Business context and reporting period
BioreStoreative Therapies, Inc. (BRT) filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2018. The company develops cell-based therapies, led by BRTX-100 for painful disc disorders, and is conducting preclinical work on its ThermoStem metabolic-disease program. Revenue came entirely from royalties under one sublicense agreement.
Financial performance and liquidity
| Metric | Three months ended September 30 | Nine months ended September 30 |
|---|---|---|
| Revenue, 2018 | $26,000 | $82,000 |
| Revenue, 2017 | $16,000 | $43,000 |
| Operating loss, 2018 | $1.189 million | $5.470 million |
| Net loss, 2018 | $2.925 million | $8.947 million |
| Net loss, 2017 | $2.052 million | $7.585 million |
| Basic and diluted loss per share, 2018 | $0.39 | $1.32 |
For the nine months, operating expenses were $5.552 million, down from $6.845 million. Revenue was immaterial relative to expenses, so conventional operating margins are not informative. The larger net loss reflected higher interest and debt-discount amortization, debt-extinguishment losses, and derivative-liability remeasurement.
At September 30, cash was $105,374, current assets were $182,041, and current liabilities were $8.923 million. Working capital deficiency was $8.741 million; stockholders’ deficiency was $8.938 million. Gross notes payable were reported as $4.929 million; the balance-sheet carrying amount, net of debt discounts, was $4.342 million. Nine-month operating cash use was $3.552 million, investing cash use was $12,869, and financing cash provided was $3.218 million, leaving cash down $346,306 from year-end 2017.
Material changes versus the prior comparable period
- Nine-month revenue increased 91% to $82,000; quarterly revenue increased to $26,000 from $16,000.
- Nine-month operating expenses declined 19%, mainly from lower consulting and R&D costs. Management attributed the reductions chiefly to less stock-based compensation and lower staffing costs.
- Nine-month net loss widened by $1.362 million despite the lower operating loss, primarily because other expense rose to $3.478 million from $783,000. Debt-discount amortization increased to $1.884 million from $377,000, and derivative-liability changes produced a $557,274 loss versus a $15,311 loss.
- Cash used in operations rose to $3.552 million from $2.494 million. Financing shifted toward debt: net debt-financing proceeds were $2.629 million and equity-financing proceeds were $589,168.
- Common shares outstanding increased to 8,721,839 at quarter-end from 6,112,473 at December 31, 2017. The filing also reports 24,710,731 shares reserved for future note conversions.
Outlook, risks, contingencies and unusual items
Management stated that substantial doubt exists about BRT’s ability to continue as a going concern. It expected available cash to fund operations only through December 2018 and said continued operations depend on raising capital and/or obtaining debt-holder conversions or maturity extensions. Failure to secure financing could require curtailing development and marketing or discontinuing operations.
BRT intended to begin BRTX-100 Phase 2 clinical-trial activities in the second quarter of 2019, subject to funding. Management estimated approximately $20 million would be needed to commence and complete Phase 2 and a further approximately $45 million to complete clinical trials, assuming no revenue. These estimates and timelines are not assured. Management expected R&D, marketing and G&A spending to increase as programs and operations advance.
After quarter-end, the company reported $1.139 million in debt-financing proceeds, $1.303 million of debt including accrued interest exchanged for common stock, and $191,391 of debt including interest and prepayment premiums repaid. As of the filing, it reported a $7,500 past-due note. Subsequent convertible financings carried conversion discounts and prepayment premiums. At September 30, $949,957 of derivative liabilities were recorded; fair-value changes are non-cash but can materially affect reported earnings. The filing describes substantial potential dilution from convertible notes, warrants and options, including variable-price conversion terms.
The filing reports no legal proceedings expected to materially affect the company and no material off-balance-sheet arrangements. Management concluded disclosure controls were effective at quarter-end and reported no material change in internal controls during the quarter.
Important facts for investors to verify
- Whether BRT obtained sufficient post-quarter financing to fund operations beyond December 2018, and the terms and availability of any additional capital.
- Current debt principal, maturities, past-due balances, prepayment obligations, extensions and conversions; reconcile the filing’s gross debt figures with net carrying amounts and subsequent transactions.
- Potential dilution from variable-price convertible notes and the reported 24.7 million shares reserved for future note conversions, as well as outstanding options and warrants.
- Whether the planned Phase 2 trial start and stated funding requirements remain current, and what regulatory, operational or financing milestones must be met.
- The sustainability and concentration of royalty revenue, which was generated from one sublicense, and the assumptions underlying derivative-liability valuations.