020
and 2019 has been prepared in accordance with GAAP for interim financial information and with the instructions to Quarterly Report
on Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, such financial information includes all adjustments
(consisting only of normal recurring adjustments) considered necessary for a fair presentation of our financial position at such
dates and the operating results and cash flows for such periods. Operating results for the three months and six ended June 30,
2020 are not necessarily indicative of the results that may be expected for the entire year or for any other subsequent interim
period.
Certain
information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted
pursuant to the rules of the U.S. Securities and Exchange Commission (the “SEC”). These unaudited financial statements
and related notes should be read in conjunction with the Company’s audited financial statements for the year ended December
31, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on March 18, 2021.
Principles
of Consolidation
The
unaudited condensed consolidated financial statements include include the accounts of the Company and its wholly-owned subsidiary
Stem Pearls. Intercompany accounts and transactions have been eliminated upon consolidation.
Reclassifications
During
the six months ended June 30, 2020, the Company reclassified $2,580,110 related to the write-off of unamortizaed debt discount
on convertible notes to reorganization items on the unaudited condensed consolidated statements of operations. This amount was
previously recorded as interest expense in the Company’s Quarterly Report on Form 10-Q filed with the SEC on March 29, 2021.
This reclassification had no effect on net loss or cash flows as previously reported.
Chapter
11 Cases
Chapter
11 Accounting
The
unaudited condensed consolidated financial statements included herein have been prepared as if we were a going concern and in
accordance with Accounting Standards Codification (“ASC”) 852, Reorganizations.
Weak
industry conditions in 2019 negatively impacted the Company’s results of operations and cash flows and may continue to do
so in the future. In order to decrease the Company’s indebtedness and maintain the Company’s liquidity levels suifficient
to meet its commitments, the Company undertook a number of actions, including minimizing capital expendtiures and further reducing
its recurring operating expenses. The Company believed that even after taking these actions, it would not have sufficient liquidity
to satisfy its debt service obligations and meet its other financial obligations. On March 20, 2020 (the “Petition Date”),
the Company filed a voluntary petition commencing a case under chapter 11 of title 11 of the U.S. Code in the United States Bankruptcy
Court for the Eastern District of New York.
Reorganization
Items
The
Company incurred costs after the Petition Date associated with the reorganization, primarily unamortized debt discount and postpetition
professional fees. In accordance with applicable guidance, costs associated with the bankruptcy proceedings have been recorded
as reorganization items, net within the accompanying unaudited condensed consolidated statements of operations for the three and
six months ended June 30, 2020. Reorganization items, net for the three and six months ended June 30, 2020, were $3,361,416 and
$781,306, respectively, representing non-cash items and cash used in operating activities.
Reorganization
items, net for the three and six months ended June 30, 2020, consisted of the following:
|
|
Three Months Ended June 30, 2020
|
|
|
Six Months Ended June 30, 2020
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
(149,690
|
)
|
|
$
|
(149,690
|
)
|
Write-off of derivative liability
|
|
|
4,375,231
|
|
|
|
4,375,231
|
|
Default interest and penalties
|
|
|
(864,125
|
)
|
|
|
(864,125
|
)
|
Unamortized debt discount on convertible notes
|
|
|
-
|
|
|
|
(2,580,110
|
)
|
Total reorganization items, net
|
|
$
|
3,361,416
|
|
|
$
|
781,306
|
|
Liabilities
Subject To Compromise
Prepetition
unsecured and secured obligation that may be impacted by the Chapter 11 case have been classified as liabilities subject to compromise
on the Company’s unaudited condensed consolidated balance sheets. These liabilities are reported at the amounts allowed
as claims by the Bankruptcy Court.
Liabilities
subject to compromise as of June 30, 2020 were $14,700,000, which consisted of:
|
|
June 30, 2020
|
|
|
|
|
|
Accounts payable
|
|
$
|
2,125,473
|
|
Accrued expenses and other current liabilites
|
|
|
3,523,075
|
|
Unsecured notes payable
|
|
|
8,021,695
|
|
Accrued interest, default interest, default principal
|
|
|
1,029,757
|
|
Total liabilities subject to compromise
|
|
$
|
14,700,000
|
|
Use
of Estimates
The
preparation of the unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets, liabilities, equity-based transactions, revenue and expenses and disclosure
of contingent liabilities at the date of the unaudited condensed consolidated financial statements. The Company bases its estimates
and assumptions on historical experience, known or expected trends and various other assumptions that it believes to be reasonable.
As future events and their effects cannot be determined with precision, actual results could differ from these estimates which
may cause the Company’s future results to be affected.
The
Company believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation
of the accompanying unaudited condensed consolidated financial statements. Significant estimates include the carrying value of
intangible assets, deferred tax asset and valuation allowance, estimated fair value of derivative liabilities stemming from convertible
debt securities, and assumptions used in the Black-Scholes-Merton pricing model, such as expected volatility, risk-free interest
rate, and expected divided rate.
Revenue
The
Company derives all of its revenue pursuant to a license agreement between the Company and a stem cell treatment company (“SCTC”)
entered into in January 2012, as amended in November 2015. Pursuant to the license agreement, the SCTC granted to the Company
a license to use certain intellectual property related to, among other things, stem cell disc procedures and the Company has granted
to the SCTC a sublicense to use, and the right to sublicense to third parties the right to use, in certain locations in the United
States and the Cayman Islands, certain of the licensed intellectual property. In consideration of the sublicenses, the SCTC has
agreed to pay the Company royalties on a per disc procedure basis.
Practical
Expedients
As
part of ASC Topic 606, the Company has adopted several practical expedients including:
●
|
Significant
Financing Component – the Company does not adjust the promised amount of consideration for the effects of a significant
financing component since the Company expects, at contract inception, that the period between when the Company transfers a
promised good or service to the customer and when the customer pays for that good or service will be one year or less.
|
●
|
Unsatisfied
Performance Obligations – all performance obligations related to contracts with a duration for less than one year, the
Company has elected to apply the optional exemption provided in ASC Topic 606 and therefore, is not required to disclose the
aggregate amount of transaction price allocated to performance obligations that are unsatisfied or partially satisfied at
the end of the reporting period.
|
●
|
Right
to Invoice – the Company has a right to consideration from a customer in an amount that corresponds directly with the
value to the customer of the Company’s performance completed to date. The Company may recognize revenue in the amount
to which the entity has a right to invoice.
|
Contract
Modifications
There
were no contract modifications during the three and six months ended June 30, 2020. Contract modifications are not routine in
the performance of the Company’s contracts.
Cash
The
Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents.
There were no cash equivalents as of June 30, 2020 or December 31, 2019.
Accounts
Receivable
Accounts
receivable are reported at their outstanding unpaid principal balances, net of allowances for doubtful accounts. The Company periodically
assesses its accounts and other receivables for collectability on a specific identification basis. The Company provides for allowances
for doubtful receivables based on management’s estimate of uncollectible amounts considering age, collection history, and
any other factors considered appropriate. Payments are generally due within 30 days of invoice. The Company writes off accounts
receivable against the allowance for doubtful accounts when a balance is determined to be uncollectible. The Company did not record
an allowance for doubtful accounts as of June 30, 2020 and December 31, 2019, respectively.
Property
and Equipment
Property
and equipment are recorded at cost. Depreciation is computed using straight-line method over the estimated useful lives of the
related assets, generally three to fifteen years. Expenditures that enhance the useful lives of the assets are capitalized and
depreciated. Computer equipment costs are capitalized, as incurred, and depreciated on a straight-line basis over a range of 3
– 5 years.
Leasehold
improvements are amortized over the lesser of (i) the useful life of the asset, or (ii) the remaining lease term. Maintenance
and repairs are charged to expense as incurred. The Company capitalizes cost attributable to the betterment of property and equipment
when such betterment extends the useful life of the assets. At the time of retirement or other disposition of property and equipment,
the cost and accumulated depreciation will be removed from the accounts and the resulting gain or loss, if any, will be reflected
in operations.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, including finite-lived intangible assets, for impairment whenever events or changes in circumstances
indicate that the carrying amount of such assets may not be recoverable. Recoverability of these assets is determined by comparing
the forecasted undiscounted net cash flows of the operation to which the assets relate to the carrying amount. If the operation
is determined to be unable to recover the carrying amount of its assets, then these assets are written down first, followed by
other long-lived assets of the operation to fair value. Fair value is determined based on discounted cash flows or appraised values,
depending on the nature of the assets. During
the three and six months ended June 30, 2020 and 2019, the Company did not record a loss on impairment.
Intangible
Assets
The
Company records its intangible assets at cost in accordance with ASC 350, Intangibles – Goodwill and Other. Definite lived
intangible assets are amortized over their estimated useful life using the straight-line method, which is determined by identifying
the period over which the cash flows from the asset are expected to be generated.
Advertising
and Marketing Costs
The
Company expenses advertising and marketing costs as they are incurred. Advertising and marketing expenses were $28,131 and $124,686
for the six months ended June 30, 2020 and 2019, respectively. Advertising and marketing expenses were $6,123 and $108,849 for
the three months ended June 30, 2020 and 2019, respectively. The above advertising and marketing expenses are recorded in marketing
and promotion on the unaudited condensed consolidated statements of operations.
Fair
Value Measurements
As
defined in ASC 820, “Fair Value Measurements and Disclosures,” fair value is the price that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).
The Company utilizes market data or assumptions that market participants would use in pricing the asset or liability, including
assumptions about risk and the risks inherent in the inputs to the valuation technique. These inputs can be readily observable,
market corroborated, or generally unobservable. ASC 820 establishes a fair value hierarchy that prioritizes the inputs used to
measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (level 1 measurement) and the lowest priority to unobservable inputs (level 3 measurement). This fair value measurement
framework applies at both initial and subsequent measurement.
Level
1:
|
Quoted
prices are available in active markets for identical assets or liabilities as of the reporting date. Active markets are those
in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on
an ongoing basis. Level 1 primarily consists of financial instruments such as exchange-traded derivatives, marketable securities
and listed equities.
|
|
|
Level
2:
|
Pricing
inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reported date. Level 2 includes those financial instruments that are valued using models or other valuation methodologies.
These models are primarily industry-standard models that consider various assumptions, including quoted forward prices for
commodities, time value, volatility factors and current market and contractual prices for the underlying instruments, as well
as other relevant economic measures. Substantially all of these assumptions are observable in the marketplace throughout the
full term of the instrument, can be derived from observable data or are supported by observable levels at which transactions
are executed in the marketplace. Instruments in this category generally include non-exchange-traded derivatives such as commodity
swaps, interest rate swaps, options and collars.
|
|
|
Level
3:
|
Pricing
inputs include significant inputs that are generally less observable from objective sources. These inputs may be used with
internally developed methodologies that result in management’s best estimate of fair value.
|
See
Note 7 – Derivative Liabilities for additional details regarding the valuation technique and assumptions used in valuing
Level 3 inputs.
Net
Income (Loss) per Common Share
Net
loss per share is computed by dividing net loss by the weighted average number of shares of common stock outstanding during the
year. All vested outstanding options and warrants are considered potential common stock. The dilutive effect, if any, of stock
options and warrants are calculated using the treasury stock method. All outstanding convertible notes are considered common stock
at the beginning of the period or at the time of issuance, if later, pursuant to the if-converted method. Since the effect of
common stock equivalents is anti-dilutive with respect to losses, options and warrants have been excluded from the Company’s
computation of net loss per common share for the three months ended June 30, 2020 and the three and six months ended June 30,
2019. Since no outstanding options or warrants were deemed to be in the money outstanding options and warrants have been excluded
from the Company’s computation of net income per share for the three months ended June 30, 2020.
The
following tables summarize the securities that were excluded from the diluted per share calculation because the effect of including
these potential shares was antidilutive:
|
|
Three Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Options
|
|
|
4,867,617
|
|
|
|
4,739,535
|
|
Warrants
|
|
|
8,021,641
|
|
|
|
5,852,952
|
|
Convertible notes – common stock
|
|
|
-
|
|
|
|
21,525,021
|
(1)
|
Convertible notes - warrants
|
|
|
-
|
|
|
|
2,555,318
|
|
Total
|
|
|
12,889,258
|
|
|
|
34,672,826
|
|
|
|
Six Months Ended
|
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Options
|
|
|
4,867,617
|
|
|
|
4,739,535
|
|
Warrants
|
|
|
8,021,641
|
|
|
|
5,852,952
|
|
Convertible notes – common stock
|
|
|
-
|
|
|
|
21,525,021
|
(1)
|
Convertible notes - warrants
|
|
|
-
|
|
|
|
2,555,318
|
|
Total
|
|
|
12,889,258
|
|
|
|
34,672,826
|
|
(1)
As of June 30, 2019, many of the convertible notes had variable conversion prices and the shares issuable were estimated
based on the market conditions. Pursuant to the note agreements, there were 105,349,305 shares of common stock reserved for
future note conversions as of June 30, 2019, respectively.
Stock-based
Compensation
The
Company applies the provisions of ASC 718, Compensation—Stock Compensation (“ASC 718”), which requires the measurement
and recognition of compensation expense for all stock-based awards made to employees, including employee stock options, in the
statements of operations.
For
stock options issued to employees and members of the board of directors for their services, the Company estimates the grant date
fair value of each option using the Black-Scholes option pricing model. The use of the Black-Scholes option pricing model requires
management to make assumptions with respect to the expected term of the option, the expected volatility of the common stock consistent
with the expected life of the option, risk-free interest rates and expected dividend yields of the common stock. For awards subject
to service-based vesting conditions, including those with a graded vesting schedule, the Company recognizes stock-based compensation
expense equal to the grant date fair value of stock options on a straight-line basis over the requisite service period, which
is generally the vesting term. Forfeitures are recorded as they are incurred as opposed to being estimated at the time of grant
and revised.
Pursuant
to Accounting Standards Update (“ASU”) 2018-07 Compensation – Stock Compensation (Topic 718): Improvements to
Nonemployee Share-Based Payment Accounting, the Company accounts for stock options issued to non-employees for their services
in accordance ASC 718. The Company uses valuation methods and assumptions to value the stock options that are in line with the
process for valuing employee stock options noted above.
Since
the shares underlying the Company’s 2010 Equity Participation Plan (the “Plan”) are registered, the Company
estimates the fair value of the awards granted under the Plan based on the market value of its freely tradable common stock as
reported on the OTC Markets. On February 3, 2020, the Company was advised by OTC Markets Group that, based upon the closing bid
price of the Company’s common stock being less than $0.001 per share for five consecutive trading days, the Company’s
common stock was moved from the OTCQB Market to the Pink Market effective at market open on February 10, 2020. The fair value
of the Company’s restricted equity instruments was estimated by management based on observations of the cash sales prices
of both restricted shares and freely tradable shares. Awards granted to directors are treated on the same basis as awards granted
to employees. Upon the exercise of an option or warrant, the Company issues new shares of common stock out of its authorized shares.
Income
Taxes
Deferred
tax assets and liabilities are recognized for the future tax consequences attributable to differences between the unaudited condensed
consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred
tax assets, including tax loss and credit carry forwards, and liabilities are measured using enacted tax rates expected to apply
to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The
Company utilizes ASC 740, Income Taxes, which requires the recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been included in the unaudited condensed consolidated financial statements or tax
returns. The Company accounts for income taxes using the asset and liability method to compute the differences between the tax
basis of assets and liabilities and the related financial amounts, using currently enacted tax rates. A valuation allowance is
recorded when it is “more likely than not” that a deferred tax asset will not be realized. At June 30, 2020 and December
31, 2019, the Company’s net deferred tax asset has been fully reserved.
For
uncertain tax positions that meet a “more likely than not” threshold, the Company recognizes the benefit of uncertain
tax positions in the unaudited condensed consolidated financial statements. The Company’s practice is to recognize interest
and penalties, if any, related to uncertain tax positions in income tax expense in the unaudited condensed consolidated statements
of operations when a determination is made that such expense is likely.
Derivative
Financial Instruments
The
Company evaluates its convertible instruments to determine if those contracts or embedded components of those contracts qualify
as derivative financial instruments to be separately accounted for in accordance with Topic 815 of the Financial Accounting Standards
Board (“FASB”) ASC. The accounting treatment of derivative financial instruments requires that the Company record
embedded conversion options (“ECOs”) and any related freestanding instruments at their fair values as of the inception
date of the agreement and at fair value as of each subsequent balance sheet date. Any change in fair value is recorded as non-operating,
non-cash income or expense for each reporting period at each balance sheet date. Conversion options are recorded as a discount
to the host instrument and are amortized as amortization of debt discount on the unaudited condensed consolidated financial statements
over the life of the underlying instrument. The Company reassesses the classification of its derivative instruments at each balance
sheet date. If the classification changes as a result of events during the period, the contract is reclassified as of the date
of the event that caused the reclassification.
The
Multinomial Lattice Model and Black-Scholes Model were used to estimate the fair value of the ECOs of convertible notes payable,
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.
Sequencing
Policy
Under
ASC 815-40-35 (“ASC 815”), the Company has adopted a sequencing policy, whereby, in the event that reclassification
of contracts from equity to assets or liabilities is necessary pursuant to ASC 815 due to the Company’s inability to demonstrate
it has sufficient authorized shares as a result of certain securities with a potentially indeterminable number of shares, shares
will be allocated on the basis of the earliest issuance date of potentially dilutive instruments, with the earliest grants receiving
the first allocation of shares. Pursuant to ASC 815, issuances of securities to the Company’s employees and directors, or
to compensate grantees in a share-based payment arrangement, are not subject to the sequencing policy.
Leases
In
February 2016, the FASB issued ASU No. 2016-02, Leases (“ASU 2016-02”)). The standard requires all leases that have
a term of over 12 months to be recognized on the balance sheet with the liability for lease payments and the corresponding right-of-use
(“ROU”) asset initially measured at the present value of amounts expected to be paid over the term. Recognition of
the costs of these leases on the income statement will be dependent upon their classification as either an operating or a financing
lease. Costs of an operating lease will continue to be recognized as a single operating expense on a straight-line basis over
the lease term. Costs for a financing lease will be disaggregated and recognized as both an operating expense (for the amortization
of the ROU asset) and interest expense (for interest on the lease liability). This standard, which the Company adopted on January
1, 2019, was applied on a modified retrospective basis to leases existing at, or entered into after, the beginning of the earliest
comparative period presented in the unaudited condensed consolidated financial statements. The adoption of ASU 2016 - 02 did not
have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.
A
lease is defined as a contract that conveys the right to control the use of identified property, plant or equipment for a period
of time in exchange for consideration. On January 1, 2019, the Company adopted ASC 842 and it primarily affected the accounting
treatment for operating lease agreements in which the Company is the lessee.
In
accordance with ASC 842, Leases, the Company recognized an ROU asset and corresponding lease liability on its balance sheets
for its office space lease agreement. See Note 9 for further discussion, including the impact on the Company’s unaudited
condensed consolidated financial statements and related disclosures.
ROU
assets include any prepaid lease payments and exclude any lease incentives and initial direct costs incurred. Lease expense for
minimum lease payments is recognized on a straight-line basis over the lease term. The lease terms may include options to extend
or terminate the lease if it is reasonably certain that the Company will exercise that option.
Leases
in which the Company is the lessee are comprised of office rental. All of the leases are classified as operating leases. The Company
has a lease agreement for office space with a remaining term of 4.50 years as of June 30, 2020.
Recently
Issued Accounting Standards
All
newly issued but not yet effective accounting pronouncements have been deemed to be not applicable or immaterial to the Company.
NOTE
3 – INTANGIBLE ASSETS
The
Company is a party to a license agreement with the SCTC (as amended) (the “SCTC Agreement”). Pursuant to the SCTC
Agreement, the Company obtained, among other things, a worldwide, exclusive, royalty-bearing license from the SCTC to utilize
or sublicense a certain medical device patent for the administration of specific cells and/or cell products to the disc and/or
spine (and other parts of the body) and a worldwide (excluding Asia and Argentina), exclusive, royalty-bearing license to utilize
or sublicense a certain method for culturing cells. Pursuant to the license agreement with the SCTC, unless certain performance
milestones had been or are satisfied, the Company would have been required to pay to the SCTC $150,000 by April 2017 and an additional
$250,000 by April 2019 in order to maintain its exclusive rights with regard to the disc/spine technology. In February 2017, the
Company received authorization from the Food and Drug Administration (the “FDA”) to proceed with a Phase 2 clinical
trial. Based upon such authorization, the Company has satisfied a performance milestone such that the Company was not required
to pay to the SCTC a minimum amount of $150,000 by April 2017 to retain exclusive rights with regard to the disc/spine technology.
In addition, the Company believes that it has until February 2022 to complete the Phase 2 clinical trial in order to satisfy the
final performance milestone such that the Company was not required to pay the additional $250,000 by April 2019 pursuant to the
SCTC Agreement to maintain its exclusive rights.
Intangible
assets consist of the following:
|
|
Patents and Trademarks
|
|
|
Licenses
|
|
|
Accumulated Amortization
|
|
|
Total
|
|
Balance as of January 1, 2019
|
|
$
|
3,676
|
|
|
$
|
1,301,500
|
|
|
$
|
(491,117
|
)
|
|
$
|
814,059
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(74,895
|
)
|
|
|
(74,895
|
)
|
Balance as of December 31, 2019
|
|
|
3,676
|
|
|
|
1,301,500
|
|
|
|
(566,012
|
)
|
|
|
739,164
|
|
Amortization expense
|
|
|
-
|
|
|
|
-
|
|
|
|
(37,448
|
)
|
|
|
(37,448
|
)
|
Balance as of June 30, 2020
|
|
$
|
3,676
|
|
|
$
|
1,301,500
|
|
|
$
|
(603,460
|
)
|
|
$
|
701,716
|
|
Weighted average remaining amortization period at June 30, 2020 (in years)
|
|
|
0.5
|
|
|
|
9.40
|
|
|
|
|
|
|
|
|
|
Amortization
of intangible assets consists of the following:
|
|
Patents and Trademarks
|
|
|
Licenses
|
|
|
Accumulated Amortization
|
|
Balance as of January 1, 2019
|
|
$
|
2,944
|
|
|
$
|
488,173
|
|
|
$
|
491,117
|
|
Amortization expense
|
|
|
368
|
|
|
|
74,527
|
|
|
|
74,895
|
|
Balance as of December 31, 2019
|
|
|
3,312
|
|
|
|
562,700
|
|
|
|
566,012
|
|
Amortization expense
|
|
|
184
|
|
|
|
37,264
|
|
|
|
37,448
|
|
Balance as of June 30, 2020
|
|
$
|
3,496
|
|
|
$
|
599,964
|
|
|
$
|
603,460
|
|
NOTE
4 – ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES
Accrued
expenses and other current liabilities consist of:
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Accrued payroll(1)
|
|
$
|
-
|
|
|
$
|
152,308
|
|
Accrued research and development expenses(1)
|
|
|
-
|
|
|
|
806,175
|
|
Accrued general and administrative expenses(1)
|
|
|
36,098
|
|
|
|
1,392,743
|
|
Accrued director compensation(1)
|
|
|
-
|
|
|
|
557,500
|
|
Accrued rent(1)
|
|
|
-
|
|
|
|
12,438
|
|
Total accrued expenses
|
|
$
|
36,098
|
|
|
$
|
2,921,164
|
|
|
(1)
|
Pursuant
to ASC 852, Reorganizations, as of June 30, 2020, the Company reclassified all
allowable prepetition claims to liabilities subject to compromise on the consolidated
balance sheets.
|
NOTE
5 – NOTES PAYABLE AND DEBTOR-IN-POSSESSION FINANCING
A
summary of the notes payable activity during the six months ended June 30, 2020 is presented below:
|
|
Related Party Notes
|
|
|
Convertible Notes
|
|
|
Other Notes
|
|
|
Debt Discount
|
|
|
Total
|
|
Outstanding, January 1, 2020
|
|
$
|
1,285,000
|
|
|
$
|
6,768,326
|
|
|
$
|
340,000
|
|
|
$
|
(1,247,420
|
)
|
|
$
|
7,145,906
|
|
Issuances
|
|
|
353,762
|
|
|
|
88,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
441,762
|
|
Third-party purchases
|
|
|
(287,041
|
)
|
|
|
287,041
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exchanges for equity
|
|
|
-
|
|
|
|
(813,393
|
)
|
|
|
-
|
|
|
|
253,654
|
|
|
|
(559,739
|
)
|
Conversions to equity
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Repayments
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Extinguishment of notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Recognition of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,958,796
|
)
|
|
|
(2,958,796
|
)
|
Accretion of interest expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,886,036
|
|
|
|
2,886,036
|
|
Amortization of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,066,526
|
|
|
|
1,066,526
|
|
Reclassification to liabilities subject to compromise
|
|
|
(1,351,721
|
)
|
|
|
(6,329,974
|
)
|
|
|
(340,000
|
)
|
|
|
-
|
|
|
|
(8,021,695
|
)
|
Outstanding, June 30, 2020
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Chapter 11 Reorganization
On March 20, 2020,
the Company filed a voluntary petition commencing a case under chapter 11 of title 11 of the U.S. Code in the United States Bankruptcy
Court for the Eastern District of New York. Pursuant to the Bankruptcy (see Note 10 – Subsequent Events), for any outstanding
principal and interest at the date of the Company’s Chapter 11 petition (except for creditors who provided additional debt
financing in connection with the Bankruptcy), 100 shares of the Company’s common stock were issued for each dollar of allowed
claim, with such shares subject to leak-out restrictions prohibiting the holder from selling, without the consent of the Company,
more than 33% of the issued shares during each of the three initial 30 day periods following the Effective Date. As a result of
the Chapter 11 petition, the conversion rights for the notes described in this Note 5 – Notes Payable – Convertible
Notes – Embedded Conversion Options and Note Provisions were rescinded and were subject to the conversion rights outlined
above. As a result of the chapter 11 reorganization, pursuant to ASC 852, Reorganizations, the Company has recorded all
prepetition liabilities at the expected allowable claim amounts as of June 30, 2020. This resulted in the Company amortizing the
remaining debt discount of $2,583,107 to interest expense on the unaudited condensed consolidated statements of operations. In
addition, pursuant to ASC 852, Reorganizations, as of June 30, 2020, the Company has reclassified the outstanding prepetition
notes payable to liabilities subject to compromise on the consolidated balance sheets.
Related
Party Notes
As
of June 30, 2020 and December 31, 2019, related party notes consisted of notes payable issued to certain directors of the Company,
family members of an officer of the Company, and the Tuxis Trust (the “Trust”). A former director and principal stockholder
of the Company (the “Director/Principal Stockholder”) serves as a trustee of the Trust, which was established for
the benefit of his immediate family.
During
the six months ended June 30, 2020, the Company issued to a former board member notes payable in the aggregate principal amount
of $353,762, which bore interest at the rate of 12% per annum and provided for original maturity date of March 10, 2020. As of
June 30, 2020, these notes are in default. Subsequent to June 30, 2020, pursuant to the Bankruptcy (See Note 10 - Subsequent Events),
these notes were exchanged for a Secured Convertible Note in a principal amount of $490,698.
Convertible
Notes
Issuances
During
the six months ended June 30, 2020, the Company issued to a certain lender a convertible note payable in the principal amount
of $88,000 for aggregate cash proceeds of $85,000 The difference was recorded as a debt discount and will be amortized over the
term of the note. The convertible note bore interest at 10% per annum payable at maturity with an original maturity date of January
31, 2021. The outstanding principal and accrued interest was convertible after 180 days at a conversion price of 61% of the lowest
daily volume weighted average price over the twenty days prior to the conversion date. The convertible note contained a cross-default
provision and was in default as of June 30, 2020. As a result, the convertible note bore a default interest of 22% per annum.
Subsequent to June 30, 2020, pursuant to the Bankruptcy (see Note 10 - Subsequent Events), the convertible note, in the aggregate
amount of $155,000 (including principal and accrued interest), was exchanged for 15,500,000 chares of the Company’s common
stock. See below within Note 7- Derivative Liabilities for additional details regarding the ECO of the convertible note.
Conversions,
Exchanges and Other
During
the six months ended June 30, 2020, the Company and certain lenders exchanged convertible notes with bifurcated ECOs with an aggegate
net carrying amount of $1,580,587 (including an aggregate of $523,516 of principal less debt discount of $234,301, $126,043 of
accrued interest and $1,165,329 related to the separated ECOs accounted for as derivative liabilities) for an aggregate of 1,515,799,750
shares of the Company’s common stock at conversion prices ranging from $0.0001 and $0.01 per share. In addition, prior to
the Petition Date, certain lenders intended to exchange outstanding debt (inclusive of accrued interest) for shares of the Company’s
common stock; however, the Company did not have sufficient shares authorized or reserved to effect the exchanges. As such, the
outstanding debt was exchanged as part of the Plan at a rate of 100 shares for each dollar of the allowable claim at the Effective
Date.
Debtor-in-Possession
Financing
During
the six months ended June 30, 2020, and subsequent to the Petition Date, in connection with the Chapter 11 Case, the Company received
debtor-in-possession loans of $713,575 in the aggregate from Auctus.
The
proceeds from the DIP Funding were used (a) for working capital and other general purposes of the Company; (b) United States Trustee
fees; (c) Bankruptcy Court approved professional fees and other administrative expenses arising in the Chapter 11 Case; and (d)
interest, fees, costs and expenses incurred in connection with the DIP Funding, including professional fees.
The
maturity date of the DIP Funding was to be the earliest to occur of (a) July 6, 2020; (b) ten days following entry of an order
confirming a chapter 11 plan in the Chapter 11 Case; (c) ten days following the entry of an order approving the sale of the Company
or the Company’s assets; or (d) the occurrence of an event of default under the promissory note evidencing the DIP Funding
(the “DIP Note”) following any applicable grace or cure periods.
Interest
on the outstanding principal amount of the DIP Note was to be payable in arrears on the maturity date at the rate of 8% per annum.
Upon the occurrence and during the continuance of an event of default, all obligations under the DIP Note were to bear interest
at a rate equal to the then current rate plus an additional 2% per annum.
Interest
expense for the three and six months ended June 30, 2020, related to the DIP Funding was $6,769.
Pursuant
to the Plan, the obligation to Auctus with respect to the DIP Funding has been exchanged for a Second Convertible Note (See Note
10 – Subsequent Events).
NOTE
6 – Stockholders’ DEFICIT
Authorized
Capital
Subsequent
to June 30, 2020 and pursuant to the Chapter 11 plan of reorganization (see Note 10 - Subsequent Events), the Company filed a
Certificate of Amendment to its Certificate of Incorporation pursuant to which, among other things, the number of shares of common
stock authorized to be issued by the Company has been increased to 300,000,000,000 and the par value of the shares of its common
stock has been reduced to $0.0001 per share. The effect of the change in par value has been reflected in the statement of changes
in stockholders’ deficit for the three and six months ended June 30, 2020 and 2019.
Warrant
and Option Valuation
The
Company has computed the fair value of warrants and options granted using the Black-Scholes option pricing model. The expected
term used for warrants and options issued to non-employees is the contractual life and the expected term used for options issued
to employees and directors is the estimated period of time that options granted are expected to be outstanding. The Company utilizes
the “simplified” method to develop an estimate of the expected term of “plain vanilla” employee option
grants. The Company is utilizing an expected volatility figure based on a review of the historical volatilities, over a period
of time, equivalent to the expected life of the instrument being valued, of similarly positioned public companies within its industry.
The risk-free interest rate was determined from the implied yields from U.S. Treasury zero-coupon bonds with a remaining term
consistent with the expected term of the instrument being valued.
Common
Stock and Warrant Offering
During
the six months ended June 30, 2020, the Company issued 1,000,000 shares of the Company’s common stock and a five-year immediately
vested warrant for the purchase of 1,000,000 shares of the Company’s common stock with an exercise price of $0.015 per share
to a certain investor for gross proceeds of $10,000. The warrants had an aggregate grant date fair value of $10,000. The warrants
were subject to the Company’s sequencing policy and, as a result, were initially recorded as derivative liabilities. See
Note 7 - Derivative Liabilities for additional details.
Warrant
Activity Summary
In
applying the Black-Scholes option pricing model to warrants granted or issued, the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Risk free interest rate
|
|
|
0
|
%
|
|
|
1.89% - 2.37
|
%
|
|
|
1.63% - 1.63
|
%
|
|
|
1.84%
- 2.62
|
%
|
Contractual term (years)
|
|
|
0.00
|
|
|
|
1.00 - 5.00
|
|
|
|
5.00 – 5.00
|
|
|
|
1.00
- 5.00
|
|
Expected volatility
|
|
|
0
|
%
|
|
|
136% - 139
|
%
|
|
|
202% - 202
|
%
|
|
|
136%
- 150
|
%
|
The
weighted average estimated fair value of the warrants granted during the three months ended June 30, 2020 and 2019 was approximately
$0 and $0.34, respectively. The weighted average estimated fair value of the warrants granted during the six months ended
June 30, 2020 and 2019 was approximately $0.01 and $0.42 per share, respectively.
A
summary of the warrant activity during the six months ended June 30, 2020 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding, January 1, 2020
|
|
|
8,379,177
|
|
|
$
|
1.43
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,000,000
|
|
|
|
0.01
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited/Expired
|
|
|
(1,357,536
|
)
|
|
|
1.60
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2020
|
|
|
8,021,641
|
|
|
$
|
1.22
|
|
|
|
3.5
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2020
|
|
|
8,021,641
|
|
|
$
|
1.22
|
|
|
|
3.5
|
|
|
$
|
-
|
|
The
following table presents information related to stock warrants at June 30, 2020:
Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Warrants
|
|
|
In Years
|
|
|
Warrants
|
|
$0.00 - $0.015
|
|
|
1,000,000
|
|
|
|
4.5
|
|
|
|
1,000,000
|
|
$0.20 - $1.99
|
|
|
5,106,746
|
|
|
|
4.0
|
|
|
|
5,106,746
|
|
$2.00 - $2.99
|
|
|
75,000
|
|
|
|
3.3
|
|
|
|
75,000
|
|
$3.00 - $3.99
|
|
|
70,000
|
|
|
|
3.0
|
|
|
|
70,000
|
|
$4.00 - $4.99
|
|
|
1,555,378
|
|
|
|
1.3
|
|
|
|
1,555,378
|
|
$5.00 - $5.99
|
|
|
182,667
|
|
|
|
1.0
|
|
|
|
182,667
|
|
$6.00 - $7.99
|
|
|
15,000
|
|
|
|
0.5
|
|
|
|
15,000
|
|
$10.00 - $15.00
|
|
|
16,850
|
|
|
|
0.1
|
|
|
|
16,850
|
|
|
|
|
8,021,641
|
|
|
|
3.5
|
|
|
|
8,021,641
|
|
Stock
Options
In
applying the Black-Scholes option pricing model to stock options granted, the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Risk free interest rate
|
|
|
0
|
%
|
|
|
1.71% - 2.42
|
%
|
|
|
0
|
%
|
|
|
1.71% - 2.62
|
%
|
Contractual term (years)
|
|
|
0.00
|
|
|
|
0.02 - 5.00
|
|
|
|
0.00
|
|
|
|
0.02 - 5.00
|
|
Expected volatility
|
|
|
0
|
%
|
|
|
98% - 139
|
%
|
|
|
0
|
%
|
|
|
98% - 156
|
%
|
The
Company did not issue stock options during the six months ended June 30, 2020.
The
weighted average estimated fair value of the stock options granted during the six months ended June 30, 2019 was approximately
$44,247.
A
summary of the option activity during the six months ended June 30, 2020 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Options
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding, January 1, 2020
|
|
|
4,879,617
|
|
|
$
|
0.99
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(12,000
|
)
|
|
|
1.98
|
|
|
|
|
|
|
|
|
|
Outstanding, June 30, 2020
|
|
|
4,867,617
|
|
|
$
|
0.98
|
|
|
|
6.7
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, June 30, 2020
|
|
|
4,056,292
|
|
|
$
|
1.03
|
|
|
|
6.4
|
|
|
$
|
-
|
|
The
following table presents information related to stock options at June 30, 2020:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
$0.26 - $0.74
|
|
|
175,000
|
|
|
|
9.2
|
|
|
|
175,000
|
|
$0.75 - $0.99
|
|
|
4,615,117
|
|
|
|
6.3
|
|
|
|
3,803,792
|
|
$1.00 - $5.99
|
|
|
5,000
|
|
|
|
4.0
|
|
|
|
5,000
|
|
$6.00 - $19.99
|
|
|
37,500
|
|
|
|
3.5
|
|
|
|
37,500
|
|
$20.00 - $30.00
|
|
|
35,000
|
|
|
|
1.7
|
|
|
|
35,000
|
|
|
|
|
4,867,617
|
|
|
|
6.4
|
|
|
|
4,056,292
|
|
The
following table presents information related to stock option expense:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
For the Three Months
|
|
|
For the Six Months
|
|
|
Unrecognized
|
|
|
Remaining
|
|
|
|
Ended
|
|
|
Ended
|
|
|
at
|
|
|
Amortization
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
June 30,
|
|
|
Period
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
(Years)
|
|
Consulting
|
|
$
|
33,589
|
|
|
$
|
175,567
|
|
|
$
|
67,178
|
|
|
$
|
471,649
|
|
|
$
|
44,784
|
|
|
|
0.3
|
|
Research and development
|
|
|
59,195
|
|
|
|
96,138
|
|
|
|
121,007
|
|
|
|
245,932
|
|
|
|
142,800
|
|
|
|
1.2
|
|
General and administrative
|
|
|
126,480
|
|
|
|
171,099
|
|
|
|
252,960
|
|
|
|
454,901
|
|
|
|
160,800
|
|
|
|
0.5
|
|
|
|
$
|
219,264
|
|
|
$
|
442,804
|
|
|
$
|
441,145
|
|
|
$
|
1,172,482
|
|
|
$
|
348,384
|
|
|
|
0.8
|
|
NOTE
7 – 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, 2020
|
|
$
|
915,959
|
|
Issuance of derivative liabilities
|
|
|
2,483,532
|
|
Extinguishment of derivative liabilities in connection with convertible note repayments and exchanges
|
|
|
(1,165,329
|
)
|
Change in fair value of derivative liabilities
|
|
|
2,141,069
|
|
Write-off of derivative liability pursuant to ASC 852
|
|
|
(4,375,231
|
)
|
Ending balance as of June 30, 2020
|
|
$
|
-
|
|
In
applying the Multinomial Lattice and Black-Scholes option pricing models to derivatives issued and outstanding during the three
and six months ended June 30, 2020 and 2019, the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
For the Six Months Ended
|
|
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2020
|
|
|
2019
|
|
|
2020
|
|
|
2019
|
|
Risk free interest rate
|
|
|
0.00
|
%
|
|
|
1.71% - 2.42
|
%
|
|
|
0.10% – 0.16
|
%
|
|
|
1.71% - 2.62
|
%
|
Contractual term (years)
|
|
|
0
|
|
|
|
0.02 - 5.00
|
|
|
|
0.02 – 5.00
|
|
|
|
0.02 - 5.00
|
|
Expected volatility
|
|
|
0.00
|
%
|
|
|
98% - 139
|
%
|
|
|
92.2% - 163.2
|
%
|
|
|
98% - 156
|
%
|
During
the six months ended June 30, 2020, the Company recorded new derivative liabilities in the aggregate amount of $2,473,532 and
$10,000 related to the ECOs of certain convertible notes payable and warrants subject to sequencing, respectively. See Note 5
– Notes Payable – Convertible Notes for additional details. See Note 6 – Stockholders’ Deficit for warrants
issued and deemed to be derivative liabilities.
During
the six months ended June 30, 2020, the Company extinguished an aggregate of $1,165,329 of derivative liabilities in connection
with the exchanges of certain convertible notes payable into shares of the Company’s common stock. See Note 5 – Notes
Payable – Conversions, Exchanges and Other for additional details.
During
the six months ended June 30, 2020 and prior to the Petition Date, the Company recomputed the fair value of ECOs recorded as derivative
liabilities to be $4,375,231. The Company recorded a loss on the change in fair value of these derivative liabilities of $2,141,069.
During
the three months ended June 30, 2020 and subsequent to the Petition Date, pursuant to ASC 852, Reorganziations, the Company
wrote-off $4,375,231 of derivative liabilities related to the convertible notes included in the Chapter 11 Reorganization allowable
claims. The Company recorded the write-off in reorganization items, net on the unaudited condensed consolidated statement of operations
as of June 30, 2020.
Note
8 - COMMITMENTS AND CONTINGENCIES
Litigation,
Claims and Assessments
Coventry
Enterprises, LLC
On
February 11, 2020, pursuant to an Order to Show Cause of the United States District Court of the Eastern District of New York
(the “Court”), in the matter of Coventry Enterprises, LLC vs. BioRestorative Therapies, Inc., pending the hearing
of the plaintiff’s application for a preliminary injunction, the Court issued a temporary restraining order enjoining the
Company from issuing any additional shares of stock except for purposes of fulfilling the plaintiff’s share reserve requests
or conversion requests until such reserve requests were fulfilled and enjoining the Company from reserving authorized shares for
any other party until the plaintiff’s reserve requests were fulfilled. Pursuant to a hearing held on February 13, 2020,
the temporary restraining order with regard to the Company issuing shares of common stock was not continued.
On
March 11, 2020, the Court ordered that the Company (i) convene and hold a special meeting, by no later than March 18, 2020, of
the Board of Directors of the Company (the “Board”), for approval of certain changes to the shares of the Company,
as set forth below; (ii) approve a reverse split and/or a stock consolidation, solely of the Company’s outstanding shares,
at a ratio of 1,000 to 1, (iii) approve of the continuation of the Company’s then total authorized shares of common stock
at 2,000,000,000 shares; and (iv) to call a special meeting of stockholders of the Company, within ten days of the special meeting
of the Board and by not later than March 25, 2020, to approve the foregoing. On March 18, 2020, the Board considered the matter,
and, based upon the Court order, determined to approve the foregoing items, including the 1,000 to 1 reverse split, subject to
the Company having available funds to effectuate such items. As discussed above in this Note 13 under “Chapter 11 Reorganization,”
on March 20, 2020, the Company filed a petition commencing its Chapter 1 Case. As of the date of this report, the Company has
not effected the reverse split.
The
Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.
Bonus
Accruals
As
of June 30, 2020 and December 31, 2019, the Company had remaining accruals of approximately $0 and $27,000, respectively, for
bonus milestones which were achieved in prior years and remain unpaid.
Appointment
or Departure of Directors and Certain Officers
The
Company and Mark Weinreb, its former Chief Executive Officer (“ Former CEO”), were parties to an employment agreement
that, as amended, was to expire on December 31, 2019. Pursuant to the employment agreement, as amended, in the event that (a)
the Former CEO’s employment was terminated by the Company without cause, or (b) the Former CEO terminated his employment
for “good reason” (each as defined in the employment agreement), or (c) the term of the Former CEO’s employment
agreement was not extended beyond December 31, 2019 and within three months of such expiration date, his employment was terminated
by the Company without “cause” or the Former CEO terminated his employment for any reason, the Former CEO was to be
entitled to receive severance in an amount equal to his then annual base salary and certain benefits, plus $100,000 (in lieu of
bonus). Further, in the event that the Former CEO’s employment was terminated by the Company without cause, or the Former
CEO terminated his employment for “good reason”, following a “change in control” (as defined in the employment
agreement), the Former CEO would be entitled to receive severance in an amount equal to one and one-half times his then annual
base salary and certain benefits, plus $300,000 (in lieu of bonus). Additionally, as part of the amended employment agreement,
the Former CEO was entitled to new performance-based cash bonuses payable for the years ending December 31, 2018 and 2019, such
that an aggregate of up to 50% of the Former CEO’s then annual base salary per annum could be earned for such year pursuant
to the satisfaction of such goals. The Former CEO resigned his employment with the Company on November 16, 2020, the effective
date of the Chapter 11 reorganization. Based upon such termination of employment, the Former CEO was entitled to receive his severance
of $400,000 and certain benefits plus $100,000, and the option accelerations as discussed above. The severance amount was generally
considered an unsecured claim in the Company’s Chapter 11 Case and the Former CEO received shares of the Company’s
common stock in exchange for such claim in a manner consistent with other unsecured creditors.
On
March 16, 2020, the Company and Mark Weinreb, its Chief Executive Officer, entered into an agreement pursuant to which, among
other matters, the term of his employment agreement with the Company was extended to the earlier of (i) September 30, 2020 or
(ii) the effective date of a plan of liquidation of the Company.
Conversion
of Convertible Notes
During
the six months ended June 30, 2020, certain lenders requested to exchange a portion of their outstanding convertible note principal
and accrued interest for shares of the Company’s common stock. As of the Petition Date these shares had yet to be issued
to the lenders; however, the shares of the Company’s common stock issued for unsecured claims as part of the Plan to the
certain lenders represented the aggregate unsecured claims less the principal and accrued interest that was represented in the
uneffected exchanges. The Company believes that there may be a potential contingency related to the non-issued shares that would
be settled in shares of the Company’s common stock and not monetary compensation.
Note
9 - LEASES
With
the adoption of ASC 842, operating lease agreements are required to be recognized on the balance sheet as ROU assets and corresponding
lease liabilities.
The Company is a party
to a lease for 6,800 square feet of space located in Melville, New York (the “Melville Lease”) with respect to its
corporate and laboratory operations. The Melville Lease was scheduled to expire in March 2020 (subject to extension at the option
of the Company for a period of five years) and provided for an annual base rental during the initial term ranging between $132,600
and $149,260. In June 2019, the Company exercised its option to extend the Melville Lease and entered into a lease amendment with
the lessor whereby the five-year extension term commenced on January 1, 2020 with annual base rent ranging between $153,748 and
$173,060.
On
August 1, 2019, the Company recognized ROU assets and lease liabilities of $638,246. The Company elected to not recognize ROU
assets and lease liabilities arising from short-term office leases (leases with initial terms of twelve months or less, which
are deemed immaterial) on the balance sheets. On June 1, 2019, the Company exercised its right to extend its existing lease of
office space for an additional five years.
When
measuring lease liabilities for leases that were classified as operating leases, the Company discounted lease payments using its estimated
incremental borrowing rate at August 1, 2019. The weighted average incremental borrowing rate applied was 12%.
The
following table presents net lease cost and other supplemental lease information:
|
|
Six Months Ended June 30 2020
|
|
Lease cost
|
|
|
|
|
Operating lease cost (cost resulting from lease payments)
|
|
$
|
76,874
|
|
Short term lease cost
|
|
|
-
|
|
Sublease income
|
|
|
-
|
|
Net lease cost
|
|
$
|
76,874
|
|
|
|
|
|
|
Operating lease – operating cash flows (fixed payments)
|
|
$
|
76,874
|
|
Operating lease – operating cash flows (liability reduction)
|
|
$
|
41,457
|
|
Non-current leases – right of use assets
|
|
$
|
531,872
|
|
Current liabilities – operating lease liabilities
|
|
$
|
93,093
|
|
Non-current liabilities – operating lease liabilities
|
|
$
|
472,805
|
|
Future
minimum payments under non-cancelable leases for operating leases for the remaining terms of the leases following the six months ended
June 30, 2020:
Fiscal Year
|
|
Operating Leases
|
|
Remainder of 2020
|
|
$
|
76,874
|
|
2021
|
|
|
158,372
|
|
2022
|
|
|
163,132
|
|
2023
|
|
|
168,028
|
|
2024
|
|
|
173,060
|
|
Total future minimum lease payments
|
|
|
739,466
|
|
Amount representing interest
|
|
|
(173,568
|
)
|
Present value of net future minimum lease payments
|
|
$
|
565,898
|
|
Note
10 – SUBSEQUENT EVENTS
Chapter
11 Reorganization
On
August 7, 2020, the Company and Auctus, the Company’s largest unsecured creditor and a stockholder as of the Petition Date, filed
an Amended Joint Plan of Reorganization (the “Plan”) and on October 30, 2020, the Bankruptcy Court entered an order (the
“Confirmation Order”) confirming the Plan, as amended. Amendments to the Plan are reflected in the Confirmation Order. On
November 16, 2020 (the “Effective Date”), the Plan became effective.
The
material features of the Plan, as amended and confirmed by the Confirmation Order, are as follows:
|
i.
|
Treatment
of the financing to the Company by Auctus of up to $7,000,000 which Auctus has provided or committed to provide consisting of the
debtor-in-possession loans made to the Company by Auctus during the Chapter 11 Case (the “DIP Funding”) and additional
funding as described below.
|
|
ii.
|
Auctus
has provided $3,500,000 in funding to the Company (the “Initial Auctus Funding”) and is to provide, subject to certain
conditions, additional funding to the Company, as needed, in an amount equal to $3,500,000, less the sum of the debtor-in-possession
loans made to the Company by Auctus during the Chapter 11 Case (inclusive of accrued interest) (approximately $1,227,000 as of the
Effective Date) and the costs incurred by Auctus as the debtor-in-possession lender (the “DIP Costs”). In addition, four
other persons and entitles (collectively, the “Other Lenders”) who held allowed general unsecured claims provided funding
to the Company in the aggregate amount of approximately $348,000 (the “Other Funding” and together with the Initial Auctus
Funding, the “Funding”). In consideration of the Funding, the Company has issued the following:
|
|
a.
|
Secured
convertible notes of the Company (each, a “Secured Convertible Note”) in the principal amount equal to the Funding; the
payment of the Secured Convertible Notes is secured by the grant of a security interest in substantially all of the Company’s
assets; the Secured Convertible Notes have the following features:
|
|
●
|
Maturity
date of three years following the Effective Date;
|
|
●
|
Interest
at the rate of 7% per annum;
|
|
●
|
The
right of the holder to convert the indebtedness into shares of common stock of the Company at a price equal to the volume weighted
average price for the common stock over the five trading days immediately preceding the conversion; and
|
|
●
|
Mandatory
conversion of all indebtedness at such time as the common stock is listed on the Nasdaq Capital Market or another senior exchange
on the same terms as provided to investors in connection with a public offering undertaken in connection with such listing;
|
|
b.
|
Warrants
(each, a “Class A Warrant”) to purchase a number of shares of common stock equal to the amount of the Funding provided
divided by $0.0005 (a total of 7,000,000,000 Class A Warrants in consideration of the Initial Auctus Funding and a total of approximately
697,000,000 Class A Warrants in the aggregate in consideration of the Other Funding), such Class A Warrants having an exercise price
of $0.0005 per share; and
|
|
|
|
|
c.
|
Warrants
(each, a “Class B Warrant” and together with the Class A Warrants, the “Plan Warrants”) to purchase a number
of shares of common stock equal to the Funding provided divided by $0.001 (a total of 3,500,000,000 Class B Warrants in consideration
of the Initial Auctus Funding and a total of approximately 348,500,000 Class B Warrants in the aggregate in consideration of the
Other Funding), such Class B Warrants having an exercise price of $0.001 per share.
|
|
iii.
|
The
obligation to Auctus with respect to the DIP Funding has been exchanged for the following:
|
|
a.
|
A
Secured Convertible Note in the principal amount of approximately $1,349,591 (110% DIP Funding) with a maturity date of November
16, 2023;
|
|
|
|
|
b.
|
A
Class A Warrant to purchase 2,453,802,480 shares of common stock; and
|
|
|
|
|
c.
|
A
Class B Warrant to purchase 1,226,901,240 shares of common stock (as to which 382,226,703 shares of common stock have been exercised
on a net exercise basis, pursuant to the terms of the Class B Warrant, with respect to the issuance of 361,176,200 shares of common
stock).
|
In
addition, Auctus shall be entitled to receive a Secured Convertible Note, a Class A Warrant and a Class B Warrant in exchange for its
allowed DIP Costs and allowed Plan costs in a manner in which the DIP Funding was treated.
The
claim arising from the secured promissory notes of the Company, dated February 20, 2020 and February 26, 2020, in the original
principal amounts of $320,200 and $33,562, respectively, issued to John Desmarais (“Desmarais”) (collectively,
the “Desmarais Notes”), was treated as an allowed secured claim in the aggregate amount of $490,699 and was
exchanged for a Secured Convertible Note in such amount.
|
iv.
|
The
claim arising from the promissory note issued in June 2016 by the Company to Desmarais in the original principal amount of
$175,000 was treated as an allowed general unsecured claim in the amount of $245,192 and was satisfied and exchanged
for 24,519,200 shares of common stock.
|
|
|
|
|
v.
|
The
claim arising from the promissory note issued in June 2016 by the Company to Tuxis Trust, an entity related to Desmarais, in the
original principal amount of $500,000 was treated as follows:
|
|
a.
|
$444,534
was treated as an allowed general unsecured claim in such amount and exchanged for 44,453,400 shares of common stock; and
|
|
|
|
|
b.
|
$309,301
was treated as an allowed secured claim in such amount and exchanged for a Secured Convertible Note in such amount with
a maturity date of November 16, 2023.
|
|
vi.
|
Holders
of allowed general unsecured claims (other than Auctus and the Other Lenders) received an aggregate of 1,049,726,797 shares of common
stock (in book entry form) in exchange for approximately $10,497,268 in outstanding accounts payable and convertible debt (including
accrued interest), with such shares being subject to a leak-out restriction prohibiting each holder from selling, without consent
of the Company, more than 33% of its shares during each of the three initial 30 day periods following the Effective Date.
|
|
|
|
|
vii.
|
Auctus
and the Other Lenders have been issued, in respect of their allowed general unsecured claims ($3,261,819 in the case of Auctus and
an aggregate of approximately $382,400 in the case of the Other Lenders), a convertible promissory note of the Company (each, an
“Unsecured Convertible Note”) in the allowed amount of the claim, which Unsecured Convertible Notes have the following
material features:
|
|
a.
|
Maturity
date of three years from the Effective Date;
|
|
|
|
|
b.
|
Interest
at the rate of 5% per annum;
|
|
|
|
|
c.
|
The
right of the holder to convert the indebtedness into shares of common stock at a price equal to the volume weighted average for the
common stock over the five trading days immediately preceding the conversion;
|
|
|
|
|
d.
|
Mandatory
conversion of all outstanding indebtedness at such time as the common stock listed on the Nasdaq Capital Market or another senior
exchange on the same terms as provided to investors in connection with a public offering undertaken in connection with such listing;
and
|
|
|
|
|
e.
|
A
leak-out restriction prohibiting each holder from selling, without the consent of the Company, more than 16.6% of the underlying
shares received upon conversion during each of the six initial 30 day periods following the Effective Date.
|
|
viii.
|
The
issuance of (a) the shares of common stock and the Unsecured Convertible Notes to the holders of allowed general unsecured claims
and (b) the Secured Convertible Notes and Plan Warrants to Auctus in exchange for the DIP Funding and any common stock into which
those Secured Convertible Notes and those Plan Warrants may be converted is exempt from the registration requirements of the Securities
Act of 1933, as amended, pursuant to the Bankruptcy Code Section 1145. Such securities shall be freely transferrable subject to Section
1145(b)(i) of the Bankruptcy Code.
|
Pursuant
to the Plan, on the Effective Date, the Company filed a Certificate of Amendment to its Certificate of Incorporation pursuant to which,
among other things, the number of shares of common stock authorized to be issued by the Company has been increased to 300,000,000,000
and the par value of the shares of common stock has been reduced to $0.0001 per share.
Debtor-in-Possession
Financing
In
connection with the Chapter 11 Case, the Company received debtor-in-possession loans of $475,838 in the aggregate from Auctus.
The
proceeds from the DIP Funding were used (a) for working capital and other general purposes of the Company; (b) United States Trustee
fees; (c) Bankruptcy Court approved professional fees and other administrative expenses arising in the Chapter 11 Case; and (d) interest,
fees, costs and expenses incurred in connection with the DIP Funding, including professional fees.
The
maturity date of the DIP Funding was to be the earliest to occur of (a) July 6, 2020; (b) ten days following entry of an order confirming
a chapter 11 plan in the Chapter 11 Case; (c) ten days following the entry of an order approving the sale of the Company or the Company’s
assets; or (d) the occurrence of an event of default under the promissory note evidencing the DIP Funding (the “DIP Note”)
following any applicable grace or cure periods.
Interest
on the outstanding principal amount of the DIP Note was to be payable in arrears on the maturity date at the rate of 8% per annum. Upon
the occurrence and during the continuance of an event of default, all obligations under the DIP Note were to bear interest at a rate
equal to the then current rate plus an additional 2% per annum.
As
discussed above, pursuant to the Plan, the obligation to Auctus with respect to the DIP Funding has been exchanged for a Second Convertible
Note.
Exercise of Warrants
During March 2021,
the Company issued an aggregate of 159,233,719 shares of common stock to certain investors, with a fair value of $0.01 per share,
as a result of the exercise of warrants associated with the Plan.
Appointment
or Departure of Directors and Certain Officers
On
November 16, 2020, as contemplated by the Plan, Mr. Weinreb, A. Jeffrey Radov, Paul Jude Tonna and Robert B. Catell resigned as directors
of the Company and Mr. Weinreb resigned as the Company’s President, Chief Executive Officer and Chairman of the Board.
Effective
as of the Effective Date, as contemplated by the Plan, Lance Alstodt was elected President, Chief Executive Officer, Chairman of the
Board and a director of the Company and Francisco Silva, the Company’s Vice President, Research and Development, was elected a
director of the Company.
On
March 18, 2021, Nickolay Kukekov was elected a director of the Company.
On
March 18, 2021, the Company’s Board of Directors adopted the BioRestorative Therapies, Inc. 2021 Stock Incentive Plan (the “Plan”).
Pursuant to the Plan, a total of 4,700,000,000 shares of common stock are authorized to be issued pursuant to the grant of stock options,
restricted stock units, restricted stock and stock appreciation rights.
On
March 18, 2021, the Company and Lance Alstodt, its President, Chief Executive Officer and Chairman of the Board, entered into an employment
agreement (the “Alstodt Employment Agreement”) which provides for a term ending on March 18, 2026. Pursuant to the Alstodt
Employment Agreement, Mr. Alstodt is entitled to receive initially an annual salary of $250,000. Mr. Alstodt’s annual salary will
increase by $50,000 per year. In addition, in the event certain performance goals are met, Mr. Alstodt’s salary will increase by
$150,000. The Alstodt Employment Agreement also provides for the grant to Mr. Alstodt pursuant to the Plan of (i) a ten year option for
the purchase of 1,173,917,974 shares of common stock of the Company and (ii) 586,958,987 restricted stock units of the Company (“RSUs”).
On
March 18, 2021, the Company and Francisco Silva, its Vice President, Research and Development, entered into an employment agreement (the
“Silva Employment Agreement”) which provides for a term ending on March 18, 2026. Pursuant to the Silva Employment Agreement,
Mr. Silva is entitled to receive initially an annual salary of $225,000. Mr. Silva’s annual salary will increase by $50,000 per
year. In addition, in the event certain performance goals are met, Mr. Silva’s salary will increase by $150,000. The Silva Employment
Agreement also provides for the grant to Mr. Silva pursuant to the Plan of (i) a ten year option for the purchase of 1,173,917,974 shares
of common stock of the Company and (ii) 586,958,987 RSUs.