Biorestoreative Therapies, Inc. — Q3 2016 Form 10-Q
Reporting period: Three and nine months ended September 30, 2016; filed November 14, 2016. The company develops cell-based therapies, including its brtxDISC disc/spine program and preclinical ThermoStem metabolic-disease program, and also develops a curved needle device and sells skincare products.
Financial results and liquidity
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Revenue | $5,000 | $96,122 | $30,280 | $429,788 |
| Gross profit | $5,000 | $45,201 | $30,199 | $227,790 |
| Operating expenses | $1,720,212 | $1,535,111 | $5,955,691 | $4,606,470 |
| Operating loss | $(1,715,212) | $(1,489,910) | $(5,925,492) | $(4,378,680) |
| Net loss | $(1,833,878) | $(1,623,835) | $(6,579,621) | $(4,804,254) |
| Basic and diluted loss per share | $(0.43) | $(0.57) | $(1.67) | $(2.11) |
Revenue was primarily lower because research-and-development agreements completed in 2015 were not replaced. 2016 revenue was mainly sublicense royalties; the company reported no R&D-agreement revenue in 2016. Gross profit was nearly all revenue, but the revenue base was minimal.
- Costs and margins: Nine-month operating expenses rose 29%, with R&D up 44% to $2.13 million and consulting up 62% to $1.27 million. Management attributed much of the increase to payroll, third-party laboratory work and stock-based compensation. Nine-month gross margin was approximately 99.7%, versus approximately 53.0% in 2015; the comparison reflects the shift away from R&D-contract revenue and associated costs.
- Cash flow: Cash used in operations was $3.94 million for the first nine months, versus $2.07 million in 2015; investing used $181,942 and financing provided $3.96 million. Cash fell to $6,316 from $166,555 at year-end 2015.
- Balance sheet at September 30: Current assets were $32,641 and current liabilities $5.55 million, producing a $5.52 million working-capital deficit. Total liabilities were $6.09 million, total assets $1.62 million, and stockholders’ deficiency $4.47 million. Gross notes payable were $1.91 million; the balance sheet reports notes payable net of discounts of approximately $1.78 million, plus accrued interest.
Changes, financing and outlook
- For the nine months, net loss widened 37% year over year as revenue fell sharply and operating expenses increased. The loss also included $437,856 of debt-discount amortization, compared with $177,947 in 2015; management cited convertible-note features and debt discounts.
- The company raised $2.92 million from stock and warrant sales and received $212,898 from warrant exercises during the period. It also issued debt, converted or exchanged notes and interest into shares, and repaid notes. Common shares issued increased to 4,437,152 from 3,338,661 at year-end 2015.
- Going concern: Management stated that the working-capital and stockholders’ deficits and recurring losses raise substantial doubt about the company’s ability to continue as a going concern. It expected available cash to fund operations only through December 2016 and said further financing was required. Failure to raise capital or obtain debt extensions/conversions could force curtailment of development or operations.
- By November 14, 2016, the company reported post-quarter equity financing of $164,966 and debt financing of $250,000; $50,000 of debt and $2,630 of accrued interest had been converted or exchanged into stock; and the due date on approximately $437,063 of debt had been extended through October 2017. It still reported $137,500 of past-due notes and total outstanding debt of $2,111,563.
- Management estimated $7.5–$8.5 million would be needed to commence and complete a Phase 2 Disc/Spine trial, with another $20–$30 million for subsequent clinical trials. These are estimates, not assured financing or trial outcomes.
- Management expected R&D, marketing and general and administrative spending to rise as programs advance and the business expands. No specific revenue or earnings guidance was provided.
Risks, contingencies and unusual items
- Notes carried interest rates ranging from 0% to 15%, with maturities through 2017; certain notes were past due. Some convertible notes allowed company-elected conversion at prices tied to a discount to market, potentially creating dilution.
- Stock-based compensation was a significant noncash expense: $1.87 million for the first nine months, including $1.72 million of option expense. A June option grant had an aggregate grant-date value of $2.68 million.
- The company disclosed up to $407,000 of performance-based cash bonuses for 2016 officers and certain employees. Management said ordinary-course legal matters were not expected to have a material financial-statement impact; legal proceedings were listed as not applicable.
- Management reported effective disclosure controls at quarter-end and no material changes in internal control over financial reporting. Market-risk disclosure was not applicable; no off-balance-sheet arrangements were reported.
Key facts for investors to verify
- Whether the company obtained enough financing after the stated December 2016 cash runway, and the terms and dilution associated with subsequent debt and equity issuances.
- Status and resolution of the $137,500 of past-due notes, other debt maturities, and the extended $437,063 obligation.
- Actual cash burn and whether clinical-development spending and the stated trial-funding estimates changed.
- Progress, regulatory status and funding requirements for BRTX-100 and ThermoStem, and whether any new R&D revenue agreements were secured.
- How continuing stock awards, warrants and discounted conversion provisions affect fully diluted share count.