Case 8-20-71757-reg Doc 73 Filed 07/09/20 Entered 07/09/20 00:06:01
[PROPOSED] DISCLOSURE STATEMENT WITH RESPECT TO JOINT PLAN OF REORGANIZATION OF BIORESTORATIVE THERAPIES, INC. AND AUCTUS FUND, LLC
THE DEBTOR AND AUCTUS, AS CO-PROPONENTS, URGE ALL CREDITORS TO VOTE TO ACCEPT THE PLAN BECAUSE IT IS ANTICIPATED TO PROVIDE A HIGHER AND MORE CERTAIN RETURN TO CREDITORS THAN ANY ALTERNATIVE.
II. SUMMARY OF THE PLAN
The Plan contemplates that new capital will be raised that will provide for the payment of Allowed Claims under the Plan and the funding of the Reorganized Debtor’s continued operations, including clinical trials and other steps necessary to continue the development of the Debtor’s technology and intellectual property. The Plan provides for the satisfaction in full of all Allowed Secured Claims, Administrative Claims, Priority Claims and Priority Tax Claims, unless the holders of such Claims agree to different treatment. The holders of Allowed General Unsecured Claims will receive, at their election, either (a) common stock in the Reorganized Debtor in exchange for their Allowed Claims, or (b) if they choose to provide financing to the Reorganized Debtor in an amount of not less than seventy-five percent (75%) of their respective Allowed Claims, a Convertible Plan Note for the amount of their respective Allowed Claims and a Secured Convertible Plan Note for the amount of financing they provide to the Reorganized Debtor.
Case
A summary of the types of Claims and the projected recovery for each type of Claim follows. A Claim is placed in a particular Class for the purpose of voting on the Plan, and only to the extent that such Claim is Allowed for voting purposes in that Class and such Claim has not been paid, released or otherwise settled prior to the Confirmation Date.
Type of Claim Estimated Amount
Administrative Claims $25,000.00
Professional Fee Claims $82,500.00
Priority Tax Claims $0
Class 1 Secured Claims of John Desmarais, Tuxis Trust and/or Phoenix Cell Group Holdings, LLC $357,000.00
Class 2 Priority Claims $85,000.00
Class 3 General Unsecured Claims $14,796,000.00
Class 4 Convenience Class Claims $70,000.00
Class 5 Equity Interests N/A Retention of Equity Interests Unimpaired
4.2 The Debtor’s Assets
C. Unsecured Claims
As of the Petition Date, exclusive of payroll obligations, the Debtor’s unsecured liabilities were approximately $13,797,835. Those liabilities, exclusive of employee related obligations, are comprised of (i) convertible promissory note debt in the aggregate amount of $10,101,493, including interest and fees; (ii) convertible promissory note debt held by current insiders, in the aggregate amount of $156,542; (iii) non-convertible promissory note debt, excluding the 2016/2017 Notes and the February 2020 Bridge Notes, in the aggregate amount of $481,050, (iv) rent and additional rent arrears to the Debtor’s landlord in the amount of $50,686; (v) unpaid amounts under a services agreement concerning an animal study in the amount of $15,409; and (vi) other unsecured trade debt other operating debt totaling approximately $2,991,792. If the liens securing the 2016/2017 Notes are avoided, then the Debtor’s unsecured debt would increase by approximately $999,027.
As of the Petition Date, the Debtor owed its non-officer employees salaries of approximately $13,333, and officers $43,260 for the most recent pay period running from March 1, 2020 through and including March 15, 2020. Thus, the total payroll accrued but unpaid as of the Petition Date totaled approximately $60,923, inclusive of the associated taxes to be withheld from the employees or otherwise paid by the employer. Additionally, as of the Petition Date, the Debtor owed its employees and officers for expense reimbursements, a pre-petition severance claim, unused vacation time and unpaid salary totaling approximately $210,783. Some portion of these amounts is likely entitled to priority treatment under Section 507 of the Bankruptcy Code.
4.4 Events Precipitating the Bankruptcy Case
Subsequent to the FDA issuing its approval for the Debtor to commence a Phase 2 trial of BRTX-100, the Debtor engaged in efforts to raise funds sufficient to start such trial. While the Debtor had some success raising funds in order to sustain its operations, those efforts were not successful in raising sufficient funds to commence the Phase 2 trial. The Debtor’s efforts continued during the year prior to the Petition Date, with the Debtor directly and through retained professionals reaching out to numerous persons and entities, including individuals, medical device companies, healthcare funds, cell therapy companies, and pharmaceutical companies, in an attempt to summon interest by these entities to make a financial commitment to the Debtor’s programs through primarily licensing or purchasing structures. Those discussions targeted a plethora of industries and the full range of company sizes and value. There was no interest in acquiring outright any of the Debtor’s programs or technology, or the Company itself. In addition, the Debtor was advised that any potential interest in the technology would only occur after a successful clinical trial of BRTX-100 (which the Debtor has yet to start and is unable to commence due to a lack of funding). After contacting over 70 parties involved in degenerative disc disease, back pain, devices to treat the spine and general regenerative medicine, no parties expressed adequate interest to offer any indication to partner, acquire or license any of the Debtor’s programs.
On January 10, 2020, Desmarais resigned from the Debtor’s board of directors. With the 2016/2017 Notes maturing on January 30, 2020, Desmarais advised the Debtor that such maturity dates would not be extended, but that he would forebear from calling a default and enforcing his rights under those notes. Subsequent to the maturity of the 2016/2017 Notes, the Debtor received an offer from Desmarais, for the Debtor to sell all or substantially all of the Debtor’s assets, including, but not limited to, its owned intellectual properties and licenses of other intellectual properties and goodwill, as a going concern (collectively, the “Sale Assets”) through an orderly, competitive bid and sale process (the “Sale”) to Phoenix as part of a chapter 11 bankruptcy filing, subject to higher or better offers and Bankruptcy Court approval.
That offer (the “Phoenix Offer”) was thereafter negotiated by the Debtor and Phoenix and culminated in the execution of a stalking horse asset purchase agreement (the “Stalking Horse APA”), as further amended, which provided for the purchase by Phoenix of the Sale Assets, subject to the approval of this Bankruptcy Court and higher or better offers.
To facilitate the Debtor’s ongoing operations until the consummation of the Sale, Phoenix also agreed to provide debtor in possession financing sufficient to maintain operations of the Debtor, pay for the operating and administrative costs of the case according to an agreed upon budget, and implement the Sale process. Accordingly, the Phoenix Offer contemplated the continuation of the Debtor’s business without any corresponding liabilities, and did not provide for a forced liquidation sale of the Sale Assets in pieces.
The February 2020 Bridge Notes funding was made so that the Debtor could continue to operate as a going concern while definitive documents for the proposed sale and DIP Facility, as well as documents necessary to commence a chapter 11 filing, were prepared. After considering available options within the context of the status of the Debtor’s operations and inability to secure sufficient funding at that time, the Debtor determined in its business judgment to accept Phoenix’ offers to purchase the Sale Assets under the Stalking Horse APA, subject to the Bankruptcy Court’s approval and higher or better offers, and to fund the Sale process under 11 U.S.C. § 363(b) and (f) with the DIP Facility, subject to entry of both an order of the Court approving the DIP Facility on an interim basis and the Bid Procedures Order.
Absent the Sale of the Sale Assets under the proposed Stalking Horse APA, the Debtor and its board of directors determined it was unlikely that the Debtor would be able to prevent Desmarais from foreclosing on the Debtor’s assets which would have eliminated any ability to provide any material amount of money to its unsecured creditors. Moreover, the Phoenix Offer preserved the going concern value of the Sale Assets and avoided a possible chapter 7 bankruptcy filing in which going concern value would have been materially impacted and subjected the Sale Asset to forced liquidation value realizations. The Debtor believed no further purpose would have been served in maintaining the Debtor’s operations for a prolonged period beyond the Sale process without additional funding and incurrence of the extra cost and expense of seeking to reorganize the Debtor’s business due to its stage in business development, which relies on debt and/or equity investments to fund operations. The Debtor strongly believed that the Sale Assets needed to be sold as quickly as possible in order to preserve the going concern value of those Assets for the benefit of the Debtor, its creditors and its Estate. This bankruptcy case followed and was commenced on the Petition Date.
8.2 Best Interests of Creditors and Comparison with Chapter 7 Liquidation
As a condition to confirmation of the Plan, Section 1129(a)(7)(A)(ii) of the Bankruptcy Code requires that each holder of a claim or an interest in an impaired Class of Claims or Equity Interests must either accept the Plan or receive or retain at least the amount or value it would receive if the Debtor were liquidated under chapter 7 of the Bankruptcy Code on the Effective Date of the Plan.
Attached as Exhibit D is a liquidation analysis for the Debtor. If the Plan is not confirmed, the Debtor’s case would be converted to a chapter 7 case. As is demonstrated by the liquidation analysis, in a chapter 7 case the liquidation of the Debtor’s assets would not generate sufficient funds to pay secured claims in full, much less pay a dividend to Administrative Claims, Priority Claims or General Unsecured Claims.
In contrast, the Plan will provide for the payment in full of all secured claims, Administrative Claims and Priority Claims, and will distribute Common Stock or convertible notes and warrants to the holders of Allowed General Unsecured Claims and Allowed Equity Interests. The Proponents have not projected the value of such Common Stock on the Effective Date, but if the Reorganized Debtor can successfully develop its technology, the Common Stock may increase in value. Since the Petition Date, the Debtor’s stock has been trading at between $0.0001 and $0.0002 per share. If the Debtor’s share price continues to trade in that range after the Effective Date, a creditor electing to receive 100 shares per each $1.00 of unsecured debt would receive value of between $0.01 and $0.02 on that debt. Naturally, in the event that share price increases because the marketplace determines that the Debtor’s value has increased prior to confirmation of the Plan or will increase upon exit from bankruptcy under a confirmed Plan, such value may increase to the benefit of all shareholders, including those creditors receiving shares in exchange for debt. In any event, confirmation of the Plan will result in a greater return to unsecured creditors than might be realized if this case were converted to a case under chapter 7 of the Bankruptcy Code.
