Note
2 – Going Concern and Management’s Plans
As
of March 31, 2019, the Company had a working capital deficiency and a stockholders’ deficiency of $8,081,062 and $7,652,744,
respectively. During the three months ended March 31, 2019, the Company incurred a net loss of $3,883,172. 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 March 31, 2019, the Company has received aggregate equity and debt financings of $556,000 and $728,280, respectively, debt
(inclusive of accrued interest) of $528,028 has been exchanged for common stock, and $573,400 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
June 2019 while it continues to apply efforts to raise additional capital. While there can be no assurance that it will be successful,
the Company is in negotiations to raise additional capital. As of the filing date of this report, the Company has notes payable
with an aggregate principal balance of $190,028 which are past due. The Company is currently in the process of negotiating an
extension with respect to these notes though there can be no assurance that the Company will be successful. See Note 9 –
Subsequent Events for additional details.
Note
3 – Summary of Significant Accounting Policies
Principles
of Consolidation
The
unaudited condensed consolidated financial statements of the Company include the accounts of Stem Pearls. All significant intercompany
transactions have been eliminated in the consolidation.
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent liabilities at the dates of the financial statements
and the reported amounts of revenue and expenses during the periods. The Company’s significant estimates and assumptions
include the recoverability and useful lives of long-lived assets, the fair value of the Company’s stock, stock-based compensation,
warrants issued in connection with notes payable, derivative liabilities and the valuation allowance related to the Company’s
deferred tax assets. Certain of the Company’s estimates, including the carrying amount of the intangible assets, could be
affected by external conditions, including those unique to the Company and general economic conditions. It is reasonably possible
that these external factors could have an effect on the Company’s estimates and could cause actual results to differ from
those estimates.
Revenue
Recognition
On
January 1, 2019, the Company adopted Accounting Standards Codification (“ASC”) Topic 606, “Revenue from Contracts
with Customers” (“ASC 606”). The core principle of ASC 606 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. ASC 606 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
five-step process outlined in the ASC 606 is as follows:
Step
1 – Identify the Contract with the Customer – A contract exists when (a) the parties to the contract have approved
the contract and are committed to perform their respective obligations, (b) the entity can identify each party’s rights
regarding the goods or services to be transferred, (c) the entity can identify the payment terms for the goods or services to
be transferred, (d) the contract has commercial substance and it is probable that the entity will collect substantially all of
the consideration to which it will be entitled in exchange for the goods or services that will be transferred to the customer.
Step
2 – Identify Performance Obligations in the Contract – Upon execution of a contract, the Company identifies as performance
obligations each promise to transfer to the customer either (a) goods or services that are distinct or (b) a series of distinct
goods or services that are substantially the same and have the same pattern of transfer to the customer. To the extent a contract
includes multiple promised goods or services, the Company must apply judgement to determine whether the goods or services are
capable of being distinct within the context of the contract. If these criteria are not met, the goods or services are accounted
for as a combined performance obligation.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Summary of Significant Accounting Policies – Continued
Revenue
Recognition
– Continued
Step
3 – Determine the Transaction Price – When (or as) a performance obligation is satisfied, the Company shall recognize
as revenue the amount of the transaction price that is allocated to the performance obligation. The contract terms are used to
determine the transaction price. Generally, all contracts include fixed consideration. If a contract did include variable consideration,
the Company would determine the amount of variable consideration that should be included in the transaction price based on expected
value method. Variable consideration would be included in the transaction price, if in the Company’s judgement, it is probable
that a significant future reversal of cumulative revenue under the contract would not occur.
Step
4 – Allocate the Transaction Price – After the transaction price has been determined, the next step is to allocate
the transaction price to each performance obligation in the contract. If the contract only has one performance obligation, the
entire transaction price will be applied to that obligation. If the contract has multiple performance obligations, the transaction
price is allocated to the performance obligations based on the relative standalone selling price (SSP) at contract inception.
Step
5 – Satisfaction of the Performance Obligations (and Recognize Revenue) – Revenue is recognized when (or as) goods
or services are transferred to a customer. The Company satisfies each of its performance obligations by transferring control of
the promised good or service underlying that performance obligation to the customer. Control is the ability to direct the use
of, and obtain substantially all of the remaining benefits from, an asset. It includes the ability to prevent other entities from
directing the use of, and obtaining the benefits from, an asset. Indicators that control has passed to the customer include: a
present obligation to pay; physical possession of the asset; legal title; risks and rewards of ownership; and acceptance of the
asset. Performance obligations can be satisfied at a point in time or over time.
The
Company recognizes 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 non-exclusive sublicense to use, and the right to sublicense to third parties the right to use, in certain locations
in the United States and the Cayman Islands, certain of the licensed intellectual property. In consideration of the sublicenses,
the SCTC has agreed to pay the Company royalties on a per disc procedure basis.
The
Company recognizes sublicensing and royalty revenue on a per disc procedure basis when the third-party sale occurs. All sales
have fixed pricing and there are currently no variable components included in the Company’s revenue. The timing of the Company’s
revenue recognition may differ from the timing of receiving royalty payments. A receivable is recorded when revenue is recognized
prior to receipt of a royalty payment and the Company has an unconditional right to the royalty payment. Alternatively, when a
royalty payment precedes the provision of the related services, the Company records deferred revenue until the performance obligations
are satisfied. During the three months ended March 31, 2019 and 2018, the Company recognized $29,000 and $19,000, respectively,
of revenue related to the Company’s sublicenses.
The
Company adopted ASC 606 for all applicable contracts using the modified retrospective method, which would have required a cumulative-effect
adjustment, if any, as of the date of adoption. The adoption of ASC 606 did not have a material impact on the Company’s
unaudited condensed consolidated financial statements as of the date of adoption. As a result, a cumulative-effect adjustment
was not required.
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.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Summary of Significant Accounting Policies – Continued
Net
Loss Per Common Share
– Continued
The
following securities are excluded from the calculation of weighted average dilutive common shares because their inclusion would
have been anti-dilutive:
|
|
March
31,
|
|
|
|
2019
|
|
|
2018
|
|
Options
|
|
|
4,750,868
|
|
|
|
3,615,369
|
|
Warrants
|
|
|
4,601,841
|
|
|
|
3,311,005
|
|
Convertible notes
|
|
|
10,747,471
|
[1]
|
|
|
864,998
|
|
Total potentially
dilutive shares
|
|
|
20,100,180
|
|
|
|
7,791,372
|
|
|
[1]
|
As
of March 31, 2019, 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 56,462,559 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.
The fair value of the award is measured on the grant date and is then recognized over the period during which services are required
to be provided in exchange for the award, usually the vesting period. The Company estimates the fair value of the awards granted
based on the market value of its freely tradable common stock as reported on the OTCQB market. 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 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, 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.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
3 – Summary of Significant Accounting Policies – Continued
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
February 2016, the FASB issued Accounting Standards Update (“ASU”) 2016-02, “Leases (Topic 842)” (“ASU
2016-02”). ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee
should recognize in the statement of financial position a liability to make lease payments (the lease liability) and a right-of-use
asset representing its right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee
is permitted to make an accounting policy election by class of underlying asset not to recognize lease assets and lease liabilities.
In transition, lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented
using a modified retrospective approach. This amendment will be effective for fiscal years beginning after December 15, 2019,
including interim periods within those fiscal years. The FASB issued ASU No. 2018-10 “Codification Improvements to Topic
842, Leases” (“ASU 2018-10”), ASU No. 2018-11 “Leases (Topic 842) Targeted Improvements” (“ASU
2018-11”) in July 2018, and ASU No. 2018-20 “Leases (Topic 842) - Narrow Scope Improvements for Lessors” (“ASU
2018-20”) in December 2018. ASU 2018-10 and ASU 2018-20 provide certain amendments that affect narrow aspects of the guidance
issued in ASU 2016-02. ASU 2018-11 allows all entities adopting ASU 2016-02 to choose an additional (and optional) transition
method of adoption, under which an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect
adjustment to the opening balance of retained earnings in the period of adoption. The Company is currently evaluating these ASUs
and their impact on its unaudited condensed consolidated financial statements.
In
August 2016, the FASB issued ASU 2016-15, “Statement of Cash Flows (Topic
230) Classification of Certain Cash Receipts and Cash Payments”. The new standard will make eight targeted changes to how
cash receipts and cash payments are presented and classified in the statement of cash flows. The new standard is effective for
fiscal years beginning after December 15, 2018. The Company has adopted this standard as of January 1, 2019. The adoption of this
standard did not have a material impact on the Company’s unaudited condensed consolidated financial statements and financial
statement disclosures.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation — Stock Compensation (Topic 718)” (“ASU 2018-07”).
ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.
Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different.
ASU 2018-07 expands the scope of Topic 718, Compensation — Stock Compensation (which currently only includes share-based
payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting
for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity
— Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for fiscal years beginning after December
15, 2019 and including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s
adoption date of Topic 606, Revenue from Contracts with Customers. The Company early adopted this accounting standard as of January
1, 2019. The adoption of this standard did not have a material impact on the Company’s unaudited condensed consolidated
financial statements and financial statement disclosures.
In
March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“Topic 842”)
(“ASU 2019-01”). These amendments align the guidance for fair value of the underlying asset by lessors that are not
manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease
commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse
of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820,
Fair Value Measurement) should be applied. (Issue 1). The ASU also requires lessors within the scope of Topic 942, Financial Services—Depository
and Lending, to present all “principal payments received under leases” within investing activities. (Issue 2). Finally,
the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company
adopts the new leases standard. (Issue 3). The transition and effective date provisions apply to Issue 1 and Issue 2. They do
not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. The effective
date of those amendments is for fiscal years beginning after December 15, 2019. The Company is currently evaluating ASU 2019-01
and its impact on its unaudited condensed consolidated financial statements and financial statement disclosures.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
4 – Accrued Expenses and Other Current Liabilities
Accrued
expenses and other current liabilities are comprised of the following:
|
|
March
31,
|
|
|
December
31,
|
|
|
|
2019
|
|
|
2018
|
|
Accrued payroll and other
accrued expenses
|
|
$
|
38,934
|
|
|
$
|
91,560
|
|
Accrued research and development expenses
|
|
|
676,175
|
|
|
|
646,175
|
|
Accrued general and administrative expenses
|
|
|
1,268,499
|
|
|
|
1,084,831
|
|
Accrued director compensation
|
|
|
482,500
|
|
|
|
482,500
|
|
Deferred rent
|
|
|
27,759
|
|
|
|
33,610
|
|
Total accrued expenses
|
|
|
2,493,867
|
|
|
|
2,338,676
|
|
Less:
accrued expenses, current portion
|
|
|
2,493,867
|
|
|
|
2,302,176
|
|
Accrued
expenses, non-current portion
|
|
$
|
-
|
|
|
$
|
36,500
|
|
During
the three months ended March 31, 2019, the Company entered into a settlement agreement with a certain consultant, pursuant to
which $46,500 of previously accrued consulting fees were exchanged for 10,000 shares of the Company’s common stock and a
$10,000 cash payment. The value of the shares was $7,200, and accordingly the Company recorded a gain on settlement of payables
of $29,300 which is reflected within general and administrative expenses in the unaudited condensed consolidated statements of
operations.
Note
5 – Notes Payable
A
summary of the notes payable activity during the three months ended March 31, 2019 is presented below:
|
|
Related
Party
|
|
|
Convertible
|
|
|
Other
|
|
|
Debt
|
|
|
|
|
|
|
Notes
|
|
|
Notes
|
|
|
Notes
|
|
|
Discount
|
|
|
Total
|
|
Outstanding, January 1, 2019
|
|
$
|
720,000
|
|
|
$
|
4,309,415
|
|
|
$
|
132,501
|
|
|
$
|
(1,012,363
|
)
|
|
$
|
4,149,553
|
|
Issuances
|
|
|
475,000
|
|
|
|
2,903,014
|
[1]
|
|
|
-
|
|
|
|
-
|
|
|
|
3,378,014
|
|
Exchanges for equity
|
|
|
-
|
|
|
|
(641,649
|
)
|
|
|
-
|
|
|
|
121,804
|
|
|
|
(519,845
|
)
|
Repayments
|
|
|
(15,000
|
)
|
|
|
(1,300,000
|
)
|
|
|
-
|
|
|
|
51,050
|
|
|
|
(1,263,950
|
)
|
Extinguishment of
notes payable
|
|
|
-
|
|
|
|
-
|
|
|
|
(148,014)
|
[1]
|
|
|
6,196
|
|
|
|
(141,818
|
)
|
Recognition of debt
discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,494,735
|
)
|
|
|
(2,494,735
|
)
|
Accretion of interest
expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
127,743
|
|
|
|
127,743
|
|
Accrued interest
reclassified to notes payable principal
|
|
|
-
|
|
|
|
-
|
|
|
|
23,013
|
|
|
|
-
|
|
|
|
23,013
|
|
Amortization
of debt discount
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
743,142
|
|
|
|
743,142
|
|
Outstanding, March 31, 2019 [2]
|
|
$
|
1,180,000
|
|
|
|
$
5,270,780
|
[3]
|
|
$
|
7,500
|
|
|
$
|
(2,457,163
|
)
|
|
$
|
4,001,117
|
|
|
[1]
|
During
the three months ended March 31, 2019, a convertible note in the principal amount of $148,014 was issued concurrently with
the extinguishment of a certain note payable in the same aggregate principal amount. See below within Note 5 – Notes
Payable – Conversions, Exchanges and Other for additional details.
|
|
|
|
|
[2]
|
As
of March 31, 2019, outstanding related party notes, convertible notes and other notes in the aggregate principal amount of
$0, $127,742 and $7,500, respectively, were considered past due.
|
|
|
|
|
[3]
|
As
of March 31, 2019, a portion of convertible notes with an aggregate principal balance of $3,465,780 were convertible into
shares of common stock at the election of the holder any time until the balance has been paid in full. As of March 31, 2019,
a portion of convertible notes with an aggregate principal balance of $1,805,000, which are not currently convertible, will
become convertible into shares of the Company’s common stock at the election of the respective holder subsequent to
March 31, 2019.
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Related
Party Notes
During
the three months ended March 31, 2019, the Company issued to family members of an officer of the Company and a Scientific Advisory
Board member (the “SAB Member”) notes payable in the aggregate principal amount of $475,000, which bear interest at
the rate of 15% per annum and provide for maturity dates between July 2019 and August 2019.
During
the three months ended March 31, 2019, the Company partially repaid a certain related party note in the principal amount of $15,000.
During
the three months ended March 31, 2019, the Company and a certain related party agreed to further extend the maturity date of a
note payable with a principal balance of $30,000 from January 2019 to December 2019.
As
of March 31, 2019, related party notes consisted of notes payable issued to certain directors of the Company, family members of
an officer of the Company, the SAB Member, 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.
As
of March 31, 2019, certain related party notes in the aggregate principal amount of $475,000 were convertible into shares of common
stock of the Company at a conversion price of $0.60 per share, subject to adjustment, and a five year warrant (the “Warrant”)
for the purchase of a number of shares equal to the number of shares issued upon the conversion of the principal amount of the
Note. The Warrant provides for an exercise price of $0.80 per share, subject to adjustment. The other related party notes in the
aggregate principal amount of $705,000 were not convertible.
Convertible
Notes
Issuances
During
the three months ended March 31, 2019, the Company issued to certain lenders convertible notes payable in the aggregate principal
amount of $2,755,000 for aggregate cash proceeds of $2,598,918. The difference of $156,083 was recorded as original issuance
debt discount and will be amortized over the terms of the respective notes. The convertible notes bear interest at rates ranging
between 8% and 15% per annum payable at maturity with original maturity dates ranging between July 2019 and March 2020. In connection
with the issuance of a certain convertible note, the Company issued the lender a five-year warrant to purchase 40,000 shares of
the Company’s common stock at an exercise price of $1.00 per share. The grant date value of the warrant was $24,000, which
was recorded as debt discount and is being amortized over the term of the convertible note. The warrant was subject to the Company’s
sequencing policy and, as a result, was recorded as a derivative liability. 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.
During
the three months ended March 31, 2019, a certain convertible note in the principal amount of $148,014 was issued concurrently
with the extinguishment of a certain other note payable in the same principal amount. See below within Note 5 – Notes Payable
– Convertible Notes – Conversions, Exchanges and Other for additional details.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Convertible
Notes
– Continued
Embedded
Conversion Options and Note Provisions
As
of March 31, 2019, outstanding convertible notes in the aggregate principal amount of $3,465,780 were convertible into shares
of common stock of the Company as follows: (i) $1,890,000 of aggregate convertible notes were convertible at a fixed price ranging
from $1.00 to $2.00 per share for the first six months following the respective issue date, and thereafter at a conversion price
generally equal to a range of 58% to 65% of the fair value of the Company’s stock, subject to adjustment, until the respective
note has been paid in full, (ii) $50,000 of convertible notes were convertible at a fixed conversion price of $2.15 per share,
(iii) $875,780 of aggregate convertible notes were convertible generally at a range of 58% to 65% of the fair value of the Company’s
stock, subject to adjustment, depending on the note, and (iv) $650,000 of aggregate convertible notes were convertible into shares
of common stock of the Company at a conversion price of $0.60 per share, subject to adjustment, and a five year warrant (the “Warrant”)
for the purchase of a number of shares equal to the number of shares issued upon the conversion of the principal amount of the
respective note. The Warrant provides for an exercise price of $0.80 per share, subject to adjustment. The Company analyzes the
ECOs of its convertible notes at issuance to determine whether the ECO should be bifurcated and accounted for as a derivative
liability or if the ECO contains a beneficial conversion feature. See below within Note 5 – Notes Payable – Convertible
Notes – Embedded Conversion Options and Note Provisions and Note 8 – Derivative Liabilities for additional details
regarding the ECOs of the convertible notes.
As
of March 31, 2019, a portion of convertible notes with an aggregate principal balance of $1,805,000, which were not yet convertible,
will generally become convertible into shares of the Company’s common stock subsequent to March 31, 2019 at a conversion
price generally equal to 58% of the fair value of the Company’s stock, subject to adjustment, until the respective notes
have been paid in full.
As
of March 31, 2019, a certain outstanding convertible note in the principal amount of $55,000 has mandatory prepayment terms at
the option of the holder (“MPOs”). The MPOs permit the 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 issuance date. As of the date of this filing, the MPOs have expired.
As
of March 31, 2019, outstanding convertible notes in the aggregate principal amount of $3,953,014 have prepayment premiums, whereby,
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.
As
of March 31, 2019, outstanding convertible notes in the aggregate principal amount of $2,052,742 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 certain
identified provisions 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 March 31, 2019, notes with applicable
MFN provisions were convertible using MFN conversion prices equal to 58% or 65% of the fair market value of the Company’s
stock, as defined.
During
the three months ended March 31, 2019, the Company determined that certain ECOs of issued or extended convertible notes were derivative
liabilities. The aggregate issuance date value of the bifurcated ECOs was $2,392,400, of which $2,307,602 was recorded as a debt
discount and is being amortized over the terms of the respective convertible notes and $84,798 was recognized as part of an extinguishment
loss as described below. See Note 8 – Derivative Liabilities for additional details.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
5 – Notes Payable – Continued
Convertible
Notes
– Continued
Conversions,
Exchanges and Other
During
the three months ended March 31, 2019, the Company and certain lenders exchanged certain convertible notes with bifurcated ECOs
with an aggregate net carrying amount of $1,388,477 (including an aggregate of $641,649 of principal less debt discount of $121,804,
$24,509 of accrued interest and $844,123 related to the separated ECOs accounted for as derivative liabilities) for an aggregate
of 1,984,017 shares of the Company’s common stock at conversion prices ranging from $0.28 to $0.42 per share. The common
stock had an aggregate exchange date value of $1,510,282 and, as a result, the Company recorded a loss on extinguishment of notes
payable of $121,805. See Note 8 – Derivative Liabilities for additional details.
During
the three months ended March 31, 2019, the Company repaid an aggregate principal amount of $1,300,000 of convertible notes payable,
$76,169 of the respective aggregate accrued interest and an aggregate of $184,637 of prepayment premiums. As a result of the repayments,
the Company recorded a loss on extinguishment of notes payable of $235,687 and an aggregate of $51,050 of the related debt discounts
were extinguished.
During
the three months ended March 31, 2019, a certain lender to the Company acquired a promissory note (classified in Other Notes)
issued by the Company in the outstanding amount of $148,014 (inclusive of accrued interest reclassified to principal of $23,013)
from a certain lender to the Company. The Company exchanged the acquired note for a new convertible note in the principal amount
of $148,014 which accrues interest at a rate of 12% per annum, payable on the maturity date in March 2020. The ECO of the note
was subject to sequencing and the issuance date fair value of $84,798 was accounted for as a derivative liability (see Note 8
– Derivative Liabilities for additional details). Since the fair value of the new ECO exceeded 10% of the principal amount
of the new note, the note exchange was accounted for as an extinguishment, and accordingly the Company recognized a net loss on
extinguishment of $90,994 in connection with the derecognition of the net carrying amount of $141,818 of the extinguished debt
and the issuance of the new convertible notes in the aggregate principal amount $148,014 plus the fair value of the new note’s
ECO of an aggregate of $84,798.
Other
Notes
Exchange
and Other
During
the three months ended March 31, 2019, the Company and a certain lender agreed to an extension of the maturity date of a certain
note payable with a principal balance of $125,000 from a maturity date in January 2019 to a new maturity date in December 2019.
In consideration of the extension, the Company issued the lender 10,000 shares of the Company’s common stock. The issuance
date fair value of the common stock of $7,052 was recorded as debt discount and is being amortized over the remaining term of
the note.
During
the three months ended March 31, 2019, a convertible promissory note in the principal amount of $148,014 was issued concurrently
with the extinguishment of a certain other note payable in the same principal amount. See above within Note 5 – Notes Payable
– Conversions, Exchanges and Other for additional details.
Note
6 – Commitments and Contingencies
Consulting
Agreements
Business
Advisory Services
In
January 2019, an agreement for business advisory services that had expired on December 31, 2018 was further extended and now provides
for an expiration date of December 31, 2019. In consideration of the extension of the term of the consulting agreement, the Company
issued to the consultant a five-year, immediately vested warrant for the purchase of 100,000 shares of the Company’s common
stock at an exercise price of $1.00 per share. The grant date value of the warrant of $56,000 was recognized immediately as stock-based
compensation expense which is reflected as consulting expense in the unaudited condensed consolidated financial statements. The
warrant was subject to the Company’s sequencing policy and, as a result, was recorded as a derivative liability. See Note
8 – Derivative Liabilities for additional details.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
6 – Commitments and Contingencies - Continued
Operating
Lease
Rent
expense amounted to approximately $30,000 and $31,000 for the three months ended March 31, 2019 and 2018, respectively.
Litigations,
Claims and Assessments
As of March 31, 2019, the Company was
not involved in any legal proceedings, claims or assessments arising from the ordinary course of business.
The
Company records legal costs associated with loss contingencies as incurred and accrues for all probable and estimable settlements.
Employment
Agreements
As
of March 31, 2019 and December 31, 2018, the Company had remaining accruals of approximately $9,000 and $91,000, respectively,
for bonus milestones which were achieved in prior years and remain unpaid. Subsequent to March 31, 2019, the Company’s
Compensation Committee and Board of Directors approved performance goals associated with cash bonuses payable to certain officers
for the year ended December 31, 2019 and, as a result, the Company accrued approximately $30,305 for 2019 bonuses as of March
31, 2019. See Note 9 – Subsequent Events for additional details.
Note
7 – Stockholders’ Deficiency
Authorized
Capital and 2010 Equity Plan
On
March 25, 2019, the Board of Directors of the Company approved an increase in the number of authorized shares of common stock
to 150,000,000, subject to shareholder approval. Additionally, the Board of Directors approved an increase in the number of authorized
shares issuable under the Company’s 2010 Equity Participation Plan to 20,000,000, subject to shareholder approval.
On
March 25, 2019, the Board of Directors determined to submit to the Company’s shareholders for their approval amendments
to the Certificate of Incorporation of the Company (with the Board of Directors having the authority to select and file one such
amendment) to effect a reverse split of the Company’s common stock at a ratio of not less than 1-for-2 and not more than
1-for-20, with the Board of Directors having the discretion as to whether or not the reverse stock split is to be effected, and
with the exact ratio of any reverse stock split to be set at a whole number within the above range as determined by the Board
of Directors in its discretion. Concurrently, the Board of Directors determined to submit to the Company’s shareholders
for their approval a proposal to authorize the Board of Directors, in the event the reverse stock split proposal is approved by
the shareholders, in its discretion, to reduce the number of authorized shares of common stock in proportion to the percentage
decrease in the number of outstanding shares of common stock resulting from the reverse split (or a lesser decrease in authorized
shares of common stock as determined by the Board of Directors in its discretion).
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.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency - Continued
Common
Stock and Warrant Offering
During
the three months ended March 31, 2019, the Company issued 1,000,000 shares of common stock of the Company, a five-year immediately
vested warrant to purchase 500,000 shares of common stock of the Company at an exercise price of $0.85 per share and a one-year
immediately vested warrant to purchase 500,000 shares of common stock of the Company at an exercise price of $0.70 per share to
an investor for gross proceeds of $600,000. The warrants had an aggregate grant date fair value of $500,000. The warrants were
subject to the Company’s sequencing policy and, as a result, were recorded as derivative liabilities. See Note 8 –
Derivative Liabilities for additional details.
Stock
Warrants
Warrant
Compensation
See
Note 6 - Commitments and Contingencies for additional details associated with the issuance of a warrant in connection with a consulting
agreement extension.
The
Company recorded stock–based compensation expense of $56,000 and $48,192 during the three months ended March 31, 2019 and
2018, respectively, related to stock warrants issued as compensation, which is reflected as consulting expense in the unaudited
condensed consolidated statements of operations. As of March 31, 2019, there was no unrecognized stock-based compensation expense
related to stock warrants.
Warrant
Activity Summary
In
applying the Black-Scholes option pricing model to warrants granted, the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk free interest rate
|
|
|
2.47% - 2.62
|
%
|
|
|
1.92% - 2.29
|
%
|
Contractual term (years)
|
|
|
1.00 - 5.00
|
|
|
|
1.98 - 5.00
|
|
Expected volatility
|
|
|
140% - 150
|
%
|
|
|
128% - 129
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The
weighted average estimated fair value of the warrants granted during the three months ended March 31, 2019 and 2018 was approximately
$0.51 and $1.22 per share, respectively.
A
summary of the warrant activity during the three months ended March 31, 2019 is presented below:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Aggregate
|
|
|
|
Number of
|
|
|
Exercise
|
|
|
Life
|
|
|
Intrinsic
|
|
|
|
Warrants
|
|
|
Price
|
|
|
In Years
|
|
|
Value
|
|
Outstanding, January 1, 2019
|
|
|
3,483,403
|
|
|
$
|
3.63
|
|
|
|
|
|
|
|
|
|
Issued
|
|
|
1,140,000
|
|
|
|
0.80
|
|
|
|
|
|
|
|
|
|
Expired
|
|
|
(21,562
|
)
|
|
|
4.80
|
|
|
|
|
|
|
|
|
|
Outstanding, March 31, 2019
|
|
|
4,601,841
|
|
|
$
|
2.92
|
|
|
|
2.2
|
|
|
$
|
45,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, March 31, 2019
|
|
|
4,601,841
|
|
|
$
|
2.92
|
|
|
|
2.2
|
|
|
$
|
45,000
|
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Warrants
- Continued
The
following table presents information related to stock warrants at March 31, 2019:
Warrants Outstanding
|
|
Warrants Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Warrants
|
|
|
In Years
|
|
|
Warrants
|
|
$0.70 - $0.99
|
|
|
1,140,000
|
|
|
|
3.1
|
|
|
|
1,140,000
|
|
$1.00 - $1.99
|
|
|
844,444
|
|
|
|
0.8
|
|
|
|
844,444
|
|
$2.00 - $2.99
|
|
|
75,000
|
|
|
|
4.6
|
|
|
|
75,000
|
|
$3.00 - $3.99
|
|
|
70,000
|
|
|
|
4.3
|
|
|
|
70,000
|
|
$4.00 - $4.99
|
|
|
2,159,635
|
|
|
|
2.2
|
|
|
|
2,159,635
|
|
$5.00 - $5.99
|
|
|
195,989
|
|
|
|
2.2
|
|
|
|
195,989
|
|
$6.00 - $7.99
|
|
|
40,000
|
|
|
|
1.3
|
|
|
|
40,000
|
|
$8.00 - $9.99
|
|
|
2,500
|
|
|
|
0.7
|
|
|
|
2,500
|
|
$10.00 - $14.99
|
|
|
40,400
|
|
|
|
1.0
|
|
|
|
40,400
|
|
$15.00 - $19.99
|
|
|
33,873
|
|
|
|
0.4
|
|
|
|
33,873
|
|
|
|
|
4,601,841
|
|
|
|
2.2
|
|
|
|
4,601,841
|
|
Stock
Options
In
March 2019, the Board of Directors reduced the exercise price of outstanding stock options for the purchase of an aggregate of
4,631,700 shares of common stock of the Company (with exercise prices ranging between $1.00 and $4.70 per share) to $0.75 per
share, which was the closing price for the Company’s common stock on the day prior to determination, as reported by the
OTCQB market. The exercise price reduction related to options held by, among others, the Company’s directors, advisors and
employees. The incremental value of the modified options compared to the original options, both valued as of the respective modification
date, of $452,637 is being recognized over the vesting term of the options.
The
following table presents information related to stock options at March 31, 2019:
Options Outstanding
|
|
Options Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Outstanding
|
|
|
Average
|
|
|
Exercisable
|
|
Exercise
|
|
Number of
|
|
|
Remaining Life
|
|
|
Number of
|
|
Price
|
|
Options
|
|
|
In Years
|
|
|
Options
|
|
$0.75 - $0.99
|
|
|
4,631,700
|
|
|
|
7.1
|
|
|
|
2,838,709
|
|
$1.00 - $5.99
|
|
|
46,668
|
|
|
|
1.0
|
|
|
|
46,668
|
|
$6.00 - $19.99
|
|
|
37,500
|
|
|
|
4.8
|
|
|
|
37,500
|
|
$20.00 - $30.00
|
|
|
35,000
|
|
|
|
3.0
|
|
|
|
35,000
|
|
|
|
|
4,750,868
|
|
|
|
6.9
|
|
|
|
2,957,877
|
|
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
7 – Stockholders’ Deficiency – Continued
Stock
Options
- Continued
The
following table presents information related to stock option expense:
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
For the Three Months Ended
|
|
|
Unrecognized at
|
|
|
Remaining
Amortization
|
|
|
|
March 31,
|
|
|
March 31,
|
|
|
Period
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
(Years)
|
|
Consulting
|
|
$
|
296,081
|
|
|
$
|
264,227
|
|
|
$
|
356,980
|
|
|
|
0.4
|
|
Research and development
|
|
|
149,794
|
|
|
|
75,845
|
|
|
|
494,727
|
|
|
|
1.3
|
|
General and administrative
|
|
|
283,802
|
|
|
|
494,548
|
|
|
|
819,204
|
|
|
|
0.8
|
|
|
|
$
|
729,677
|
|
|
$
|
834,620
|
|
|
$
|
1,670,911
|
|
|
|
0.9
|
|
Note
8 – Derivative Liabilities
The
following table sets forth a summary of the changes in the fair value of Level 3 derivative liabilities that are measured at fair
value on a recurring basis:
Beginning balance as of January 1, 2019
|
|
$
|
1,094,607
|
|
Issuance of derivative liabilities
|
|
|
2,972,400
|
|
Extinguishment of derivative liabilities in connection with convertible note
repayments and exchanges
|
|
|
(844,124
|
)
|
Change in fair value of derivative liabilities
|
|
|
46,264
|
|
Reclassification of derivative liabilities to equity
|
|
|
(2,517,254
|
)
|
Ending balance as of March 31, 2019
|
|
$
|
751,893
|
|
In
applying the Multinomial Lattice and Black-Scholes option pricing models to derivatives issued and outstanding during the three
months ended March 31, 2019 and 2018, the Company used the following assumptions:
|
|
For the Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Risk free interest rate
|
|
|
2.21% - 2.62
|
%
|
|
|
1.22% - 2.56
|
%
|
Expected term (years)
|
|
|
0.07 - 5.00
|
|
|
|
0.75 - 4.66
|
|
Expected volatility
|
|
|
104% - 156
|
%
|
|
|
100% - 111
|
%
|
Expected dividends
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
During
the three months ended March 31, 2019, the Company recorded new derivative liabilities in the aggregate amounts of $2,392,400
and $580,000 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 – Commitments and Contingencies and
Note 7 – Stockholders’ Deficiency for warrants issued and deemed to be derivative liabilities.
During
the three months ended March 31, 2019, the Company extinguished an aggregate of $844,124 of derivative liabilities in connection
with repayments and exchanges of certain convertible notes payable into shares of the Company’s common stock. See Note 7
– Notes Payable – Convertible Notes for additional details.
During
the three months ended March 31, 2019, the Company reclassified an aggregate of $2,517,254 of derivative liabilities to equity
as a result of a change in the sequencing status.
BIORESTORATIVE
THERAPIES, INC. & SUBSIDIARY
Notes
to Condensed Consolidated Financial Statements
(unaudited)
Note
8 – Derivative Liabilities – Continued
On
March 31, 2019, the Company recomputed the fair value of ECOs recorded as derivative liabilities to be $724,634. The Company recorded
a loss on the change in fair value of these derivative liabilities of $96,838 for the three months ended March 31, 2019.
On
March 31, 2019, the Company recomputed the fair value of the derivative liabilities related to outstanding warrants to be $27,260.
These warrants are either redeemable for cash equal to the Black-Scholes value, as defined, at the election of the warrant holder
upon a fundamental transaction pursuant to the warrant terms or were issued subsequent to the commencement of sequencing. The
Company recorded a gain on the change in fair value of these derivative liabilities of $50,574 for the three months ended March
31, 2019.
Note
9 – Subsequent Events
Common
Stock and Warrant Offerings
Subsequent
to March 31, 2019, the Company issued 80,000 shares of common stock of the Company to an SAB Member at a purchase price of $0.70
per share. In consideration thereof, the Company issued an immediately vested five-year warrant for the purchase of 80,000 shares
of common stock of the Company at an exercise price of $1.00 per share.
Subsequent
to March 31, 2019, the Company issued 1,111,111 shares of common stock of the Company to a certain related party at a purchase
price of $0.45 per share. In consideration thereof, the Company issued an immediately vested five-year warrant for the purchase
of 555,556 shares of common stock of the Company at an exercise price of $0.85 per share, and an immediately vested one-year warrant
for the purchase of 555,555 shares of common stock of the Company at an exercise price of $0.70 per share.
Notes
Payable
Subsequent
to March 31, 2019, the Company issued convertible promissory notes in the aggregate principal amount of $760,000 to certain lenders
for aggregate cash proceeds of $728,280. The difference of $31,720 was recorded as a debt discount and will be amortized over
the terms of the respective notes. The convertible notes bear interest at the rate of 12% per annum, payable at maturity, with
original maturity dates ranging from October 2019 to January 2020. The convertible notes and the respective accrued interest are
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 generally equal to 58% of the fair value of the Company’s common stock. In connection with the
issuance of a certain convertible promissory note, the Company issued to the lender 68,873 shares of the Company’s common
stock. The relative fair value of the common stock will be recorded as a debt discount and will be amortized over the term of
the note. In the event that the Company elects to prepay any of the respective notes during the first ninety-day period following
the issue date, the holder is entitled to receive a prepayment premium of up to 25%, 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 of up to 35%, depending on the note, of
the then outstanding principal balance plus accrued interest.
Subsequent
to March 31, 2019, the Company and certain lenders agreed to exchange an aggregate principal amount of $504,501 and aggregate
accrued interest of $23,527 of certain convertible notes payable for an aggregate of 1,488,673 shares of the Company’s common
stock at exchange prices ranging from $0.20 to $0.43 per share.
Subsequent
to March 31, 2019, the Company repaid an aggregate principal amount of $501,629 of convertible notes payable, $29,371 of the respective
aggregate accrued interest and an aggregate of $42,400 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 months ended March 31, 2019 and 2018 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, 2018 filed with the Securities and Exchange Commission (the “SEC”) on March 29,
2019.
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 may include references to our federally registered trademarks, BioRestorative Therapies, the Dragonfly
Logo, brtxDISC, ThermoStem, Stem Cellutrition, Stem Pearls and Stem the Tides of Time. The Dragonfly Logo is also registered with
the U.S. Copyright Office. 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 lead cell therapy candidate being called
BRTX-100
.
We submitted an IND application to the FDA to obtain authorization to commence a Phase 2 clinical trial investigating the use
of
BRTX-100
in the treatment of chronic lower back pain arising from degenerative disc disease. We have received such authorization
from the FDA. We intend to commence such clinical trial during the third quarter of 2019 (assuming the receipt of necessary funding).
We have obtained a license to utilize or sublicense a method for the hypoxic (low oxygen) culturing of cells for use in treating
disc and spine conditions, including protruding and bulging lumbar discs. The technology is an advanced stem cell injection procedure
that may offer relief from lower back pain, buttock and leg pain, and numbness and tingling in the leg and foot. 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. United States patents
related to the
ThermoStem Program
were issued in September 2015 and January 2019, an Australian patent related to the
ThermoStem
Program
was issued in April 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 March 31, 2019, our accumulated deficit was $67,805,428, our stockholders’ deficiency was $7,652,744 and our working
capital deficiency was $8,081,062. 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 March 31, 2019, and our forecast for continued operating losses, we require equity and/or
debt financing to continue our operations. As of March 31, 2019, our outstanding debt of $6,458,280, with interest at rates ranging
between 6% and 15% per annum, was due on various dates through March 2020. Subsequent to March 31, 2019, we have received aggregate
equity and debt financings of $556,000 and $728,280, respectively, debt (inclusive of accrued interest) of $528,028 has been exchanged
for common stock, and $573,400 of debt (inclusive of accrued interest and prepayment premiums) has been repaid. Giving effect
to the above actions, we currently have notes payable in the aggregate principal amount of $190,028 which are past due. Based
upon our working capital deficiency and outstanding debt, we expect to be able to fund our operations through June 2019 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 March 31, 2019 Compared with Three Months Ended March 31, 2018
The
following table presents selected items in our unaudited condensed consolidated statements of operations for the three months
ended March 31, 2019 and 2018, respectively:
|
|
For The Three Months Ended
|
|
|
|
March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Revenues
|
|
$
|
29,000
|
|
|
$
|
19,000
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses:
|
|
|
|
|
|
|
|
|
Marketing and promotion
|
|
|
15,837
|
|
|
|
41,023
|
|
Consulting
|
|
|
599,734
|
|
|
|
432,930
|
|
Research and development
|
|
|
455,006
|
|
|
|
407,130
|
|
General and administrative
|
|
|
1,286,759
|
|
|
|
1,368,655
|
|
Total Operating Expenses
|
|
|
2,357,336
|
|
|
|
2,249,738
|
|
Loss From Operations
|
|
|
(2,328,336
|
)
|
|
|
(2,230,738
|
)
|
|
|
|
|
|
|
|
|
|
Other (Expense) Income:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
(316,944
|
)
|
|
|
(161,259
|
)
|
Amortization of debt discount
|
|
|
(743,142
|
)
|
|
|
(261,646
|
)
|
Loss on extinguishment of notes payable, net
|
|
|
(448,486
|
)
|
|
|
(18,837
|
)
|
Change in fair value of derivative liabilities
|
|
|
(46,264
|
)
|
|
|
164,820
|
|
Total Other Expense
|
|
|
(1,554,836
|
)
|
|
|
(276,922
|
)
|
Net Loss
|
|
$
|
(3,883,172
|
)
|
|
$
|
(2,507,660
|
)
|
Revenues
For
the three months ended March 31, 2019 and 2018, we generated $29,000 and $19,000, respectively, of royalty revenue in connection
with our sublicense agreement.
Marketing
and promotion
Marketing
and promotion expenses include corporate advertising and promotion, marketing and seminars, meals, entertainment and travel expenses.
For the three months ended March 31, 2019, marketing and promotion expenses decreased by $25,186, from $41,023 to $15,837 as compared
to the three months ended March 31, 2018. The decrease is primarily due to a decrease in travel activity and associated costs.
We
expect that marketing and promotion expenses will 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 March 31, 2019, consulting
expenses increased by $166,804, or 39%, from $432,930 to $599,734, as compared to the three months ended March 31, 2018. The increase
is primarily due to an increase of approximately $131,000 in cash consulting fees in connection with clinical trials and strategic
planning and an increase of approximately $40,000 in stock-based compensation expense related to options and warrants issued to
consultants.
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; and (c) 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 March 31, 2019, research and development
expenses increased by $47,876, or 12%, from $407,130 to $455,006, as compared to the three months ended March 31, 2018. The increase
was primarily a result of approximately $74,000 in stock-based compensation expense primarily related to options issued to our
Scientific Advisory Board members and incremental modification expense related to an option repricing in 2019, partially offset
by a decrease of approximately $27,000 in cash compensation related to the termination of our former Chief Medical Advisor for
Spine Medicine in February 2018.
We
expect that our research and development expenses will increase with the continuation of the aforementioned initiatives.
General
and administrative
General
and administrative expenses consist primarily of salaries, bonuses, payroll taxes, severance costs and stock-based compensation
to employees (excluding any cash or non-cash compensation of our Vice President of Research and Development and our laboratory
staff) as well as corporate support expenses such as legal and professional fees, investor relations and occupancy related expenses.
For the three months ended March 31, 2019, general and administrative expenses decreased by $81,896, or 6%, from $1,368,655 to
$1,286,759, as compared to the three months ended March 31, 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 three months ended March 31, 2019, interest expense increased $155,685 or 97%, as compared to the three months ended March
31, 2018. The increase of interest expense was due to an increase in interest-bearing short-term borrowings and accretion of original
issue debt discounts in connection with borrowings.
Amortization
of debt discount
For
the three months ended March 31, 2019, amortization of debt discount increased $481,496, or 184%, as compared to the three months
ended March 31, 2018. The increase was primarily due to the timing of the recognition of expense related to the bifurcated embedded
conversion options of convertible notes.
Loss
on extinguishment of notes payable, net
For
the three months ended March 31, 2019, the loss on extinguishment of notes payable increased by $429,649, from $18,837 to $448,486
as compared to the three months ended March 31, 2018. The increase is associated with debt repayments and debtholders’ exchanges
of debt into equity securities resulting in a loss on the exchange.
Change
in fair value of derivative liabilities
For
the three months ended March 31, 2019, we recorded a loss related to the change in fair value of derivative liabilities of $46,264
due to the increase in time value of embedded conversion options within certain convertible notes payable, as compared to a gain
related to the change in fair value of derivative liabilities of $164,820 for the three months ended March 31, 2018.
Liquidity
and Capital Resources
Liquidity
We
measure our liquidity in a number of ways, including the following:
|
|
March 31,
2019
|
|
|
December 31,
2018
|
|
Cash
|
|
$
|
496,279
|
|
|
$
|
117,523
|
|
|
|
|
|
|
|
|
|
|
Working Capital Deficiency
|
|
$
|
(8,081,062
|
)
|
|
$
|
(9,073,901
|
)
|
|
|
|
|
|
|
|
|
|
Notes Payable (Gross)
|
|
$
|
6,458,280
|
|
|
$
|
5,161,916
|
|
Availability
of Additional Funds
Based
upon our working capital deficiency and stockholders’ deficiency of $8,081,062 and $7,652,744, respectively, as of March
31, 2019, 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 March 31, 2019, our outstanding debt of $6,458,280, together with interest at rates ranging between 6% and 15% per annum, was
due on various dates through March 2020. Subsequent to March 31, 2019, we have received aggregate equity and debt financings of
$556,000 and $728,280, respectively, debt (inclusive of accrued interest) of $528,028 has been exchanged for common stock, and
$573,400 of debt (inclusive of accrued interest and prepayment premiums) has been repaid. Giving effect to the above actions,
we currently have notes payable in the aggregate principal amount of $190,028 which are past due. As of the date of filing, our
outstanding debt was as follows:
|
|
Principal
|
|
Maturity Date
|
|
Amount
|
|
Past Due
|
|
$
|
190,028
|
|
QE 6/30/2019
|
|
|
362,500
|
|
QE 9/30/2019
|
|
|
1,826,608
|
|
QE 12/31/2019
|
|
|
2,365,000
|
|
QE 3/31/2020
|
|
|
1,468,014
|
|
|
|
$
|
6,212,150
|
|
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 June 2019. 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 three months ended March 31, 2019 and 2018, 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 three months ended March 31, 2019 and 2018 in the amounts of
$1,980,162 and $1,158,201, respectively. The net cash used in operating activities for the three months ended March 31, 2019 was
primarily due to cash used to fund a net loss of $3,883,172, adjusted for non-cash expenses in the aggregate amount of $1,990,036,
plus $87,026 of cash used by changes in the levels of operating assets and liabilities, primarily as a result of decreases in
accounts payable and increases in prepaid expenses and other current assets, partially offset by an increase in accrued interest,
expenses and other current liabilities. The net cash used in operating activities for the three months ended March 31, 2018 was
primarily due to cash used to fund a net loss of $2,507,660, adjusted for non-cash expenses in the aggregate amount of $1,126,621,
plus $222,838 of cash generated by changes in the levels of operating assets and liabilities, primarily as a result of increases
in accrued interest, expenses and other current liabilities, partially offset by a decrease in accounts payable.
Net
Cash Provided by Financing Activities
Net
cash provided by financing activities during the three months ended March 31, 2019 and 2018 was $2,358,918 and $715,085, respectively.
During the three months ended March 31, 2019, $1,758,918 of net proceeds were from debt financings and $600,000 of proceeds were
from equity financings. During the three months ended March 31, 2018, $300,917 of net proceeds were from debt financings and $414,168
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, 2018 filed with the SEC
on March 29, 2019, except as follows:
Effective
January 1, 2019, we adopted Accounting Standards Codification (“ASC”) 606, “Revenue from Contracts with Customers”
(“ASC 606”). ASC 606 will require management to make significant judgments and estimates. As a result, we implemented
changes to our internal controls related to revenue recognition for the quarter ended March 31, 2019. These changes include updated
accounting policies affected by ASC 606, redesigned internal controls over financial reporting related to ASC 606, expanded data
gathering to comply with the additional disclosure requirements, and ongoing contract review requirements.
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.