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EX-32.2 - Bone Biologics Corpex32-2.htm
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EX-31.1 - Bone Biologics Corpex31-1.htm

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2018

 

[  ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from _________ to _________

 

Commission File No. 000-53078

 

Bone Biologics Corporation

(Exact name of registrant as specified in its charter)

 

Delaware   42-1743430

(State or other jurisdiction of

incorporation or formation)

 

(I.R.S. employer

identification number)

 

2 Burlington Woods Drive, Ste 100, Burlington, MA 01803

(Address of principal executive offices and Zip Code)

 

(781) 552-4452

(Registrant’s telephone number, including area code)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the preceding 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

[X] Yes [  ] No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (Section 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

[X] Yes [  ] No

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in rule 12b-2 of the Exchange Act.

 

Large accelerated filer [  ]   Accelerated filer [  ]
Non-accelerated filer [  ]   Smaller reporting company [X]
Emerging growth company [X]      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. [  ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

[  ] Yes [X] No

 

As of November 12, 2018, there were 8,439,185 shares of the issuer’s common stock, $0.001 par value, outstanding.

 

 

 

   
 

 

Bone Biologics Corporation

- INDEX -

 

  Page
PART I – FINANCIAL INFORMATION:  
   
Item 1. F-1
   
Unaudited Condensed Consolidated Financial Statements  
   
Unaudited Condensed Consolidated Balance Sheets F-1
   
Unaudited Condensed Consolidated Statements of Operations F-2
   
Consolidated Statement of Stockholders’ Deficit F-3
   
Unaudited Condensed Consolidated Statements of Cash Flows F-4
   
Notes to Unaudited Condensed Consolidated Financial Statements F-5
   
Item 2. Management’s Discussion and Analysis or Plan of Operation 4
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
   
Item 4. Controls and Procedures 9
   
PART II – OTHER INFORMATION:  
   
Item 1. Legal Proceedings 9
   
Item 1A. Risk Factors 9
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 10
   
Item 3. Defaults Upon Senior Securities 10
   
Item 4. Mine Safety Disclosures 10
   
Item 5. Other Information 10
   
Item 6. Exhibits 10
   
Signatures 11

 

 2 
 

 

NOTE ON FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (this “Form 10-Q”) contains forward-looking statements. Such forward-looking statements include those that express plans, anticipation, intent, contingency, goals, targets or future development and/or otherwise are not statements of historical fact. These forward-looking statements are based on our current expectations and projections about future events and they are subject to risks and uncertainties known and unknown that could cause actual results and developments to differ materially from those expressed or implied in such statements. These forward-looking statements are subject to a number of risks, uncertainties and assumptions. For a more detailed listing of some of the risks and uncertainties facing the Company, please see our Current Report on Form 10-K for the fiscal year ended December 31, 2017, filed with the Securities and Exchange Commission (“SEC”) on April 2, 2018.

 

All statements other than historical facts contained in this report, including statements regarding our future financial position, capital expenditures, cash flows, business strategy and plans and objectives of management for future operations are forward-looking statements. The words “anticipated,” “believe,” “expect,” “plan,” “intend,” “seek,” “estimate,” “project,” “could,” “may,” and similar expressions are intended to identify forward-looking statements. These statements include, among others, information regarding future operations, future capital expenditures, and future net cash flow. Such statements reflect our management’s current views with respect to future events and financial performance and involve risks and uncertainties, including, without limitation, our ability to raise additional capital to fund our operations, obtaining Food and Drug Administration (“FDA”) and other regulatory authorization to market our drug and biological products, successful completion of our clinical trials, our ability to achieve regulatory authorization to market our lead product NELL-1, our reliance on third party manufacturers for our drug products, market acceptance of our products, our dependence on licenses for certain of our products, our reliance on the expected growth in demand for our products, exposure to product liability and defect claims, development of a public trading market for our securities, and various other matters, many of which are beyond our control.

 

Should one or more of these risks or uncertainties occur, or should underlying assumptions prove to be incorrect, actual results may vary materially and adversely from those anticipated, believed, estimated or otherwise indicated. Consequently, all of the forward-looking statements made in this Annual Report are qualified by these cautionary statements and accordingly there can be no assurances made with respect to the actual results or developments. We undertake no obligation to revise or publicly release the results of any revision to these forward-looking statements, except as required by law. Given these risks and uncertainties, readers are cautioned not to place undue reliance on such forward-looking statements.

 

Unless expressly indicated or the context requires otherwise, the terms “Company,” “we,” “us,” and “our” in this document refer to Bone Biologics Corporation, a Delaware corporation, and, its wholly owned subsidiary as defined under the heading “Management’s Discussion and Analysis” in this Form 10-Q.

 

 3 
 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements.

 

Bone Biologics Corporation

 

Condensed Consolidated Balance Sheets

 

    September 30, 2018    

December 31,

2017

 
      (unaudited)          
Assets                
                 
Current assets                
Cash   $ 2,294,118     $ 690,279  
Prepaid expenses     56,111       105,234  
                 
Total current assets     2,350,229       795,513  
                 
Property and equipment, net     74       146  
                 
Total assets   $ 2,350,303     $ 795,659  
                 
Liabilities and Stockholders’ Deficit                
                 
Current liabilities                
Accounts payable and accrued expenses   $ 133,127     $ 720,128  
Deferred compensation     391,667       241,667  
                 
Total current liabilities     524,794       961,795  
                 
Note payable – related party, net of debt discount of $0 and $770,313, respectively     9,000,000       8,229,687  
                 
Total liabilities     9,524,794       9,191,482  
                 
Commitments and Contingencies                
                 
Stockholders’ deficit                
Preferred Stock, $0.001 par value per share; 20,000,000 shares authorized; none issued or outstanding at September 30, 2018 and December 31, 2017     -       -  
Common stock, $0.001 par value per share; 100,000,000 shares authorized; 8,439,185 and 4,328,080 shares issued and outstanding at September 30, 2018 and December 31, 2017     8,439       4,328  
Additional paid-in capital     54,961,803       48,961,794  
Common stock to be issued to related parties; -0- and 115,385 shares at September 30, 2018 and December 31, 2017     -       1,823,077  
Accumulated deficit     (62,144,733 )     (59,185,022 )
                 
Total stockholders’ deficit     (7,174,491 )     (8,395,823 )
                 
Total liabilities and stockholders’ deficit   $ 2,350,303     $ 795,659  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 F-1 
 

 

Bone Biologics Corporation

 

Condensed Consolidated Statements of Operations

 

    Three
Months
Ended
September 30, 2018
    Three
Months
Ended
September 30, 2017
   

Nine

Months
Ended
September 30, 2018

   

Nine

Months
Ended
September 30, 2017

 
    (unaudited)     (unaudited)     (unaudited)     (unaudited)  
Revenues   $ -     $ -     $ -     $ -  
                                 
Cost of revenues     -       -       -       -  
                                 
Gross profit     -       -       -       -  
                                 
Operating expenses                                
Research and development                                
Trade     (1,049,257     234,264       (444,947     1,070,342  
Related party     -       -       -       (2,744,749 )
General and administrative     644,466       896,512       1,997,030       2,990,393  
                                 
Total operating expenses     (404,791     1,130,776       1,552,083       1,315,986  
                                 
Income (Loss) from operations     404,791       (1,130,776     (1,552,083 )     (1,315,986  )
                                 
Other expenses                                
Interest expense, net – related party     (238,234 )     (1,244,963 )     (997,727 )     (2,964,377 )
Loss on debt extinguishment – related party     (408,294 )     -       (408,294 )     -  
                                 
Total other expenses     (646,528 )     (1,244,963 )     (1,406,021 )     (2,964,377 )
                                 
Loss before provision for income taxes     (241,737 )     (2,375,739 )     (2,958,104 )     (4,280,363 )
                                 
Provision for income taxes     7       -       1,607       1,600  
                                 
Net loss   $ (241,744 )   $ (2,375,739 )   $ (2,959,711 )   $ (4,281,963 )
                                 
Weighted average shares outstanding – basic and diluted     7,393,788       3,888,808       5,398,506       3,886,869   
                                 
Net Loss per share – basic and diluted   $ (0.03 )   $ (0.61 )   $ (0.55 )   $ (1.10 )

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 F-2 
 

 

Bone Biologics Corporation

 

Consolidated Statement of Stockholders’ Deficit

For the nine months ended September 30, 2018

(unaudited)

 

    Common Stock     Additional Paid-in     Common Stock to be     Accumulated     Total Stockholders’  
    Shares     Amount     Capital     Issued     Deficit     Deficit  
Balance at December 31, 2017     4,328,080     $ 4,328     $ 48,961,794     $ 1,823,077     $ (59,185,022 )   $ (8,395,823 )
                                                 
Fair value of vested stock options     -       -       (637,436     -       -       (637,436
                                                 
Shares issued for cash     25,000       25       492,475       -       -       492,500  
                                                 
Fair value of shares issued in settlement of bonus payable     23,146       23       455,977       -       -       456,000  
                                                 
Shares issued to related party upon net settlement of warrants     30,847       31       (31 )     -       -       -  
                                                 
Shares issued to related party under anti-dilution provision     46,667       47       (47 )     -       -       -  
                                                 
Shares issued to related party for cash     3,539,654       3,540       3,536,114       -       -       3,539,654  
                                                 
Shares issued upon close of rights offering (including 329,674 shares to related parties)     330,325       330       329,995       -       -       330,325  
                                                 
Share adjustment for stock split rounding     81       -       -       -       -       -  
                                                 
Issuance pursuant founders agreement     115,385       115       1,822,962       (1,823,077 )     -       -  
                                                 
Net Loss     -       -       -       -       (2,959,711 )     (2,959,711 )
                                                 
Balance at September 30, 2018 (unaudited)     8,439,185     $ 8,439     $ 54,961,803     $ -     $ (62,144,733 )   $ (7,174,491 )

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 F-3 
 

 

Bone Biologics Corporation

 

Condensed Consolidated Statements of Cash Flows

 

   

Nine Months
Ended

September 30, 2018

    Nine Months
Ended
September 30, 2017
 
    (unaudited)     (unaudited)  
Cash flows from operating activities                
Net loss   $ (2,959,711 )   $ (4,281,963 )
Adjustments to reconcile net loss to net cash used in operating activities:                
Depreciation     72       72  
Debt discount amortization     340,735       2,158,496  
Debt issuance costs amortization     21,283       29,383  
Stock-based compensation     492,754       1,405,396  
Options issued to consultants     (1,130,189     (2,338,812 )
Loss on debt extinguishment     408,294       -  
Changes in operating assets and liabilities:                
Prepaid expenses and other current assets     41,623       34,117  
Accounts payable and accrued expenses     (131,001 )     479,915  
Deferred issuance costs     -       (35,000 )
Deferred compensation     150,000       150,000  
                 
Net cash used in operating activities     (2,766,140 )     (2,398,396 )
                 
Cash flows from financing activities                
Proceeds from issuance of common stock     4,369,979       700,000  
Proceeds from issuance of note payable     600,000       2,700,000  
Repayment of note payable     (600,000 )     -  
Net cash provided by financing activities     4,369,979       3,400,000  
                 
Net increase in cash     1,603,839       1,001,604  
                 
Cash, beginning of period     690,279       620,375  
Cash, end of period   $ 2,294,118     $ 1,621,979  
                 
Supplemental non-cash information                
Interest paid   $ 389,519     $ 516,375  
Taxes paid   $ 1,607     $ 1,600  
Supplemental non-cash investing and finance activities:                
Beneficial conversion feature of notes payable   $ -     $ 2,000,000  
Prepaid offering costs netted against proceeds from issuance of common stock   $ 7,500     $ -  
Shares issued in settlement of bonus payable   $ 456,000     $ -  

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

 F-4 
 

 

Bone Biologics Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For the nine months ended September 30, 2018

 

1. The Company

 

Bone Biologics Corporation (the “Company”) was incorporated under the laws of the State of Delaware on October 18, 2007 as AFH Acquisition X, Inc. Pursuant to a Merger Agreement, dated September 19, 2014, by and among the Company, its wholly-owned subsidiary, Bone Biologics Acquisition Corp., a Delaware corporation (“Merger Sub”), and Bone Biologics, Inc. Merger Sub merged with and into Bone Biologics Inc., with Bone Biologics Inc. remaining as the surviving corporation in the merger. Upon the consummation of the merger, the separate existence of Merger Sub ceased. On September 22, 2014, the Company officially changed its name to “Bone Biologics Corporation” to more accurately reflect the nature of its business and Bone Biologics, Inc. became a wholly owned subsidiary of the Company. Bone Biologics, Inc. was incorporated in California on September 9, 2004.

 

We are a medical device company that is currently focused on bone regeneration in spinal fusion using the recombinant human protein, known as NELL-1/DBX®. The NELL-1/DBX® combination product is an osteostimulative recombinant protein that provides target specific control over bone regeneration. The protein, as part of the UCB-1 technology platform, has been licensed exclusively for worldwide applications to us through a technology transfer from UCLA Technology Development Group on behalf of UC Regents (“UCLA TDG”). UCLA TDG and the Company received guidance from the FDA that NELL-1/DBX® will be classified as a combination product with a device lead.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. We would cease to be an emerging growth company upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year; or (iii) the date on which we have, during the previous three-year period, issued more than $1.07 billion in non-convertible debt securities. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. We have elected to take advantage of these reduced disclosure obligations, and may elect to take advantage of other reduced reporting obligations in the future.

 

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to irrevocably “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted.

 

The production and marketing of the Company’s products and its ongoing research and development activities will be subject to extensive regulation by numerous governmental authorities in the United States. Prior to marketing in the United States, any combination product developed by the Company must undergo rigorous preclinical (animal) and clinical (human) testing and an extensive regulatory approval process implemented by the FDA under the Food, Drug and Cosmetic Act. There can be no assurance that the Company will not encounter problems in clinical trials that will cause the Company or the FDA to delay or suspend clinical trials.

 

The Company’s success will depend in part on its ability to obtain patents and product license rights, maintain trade secrets, and operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurance that patents issued to or licensed by the Company will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to the Company.

 

 F-5 
 

 

Going Concern and Liquidity

 

The Company has no significant operating history and since inception to September 30, 2018 has incurred accumulated losses of approximately $62.1 million. The Company will continue to incur significant expenses for development activities for their lead product NELL-1/DBX®. Operating expenditures for the next twelve months are estimated at $8.2 million. The accompanying condensed consolidated financial statements for the period ended September 30, 2018 have been prepared assuming the Company will continue as a going concern. As reflected in the condensed consolidated financial statements, the Company had a stockholders’ deficit of $7,174,491 at September 30, 2018, and incurred a net loss of $2,959,711, and used net cash in operating activities of $2,766,140 during the nine-month period ended September 30, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In addition, our independent accounting firm, in its audit report to the financial statements included in our Annual Report for the year ended December 31, 2017, expressed substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The Company will continue to attempt to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs. If cash resources are insufficient to satisfy the Company’s on-going cash requirements, the Company will be required to scale back or discontinue its product development programs, or obtain funds if available (although there can be no certainties) through strategic alliances that may require the Company to relinquish rights to its technology, substantially reduce or discontinue its operations entirely. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

 

The Company closed on $500,000 of equity financing in March 2018 and $600,000 of debt financing in May 2018. On July 16, 2018, the Company closed a Rights Offering (“Rights Offering”) to existing shareholders and certain related parties and, on July 24, 2018, a private placement with Hankey Capital LLC (“Hankey Capital”) in the aggregate amount of $3,869,979 and secured a credit facility with Hankey Capital for $2,000,000. In the Rights Offering the Company issued 330,325 shares to four shareholders, including 329,674 shares to certain related parties(the “Rights Shares”) and issued 3,539,654 shares to Hankey Capital (the “Hankey Shares”) pursuant to a Securities Purchase Agreement.

 

The proceeds from the sale of the Rights Shares and the Hankey Shares of $3,869,979 were used to repay the promissory note for $600,000 and the remaining proceeds have been and will be used for working capital, protein development, animal testing, regulatory and clinical expenses, as well as for other purposes not presently contemplated herein but which are related directly to growing the Company’s current business, research and development activities.

 

Pursuant to our October 2016 and February 2017 Convertible Notes, which were subsequently converted into shares of common stock on December 31, 2017, the Company may only use the proceeds from the issuance of these Convertible Notes to focus on prioritizing operations on essential research and development activities. Also pursuant to the October 2016 Note Purchase Agreement, the Company’s management has agreed to defer 20% of earned compensation and the Board of Directors has authorized a change in director compensation to defer 50% of the directors’ cash compensation until at least $5,000,000 has been received in cumulative funding from non-current stockholders.

 

Reverse Stock Split

 

On June 11, 2018 and effective July 24, 2018, the directors of the Company approved a resolution to undertake a reverse split of the common stock of the Company on a basis of 1 new common share for 10 old common share. All references in these financial statements to number of common shares, price per share and weighted average number of shares outstanding prior to the 1 for 10 reverse split have been adjusted to reflect the stock split on a retroactive basis as of the earliest period presented, unless otherwise noted.

 

 F-6 
 

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation

 

The interim condensed consolidated financial statements included herein reflect all material adjustments (consisting of normal recurring adjustments and reclassifications and non-recurring adjustments) which, in the opinion of management, are ordinary and necessary for a fair presentation of results for the interim periods. Certain information and footnote disclosures required under the accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). The Company believes that the disclosures are adequate to make the information presented not misleading. The condensed consolidated balance sheet information as of December 31, 2017 was derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K filed with the SEC on April 2, 2018 (the “2017 Annual Report”). These condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2017 and notes thereto included in the 2017 Annual Report.

 

The results of operations for the three and nine months ended September 30, 2018 are not necessarily indicative of the results to be expected for the entire fiscal year ended December 31, 2018 or for any other period.

 

Reclassification

 

Certain accounts totaling $20,833 previously reflected in the prior-period financial statements as research and development expense have been reclassified to general and administrative expense to conform to the presentation in the current-period financial statements.

 

Use of Estimates

 

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make certain estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and reported amounts of expenses during the reporting period. Significant estimates include the assumptions used in the accrual for potential liabilities, the valuation of stock options and warrants issued for services, and deferred tax valuation allowances. Actual results could differ from those estimates.

 

Fair Value of Financial Instruments

 

The Company’s consolidated financial instruments are cash, accounts payable and notes payable. The recorded values of cash and accounts payable approximate their values based on their short-term nature. The fair value of convertible notes payable approximate their fair value since the current interest rates and terms on these obligations are the same as prevailing market rates.

 

The Company defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value hierarchy is based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last is considered unobservable:

 

Level 1: Quoted prices in active markets for identical assets or liabilities.

 

Level 2: Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 assumptions: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities including liabilities resulting from embedded derivatives associated with certain warrants to purchase common stock.

 

An “established trading market” for the Company’s common stock does not exist. During the six months ended June 30, 2018, the Company utilized $20.00 (post reverse split) per share as the fair value of its common stock for accounting purposes based on one common stock transaction with an investor during March 2018. Subsequently, during the three months ended September 30, 2018, based on the analysis as described below, management determined that the fair value of the Company’s common stock for accounting purposes was $0.94 per share. The reduction in the fair value of the Company’s common stock from $20.00 per share to $0.94 per share during the three months ended September 30, 2018 resulted in a reversal of certain stock-based compensation charges recorded during the six months ended June 30, 2018 and thus a credit balance in certain operating accounts for the nine months ended September 30, 2018.

 

In drawing its conclusions, management considered various relevant factors, including the work of an independent third party valuation firm engaged to provide a valuation analysis as of July 24, 2018, which indicated a valuation of $0.94 per common share. Management also took into account the recent cash transaction price for the Company’s common stock pursuant to a July 2018 Rights Offering to all common stockholders, which resulted in the sale of common shares to an affiliate of the Company and parties related to such affiliate at a slightly higher price of $1.00 per share. The Company entered into a series of interrelated transactions with such affiliate at the same $1.00 price per share during the three months ended September 30, 2018.

 

The July 24, 2018 valuation analysis employed the discounted future value method and utilized financial metrics observed in the marketplace. Management ultimately determined, and the valuation firm concurred, that the discounted future value method was the most appropriate valuation methodology under the circumstances.

 

The utilization of the discounted future value method involved the estimation of a business enterprise value (“BEV”)/revenue multiple, the probability of approval of the Company’s technology, the estimation of the Company’s cost of equity and weighted average cost of capital, the estimation of a required rate of return appropriate for discounting projected revenues to calculate the present value of the business enterprise, and an appropriate discount period. This method involved projecting revenues through 2028 and applying an appropriate BEV/revenue multiple.

 

Stock Based Compensation

 

ASC 718, Compensation – Stock Compensation, prescribes accounting and reporting standards for all share-based payment transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including grants of employee stock options, are recognized as compensation expense in the consolidated financial statements based on their fair values. That expense is recognized over the period during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting period).

 

The Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of ASC 505-50, Equity – based Payments to Non-Employees. Measurement of share-based payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier of the performance commitment date or the performance completion date.

 

In light of the lack of an “established trading market”, the fair value of the shares was determined based on the discounted future value valuation methodology. Pursuant to ASU No. 2016-09 – Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting, the Company accounts for forfeitures when they occur.

 

Stock options issued to non-employees and consultants are revalued each reporting period to determine the amount to be recorded in the statement of operations in the respective period. As stock options vest, they are valued on each vesting date and an adjustment is recorded for the difference between the value already recorded and the value on the date of vesting. Forfeitures of the unvested portion of stock option grants are recorded when the underlying event occurs, and are recorded as a reversal of the related expense. An increase in the Company’s stock price during a reporting period will generally result in an increase in the fair value of unvested stock options and thus the related expense, and a decrease in the Company’s stock price during a reporting period will generally result in a decrease in the fair value of unvested stock options and thus the related expense. Accordingly, depending on various factors, the recording of forfeitures and a decrease in the price of the Company’s common stock during a reporting period can result in a credit balance in an operating account in the statement of operations.

 

Loss per Common Share

 

The Company utilizes FASB ASC Topic No. 260, Earnings per Share. Basic loss per share is computed by dividing loss available to common shareholders by the weighted-average number of common shares outstanding. Diluted loss per share is computed similar to basic loss per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. Diluted loss per common share reflects the potential dilution that could occur if convertible debentures, options and warrants were to be exercised or converted or otherwise resulted in the issuance of common stock that then shared in the earnings of the entity.

 

 F-7 
 

 

Since the effects of outstanding options, warrants, and the conversion of convertible debt are anti-dilutive for the three and nine months ended September 30, 2018 and 2017, shares of common stock underlying these instruments have been excluded from the computation of loss per common share.

 

The following sets forth the number of shares of common stock underlying outstanding options, warrants, and convertible debt as of September 30, 2018 and 2017:

 

   September 30, 
   2018   2017 
Warrants   860,919    1,039,082 
Stock options   843,648    839,722 
Convertible promissory notes   7,860,760    959,620 
    9,565,327    2,838,424 

 

New Accounting Standards

 

In February 2016, the FASB issued Accounting Standards Update No. 2016-02 (ASU 2016-02), Leases (Topic 842). ASU 2016-02 requires a lessee to record a right-of-use asset and a corresponding lease liability, initially measured at the present value of the lease payments, on the balance sheet for all leases with terms longer than 12 months, as well as the disclosure of key information about leasing arrangements. ASU 2016-02 requires recognition in the statement of operations of a single lease cost, calculated so that the cost of the lease is allocated over the lease term, generally on a straight-line basis. ASU 2016-02 requires classification of all cash payments within operating activities in the statement of cash flows. Disclosures are required to provide the amount, timing and uncertainty of cash flows arising from leases. A modified retrospective transition approach is required for lessees for capital and operating leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. ASU 2016-02 is effective for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Company has not yet evaluated the impact of the adoption of ASU 2016-02 on the Company’s financial statement presentation or disclosures.

 

In July 2017, the FASB issued ASU No. 2017-11, “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features; (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception” (“ASU 2017-11”). ASU 2017-11 allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted for as derivative liabilities. A company will recognize the value of a down round feature only when it is triggered, and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, an entity will treat the value of the effect of the down round as a dividend and a reduction of income available to common stockholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. ASU 2017-11 is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption is permitted. The guidance in ASU 2017-11 can be applied using a full or modified retrospective approach. The Company is currently evaluating the impact of the adoption of ASU 2017-11 on the Company’s financial statement presentation or disclosures.

 

In September 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to nonemployee share-based payment accounting. This ASU simplifies the accounting and reporting for share-based payments issued to nonemployees by expanding the scope of ASC 718, Compensation - Stock Compensation, which currently only includes share-based compensation to employees, to also include share-based payments to nonemployees for goods and services. The standard is effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. Early adoption is permitted, but no earlier than a company’s adoption date of ASC 606. Management is currently in the process of evaluating the impact of the standard on its consolidated financial statements and disclosures.

 

 F-8 
 

 

Other recent accounting pronouncements issued by the FASB, including its Emerging Issues Task Force, the American Institute of Certified Public Accountants, and the Securities and Exchange Commission did not or are not believed by management to have a material impact on the Company’s present or future consolidated financial statements.

 

3. Accounts Payable and Accrued Expenses

 

Accounts payable and accrued expenses consist of the following:

 

   

September 30,

2018

    December 31,
2017
 
Accounts payable   $ 65,485     $ 216,903  
Accrued bonus     -       456,000  
Deferred Directors’ fees     67,642       47,225  
    $ 133,127     $ 720,128  

 

4. Notes Payable - Related Parties

 

Note Type  Issue
Date
  Maturity Date 

Interest

Rate

   September 30, 2018   December 31,
2017
 
                   
(A) First Secured Convertible Note  10/24/14  12/31/19   9.25%  $5,000,000   $5,000,000 
                      
(A) Second Secured Convertible Note  5/4/15  12/31/19   9.25%   2,000,000    2,000,000 
                      
(B) Third Secured Convertible Note  2/24/16  12/31/19   9.25%   2,000,000    2,000,000 
               9,000,000    9,000,000 
Less: Debt discount              -    (724,606)
Less: Debt issuance costs              -    (45,707)
Net Notes payable             $9,000,000   $8,229,687 

 

 F-9 
 

 

First and Second Secured Convertible Notes and Warrants

 

(A) On October 24, 2014 and May 4, 2015, the Company issued two convertible promissory notes in the aggregate amount of $7,000,000 to Hankey Capital. Don Hankey, the CEO and Chairman of Hankey Group, is our non-independent Chairman of the Board and a significant shareholder. Bret Hankey, the president of Hankey Capital, is a non-independent board member. The Convertible Notes mature on December 31, 2019 and bear interest at an annual rate of interest of the “prime rate” plus 4.0%, with a minimum rate of 8.5% per annum until maturity, with interest payable monthly in arrears. Prior to the Maturity Date, Hankey Capital has a right, in its sole discretion, to convert the Convertible Notes into shares of the Company’s Common Stock, at a conversion rate equal to the greater of (i) $15.80 per share or (ii) 70% of the average daily price for the Common Stock as measured over the course of the 60 day period prior to the conversion. The Company also issued warrants to Hankey Capital for 585,443 shares of Common Stock at an exercise price per share of $15.80 that expire three years from the date of issuance. In connection with the Convertible Notes, the Company issued 886,076 common shares as collateral shares and paid commitment fees in the amount of 3.0% of the original principal amount of the loans ($210,000) to Hankey Capital and other aggregate offering costs of $594,550. The aggregate value of the warrants and offering costs totaling $2,891,409 was considered to be a debt discount upon issuance of the notes and was amortized as interest over the terms of the notes or in full upon the conversion of the notes.

 

  The Convertible Notes are secured by 585,443 collateral shares of Common Stock issued by the Company in the name of Hankey Capital, in such amount so as to maintain a loan to value ratio of no greater than 50% (the “Collateral”). The number of shares in the Collateral shall be adjusted on a yearly basis. The Convertible Notes are further secured by collateral assignments of all the Company’s license agreements. The principal amount of the loan is pre-payable in whole or in part at any time, without premium or penalty. Upon any voluntary partial prepayment of outstanding principal, Hankey Capital will return Collateral shares to the Company in the amount necessary, if any, to maintain the loan to value ratio at no less than 50%. Upon a full payment of the outstanding principal, all Collateral shares shall be returned return and cancelled. Hankey Capital will also return Collateral shares under the same terms in case of partial or full conversion of the Convertible Notes. The Notes and Warrants contain provisions limiting the exercise/conversion thereof.
   
  On February 24, 2016, the First and Second Secured Convertible Notes were modified to extend the maturity date to December 31, 2019 and fix the conversion price at $15.80 and the warrants were amended to extend their expiration date by two years. The Company determined that the extension of the convertible notes’ maturity dates and the warrants’ expiration dates resulted in a debt extinguishment for accounting purposes since the change in fair value of the warrants as a result of the extension of their expiration dates was more than 10% of the original value of the convertible notes. As such, the Company recorded the notes at their aggregate fair value of $7,000,000.

 

 F-10 
 

 

Third Convertible Secured Term Note and Warrants

 

(B) On February 24, 2016, the Company issued a convertible promissory note in the amount of $2,000,000 to Hankey Capital. The Third Convertible Note matures on February 23, 2019 (the “Maturity Date”) and bears interest at an annual rate of interest at the “prime rate” (as quoted in the “Money Rates” section of The Wall Street Journal) plus 4.0%, with a minimum rate of 8.5% per annum until maturity, with interest payable monthly in arrears. Prior to the Maturity Date, Hankey Capital has a right, in its sole discretion, to convert the Convertible Note into shares of the Company’s common stock (the “Conversion Shares”), at a conversion rate equal to $15.80 per share and issued a warrant to Hankey Capital for 146,342 shares of Common Stock at an exercise price per share of $20.50. The Warrant will expire on February 23, 2021. The Note and Warrant contain provisions limiting the exercise/conversion thereof. The Convertible Note is secured by 146,342 collateral shares of Common Stock issued by the Company in the name of Hankey Capital, in such amount so as to maintain a loan to value ratio of no greater than 50%. The number of Collateral Shares will be adjusted on a yearly basis. The Convertible Note is further secured by all of the Company’s personal property, including collateral assignments of all the Company’s license agreements and the MTF Sygnal Option Agreement. The principal amount of the loan is prepayable in whole or in part at any time, without premium or penalty. Upon any voluntary partial prepayment of outstanding principal, Hankey Capital will return Collateral Shares to the Company in the amount necessary, if any, to maintain the loan to value ratio at no less than 50%. Upon a full payment of the outstanding principal, all Collateral Shares will be returned and cancelled. Hankey Capital will also return Collateral Shares under the same terms in case of partial or full conversion of the Convertible Note. In connection with the Convertible Note, on February 24, 2016 the Company issued 253,165 common shares as collateral and paid a commitment fee in the amount of $40,000 (2% of the original principal amount of the Loan) and other offering costs totaling $77,532. The aggregate value of the warrants, beneficial conversion feature and offering costs of $2,000,000 was considered to be a debt discount upon issuance of the note and will be amortized as interest over the term of the note or in full upon the conversion of the note.

  

Debt Amendments

 

In connection with the financing that closed on July 16, 2018 (Note 6), the Company and Hankey Capital executed amendments (the “Amendments”) to the First, Second and Third convertible secured term notes (the “Existing Convertible Notes”). The Amendments change Hankey Capital’s conversion price from $15.80 per share to $1.00 per share on a post reverse stock split basis on the Existing Convertible Notes and extends the maturity date of the Third Convertible Note from February 24, 2019 to December 31, 2019. The Amendments became effective on the closing of the rights offering, July 16, 2018. The Company determined that the change in the conversion prices of the Existing Convertible Notes and extension of the Third Convertible Note’s maturity date resulted in debt extinguishments for accounting purposes since the change in fair value of the conversion options was more than 10% of the original value of the Existing Convertible Notes. The Company recorded a loss on extinguishment of debt totaling $408,294 for the remaining unamortized debt discount.

 

The total debt discount amortization related to our outstanding debt for the periods ended September 30, 2018 and 2017, was $340,735 and $2,158,496, respectively. The unamortized debt discount at September 30, 2018 was $-0-. The unamortized debt discount at December 31, 2017 was $724,606. During 2018, $383,861 of debt discount was written off as a result of the debt extinguishment.

 

The total debt issuance amortization related to our outstanding debt for the periods ended September 30, 2018 and 2017, was $21,283 and $29,383, respectively. The unamortized debt issuance costs at September 30, 2018 was $-0-. The unamortized debt issuance costs at December 31, 2017 was $45,707. During 2018, $24,433 of debt issuance costs were written off as a result of the debt extinguishment.

 

5. Credit Facility

 

On July 24, 2018, the Company and Hankey Capital entered into an agreement under which Hankey Capital will provide a credit facility to the Company of $2,000,000 to be drawn down by the Company upon notice to Hankey Capital. Each draw will be evidenced by a convertible secured note are convertible prior to the maturity date at $1.00 per share and are due on December 31, 2019. Draws bear interest at an annual rate of interest at the “prime rate” (as quoted in the “Money Rates” section of The Wall Street Journal) plus 4.0%, with a minimum rate of 8.5% per annum until maturity, with interest payable monthly in arrears. Each note will be dated the date of the applicable draw and will bear interest from the date of the draw. At September 30, 2018, the Company had not drawn any funds under the facility.

 

6. Stockholders’ Deficit

 

Preferred Stock

 

The Company’s amended and restated certificate of incorporation authorizes the Company to issue a total of 20,000,000 shares of preferred stock. No shares have been issued.

 

Common Stock

 

The Company’s amended and restated certificate of incorporation authorizes the Company to issue a total of 100,000,000 shares of common stock. As of September 30, 2018 and December 31, 2017, the Company had an aggregate of 8,429,185 and 4,328,080 shares of common stock outstanding, respectively.

 

 F-11 
 

 

In February 2018, 32,289 warrants were exercised on a cashless basis resulting in the issuance of 16,706 shares of common stock. In May 2018, 28,719 warrants were exercised on a cashless basis resulting in the issuance of 14,141 shares of common stock.

 

In February 2018, management was issued 23,146 shares of restricted common stock with a fair value of $456,000 in settlement of bonuses payable.

 

On March 26, 2018, the Company entered into a share purchase agreement pursuant to which an aggregate of 25,000 shares of common stock of the Company were issued at a price per share equal to $20.00 ($2.00 pre-split) for total proceeds of $500,000.

 

In May 2018, the Company closed a private placement offering and in accordance with the terms of the anti-dilution provision of the subscription agreement with Musculoskeletal Transplant Foundation (“MTF”), issued to MTF 46,667 shares of common stock.

 

In July 2018, the Company closed a Rights Offering, issued 330,325 shares to four shareholders (including an aggregate of 329,674 shares to two related parties), and issued 3,539,654 shares to Hankey Capital pursuant to a Securities Purchase Agreement for aggregate proceeds of $3,869,979.

 

In September 2018, the Company issued 115,385 shares with a value of $1,823,077 previously reflected as common stock to be issued pursuant to the Founders’ Letter Agreement dated October 2, 2015 (Note 8).

 

Common Stock Warrants

 

A summary of warrant activity for the period ended September 30, 2018 is presented below:

 

   Number of   Weighted
Average
Exercise
   Weighted
Average
 
Subject to Exercise  Warrants   Price   Life (Years) 
Outstanding as of December 31, 2017   1,026,424   $15.17    2.23 
Granted – 2018   -    -    - 
Forfeited/Expired – 2018   (104,497)   -    - 
Exercised – 2018   (61,008)   9.74    2.89 
Outstanding as of September 30, 2018   860,919   $5.14    1.63 

 

As of September 30, 2018, the Company had outstanding vested and unexercised Common Stock Warrants as follows:

 

Date Issued  Exercise Price   Number of Warrants   Expiration date 
2009  $4.40    11,839    March 16, 2019 
2010  $4.40    22,659    February 4, 2020 
April 2013  $10.00    5,000    April 28, 2020 
September 2013  $10.00    5,000    September 4, 2020 
September 2013  $10.00    2,500    September 20, 2020 
November 2013  $10.00    7,500    November 14, 2020 
July 2014  $10.00    50,000    June 30, 2020 
July 2014  $10.00    4,667    July 2, 2019 
September 2014  $16.20    62,500    August 31, 2021 
September 2014  $10.00    11,800    September 18, 2021 
September 2014  $10.00    8,959    September 29, 2021 
October 2014  $15.80    316,456    October 23, 2019 
May 2015  $15.80    189,874    May 4, 2020 
October 2015  $15.80    15,823    October 27, 2018 
February 2016  $20.50    146,342    February 23, 2021 
                
Total warrants at September 30, 2018        860,919      

 

An aggregate of 61,008 common stock warrants were exercised on a non-cash basis resulting in the issuance of 30,847 common shares and 104,497 warrants expired during the period ended September 30, 2018. The intrinsic value of the outstanding warrants on September 30, 2018 is $-0-.

 

 F-12 
 

 

7. Stock-based Compensation

 

2015 Equity Incentive Plan

 

The Company has 1,400,000 shares of Common Stock authorized and reserved for issuance under our 2015 Equity Incentive Plan for option awards. This reserve may be increased by the Board each year by up to the number of shares of stock equal to 5% of the number of shares of stock issued and outstanding on the immediately preceding December 31. Appropriate adjustments will be made in the number of authorized shares and other numerical limits in our 2015 Equity Incentive Plan and in outstanding awards to prevent dilution or enlargement of participants’ rights in the event of a stock split or other change in our capital structure. Shares subject to awards granted under our 2015 Equity Incentive Plan which expire, are repurchased or are cancelled or forfeited will again become available for issuance under our 2015 Equity Incentive Plan. The shares available will not be reduced by awards settled in cash. Shares withheld to satisfy tax withholding obligations will not again become available for grant. The gross number of shares issued upon the exercise of stock appreciation rights or options exercised by means of a net exercise or by tender of previously owned shares will be deducted from the shares available under our 2015 Equity Incentive Plan.

 

Awards may be granted under our 2015 Equity Incentive Plan to our employees, including officers, director or consultants, and our present or future affiliated entities. While we may grant incentive stock options only to employees, we may grant non-statutory stock options, stock appreciation rights, restricted stock purchase rights or bonuses, restricted stock units, performance shares, performance units and cash-based awards or other stock based awards to any eligible participant.

 

The 2015 Equity Incentive Plan will be administered by our compensation committee. Subject to the provisions of our 2015 Equity Incentive Plan, the compensation committee determines, in its discretion, the persons to whom, and the times at which, awards are granted, as well as the size, terms and conditions of each award. All awards are evidenced by a written agreement between us and the holder of the award. The compensation committee has the authority to construe and interpret the terms of our 2015 Equity Incentive Plan and awards granted under our 2015 Equity Incentive Plan.

 

A summary of stock option activity for the period ended September 30, 2018, is presented below:

 

   Number of   Weighted
Average
Exercise
   Weighted
Average
   Aggregate
Intrinsic
 
Subject to Exercise  Options   Price   Life (Years)   Value 
Outstanding as of December 31, 2017   839,732   $16.41    7.55   $4,373,120 
Granted – 2018   5,222    19.70    10.00    - 
Forfeited – 2018   (1,306)   -    -    - 
Exercised – 2018   -    -    -    - 
Outstanding as of September 30, 2018   843,648   $16.91    6.75   $- 

 

 F-13 
 

 

As of September 30, 2018, the Company had unexercised stock options as follows:

 

Date Issued  Exercise Price  

Number of

Options

   Expiration date
September 2014  $15.90    58,307   December 27, 2025
November 2014  $15.90    17,492   December 27, 2025
August 2015  $15.90    312,180   December 27, 2025
September 2015  $15.90    20,000   December 27, 2025
November 2015  $15.90    122,464   December 27, 2025
December 2015  $15.90    80,275   December 27, 2025
January 2016  $15.90    127,581   January 9, 2026
March 2016  $20.50    5,400   February 24, 2021
May 2016  $20.50    80,744   May 26, 2026
September 2016  $20.50    9,933   May 31, 2026
January 2017  $20.50    5,356   January 1, 2027
January 2018  $19.70    3,916   January 1, 2028
              
Total options at September 30, 2018        843,648    

 

The aggregate intrinsic value in the table above represents the total pre-tax intrinsic value (i.e. , the difference between our closing stock price on the respective date and the exercise price, times the number of shares) that would have been received by the option holders had all option holders exercised their options. No options were exercised and 1,306 options were cancelled during the period ended September 30, 2018.

 

There were 5,222 options granted with a fair value of $100,000 during the period ended September 30, 2018. Vesting of options differs based on the terms of each option. The Company has valued the options at their date of grant utilizing the Black-Scholes option pricing model. As of the issuance of these condensed consolidated financial statements, there was no active public market for the Company’s shares. Accordingly, the fair value of the options was determined based on the historical volatility data of similar companies, considering the industry, products and market capitalization of such other entities. The risk-free interest rate used in the calculations is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options as calculated using the simplified method. The expected life of the options used was based on the contractual life of the option granted. Stock-based compensation is a non-cash expense because we settle these obligations by issuing shares of our common stock from our authorized shares instead of settling such obligations with cash payments.

 

During the periods ended September 30, 2018 and 2017, the Company had stock-based compensation expense of $(637,436) and $(933,416), respectively, related to the vesting of stock options granted to the Company’s employees, directors, and consultants included in our reported net loss. During the nine months ended September 30, 2018, 1,306 options forfeited upon the resignation of one of our directors. During the nine months ended September 30, 2017, there were 412,531 options cancelled in conjunction with the termination of the Founders Professional Services Agreement and 2,008 options were forfeited upon the resignation of one of our directors. Our policy is to account for forfeitures of the unvested portion of option grants when they occur; therefore, these forfeitures are recorded as a reversal to expense, which can result in a credit balance in the statement of operations. Forfeiture reversals for the nine months ended September 30, 2018 and 2017 were $13,400 and $2,744,749, respectively.

 

The Company utilized the Black-Scholes option pricing model. The assumptions used for the periods ended September 30, 2018 and 2017 are as follows:

 

    September 30,
2018
    September 30,
2017
 
Risk free interest rate     2.302%-2.984 %     1.99%-2.306 %
Expected life (in years)     6.24-7.75       5.5-9.0  
Expected Volatility     169.33%-175.89 %     135.94%-153.79 %
Expected dividend yield     0 %     0 %

 

 F-14 
 

 

A summary of the changes in the Company’s non-vested options during the period ended September 30, 2018, is as follows:

 

   Number of
Non-vested
Options
   Weighted
Average
Fair Value at
Grant Date
 
Non-vested at January 1, 2018   265,304   $15.01 
Granted in 2018   5,222   $19.15 
Forfeited – 2018   (1,306)  $19.15 
Vested in 2018   (135,579)  $14.18 
Non-vested at September 30, 2018   133,641   $15.98 
Exercisable at September 30, 2018   710,007   $14.35 
Outstanding at September 30, 2018   843,648   $14.01 

 

As of September 30, 2018, total unrecognized compensation cost related to unvested stock options was $52,775. The cost is expected to be recognized over a weighted average period of 1.13 years.

 

8. Related Party Transactions

 

Hankey Capital LLC (Hankey Capital)

 

Hankey Capital holds certain convertible notes of the Company as discussed in Note 5. Don Hankey, the CEO and Chairman of Hankey Group, is our non-independent Chairman of the Board and a significant shareholder. Bret Hankey, the president of Hankey Capital, is a non-independent board member. The Hankey Group is an affiliate of Hankey Capital.

 

Founders

 

The Company entered into a Letter Agreement dated September 24, 2015, with each of Dr. Chia Soo, Dr. Eric Kang Ting and Dr. Ben Wu (collectively, the “Founders”). The Founders were three of the original shareholders of the Company. Pursuant to the Letter Agreement, the Founders agrees to deliver to the Company all past work product and past data related to NELL-1 (the “Data”) for use by the Company in its sole discretion, within the applicable licensing rights granted under the UCLA license and in exchange the Company agreed to the future issuance of an aggregate of 115,385 shares of the Company’s common stock. The Shares are to be equally distributed between the Founders upon the earlier of (i) the third anniversary of the Agreement and (ii) the occurrence of a Liquidity Event (as defined in the Letter Agreement) and are currently reported as Shares to be Issued. During the nine months ended September 30, 2018, 115,385 shares were issued pursuant to the Letter Agreement.

 

9. Commitments and Contingencies

 

Contingencies

 

The Company is subject to claims and assessments from time to time in the ordinary course of business. The Company’s management does not believe that any such matters, individually or in the aggregate, will have a material adverse effect on the Company’s business, financial condition, results of operations or cash flows.

 

On August 3, 2018, a shareholder derivative complaint was filed against the Company, as nominal defendant, The Musculoskeletal Transplant Foundation, Inc., one of our stockholders, and certain of our directors. The complaint alleges, among other things, violation of Section 14(c) of the Securities Exchange Act and Rule 14c-6 and breach of fiduciary duty. The complaint also seeks rescission of the reverse split which was effective as July 24, 2018.

 

The Company intends to vigorously defend against the allegations in the complaint. Based on the very early stage of the litigation, it is not possible to estimate the amount or range of any possible loss arising from the expenditure of defense fees, a judgment or settlement of the matter.

 

 F-15 
 

 

Item 2. Management’s Discussion and Analysis.

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q and audited consolidated financial statements for the years ended December 31, 2017 and 2016 and the related notes included in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2017, with the SEC on April 2, 2018. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See “Note Regarding Forward-Looking Statements” for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors.

 

Overview

 

We are a medical device company that is currently focused on bone regeneration in spinal fusion using the recombinant human protein, known as NELL-1/DBX®. The NELL-1/DBX® combination product is an osteostimulative recombinant protein that provides target specific control over bone regeneration. The protein, as part of the UCB-1 technology platform has been licensed exclusively for worldwide applications to us through a technology transfer from UCLA Technology Development Group on behalf of UC Regents (“UCLA TDG”). UCLA TDG and the Company received guidance from the FDA that NELL-1/DBX® will be classified as a combination product with a device lead.

 

The Company was founded by University of California professors in collaboration with an Osaka University professor and a University of Southern California surgeon in 2004 as a privately-held company with proprietary, patented technology that has been validated in sheep and non-human primate models to facilitate bone growth. Our platform technology has application in delivering improved outcomes in the surgical specialties of spinal, orthopedic, general orthopedic, plastic reconstruction, neurosurgery, interventional radiology, and sports medicine. Lead product development and clinical studies are targeted on spinal fusion surgery, one of the larger segments in the orthopedic market.

 

We are an “emerging growth company” as defined in the Jumpstart Our Business Startups Act of 2012, which we refer to as the JOBS Act. We would cease to be an emerging growth company upon the earliest of: (i) the last day of the first fiscal year in which our annual gross revenues are $1.07 billion or more; (ii) the end of any fiscal year in which the market value of our common stock held by non-affiliates exceeded $700.0 million as of the end of the second quarter of that fiscal year; or (iii) the date on which we have, during the previous three-year period, issued more than $1.07 billion in non-convertible debt securities. An emerging growth company may take advantage of specified reduced reporting and other burdens that are otherwise applicable generally to public companies. We have elected to take advantage of these reduced disclosure obligations, and may elect to take advantage of other reduced reporting obligations in the future.

 

The JOBS Act permits an emerging growth company like us to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. We are choosing to irrevocably “opt out” of this provision and, as a result, we will comply with new or revised accounting standards as required when they are adopted.

 

Our success will depend in part on our ability to obtain patents and product license rights, maintain trade secrets, and operate without infringing on the proprietary rights of others, both in the United States and other countries. There can be no assurance that patents issued to or licensed by us will not be challenged, invalidated, or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to us.

 

UCLA TDG Exclusive License Agreement

 

Effective August 18, 2017, the Company entered into an Amended and Restated Exclusive License Agreement (the “Restated License Agreement”) with the UCLA Technology Development Group on behalf of UC Regents (“UCLA TDG”). The Restated License Agreement amends and restates the Exclusive License Agreement, effective March 15, 2006, between the Company and UCLA TDG, as amended by ten amendments. Under the terms of the Restated License Agreement, the Regents have continued to grant the Company exclusive rights to develop and commercialize NELL-1 (the “Licensed Product”) for spinal fusion applications. The Licensed Product is a recombinant human protein growth factor that is essential for normal bone development.

 

Following the completion of several key milestones, the Company has expanded its Field of Use definition beyond spine fusion within the Restated License Agreement for both osteoporosis and trauma through a technology transfer.

 

We have agreed to pay an annual maintenance fee to UCLA TDG of $10,000 as well as to pay certain royalties to UCLA TDG under the Restated License Agreement at the rate of 3.0% of net sales of licensed products. We must pay the royalties to UCLA TDG on a quarterly basis. Upon a first commercial sale, we also must pay between $50,000 and $250,000, depending on the calendar year which is after the first commercial sale. If we are required to pay any third party any royalties as a result of us making use of UCLA TDG patents, then we may reduce the royalty owed to UCLA TDG by 0.333% for every percentage point paid to a third party. If we grant sublicense rights to a third party to use the UCLA TDG patent, then we will pay to UCLA TDG10% to 20% of the sublicensing income we receive from such sublicense.

 

 4 
 

 

We are obligated to make the following milestone payments to UCLA TDG for each Licensed Product or Licensed Method:

 

  $100,000 upon enrollment of the first subject in a Feasibility Study;
     
  $250,000 upon enrollment of the first subject in a Pivotal Study:
     
  $500,000 upon Pre-Market Approval of a Licensed Product or Licensed Method; and
     
  $1,000,000 upon the First Commercial Sale of a Licensed Product or Licensed Method.

 

We are also obligated to pay UCLA TDG a cash milestone payment within thirty (30) days of a Liquidity Event (including a Change of Control Transaction and a payment election by UCLA TDG exercisable after December 22, 2017), such payment to equal the greater of:

 

  $500,000; or
     
  2% of all proceeds in connection with a Change of Control Transaction.

 

We are obligated to diligently proceed with developing and commercializing licensed products under UCLA patents set forth in the Restated License Agreement. UCLA TDG has the right to either terminate the license or reduce the license to a non-exclusive license if we do not meet certain diligence milestone deadlines set forth in the Restated License Agreement.

 

We must reimburse or pre-pay UCLA TDG for patent prosecution and maintenance costs incurred during the term of the Restated License Agreement. We have the right to bring infringement actions against third party infringers of the Restated License Agreement, UCLA TDG may join voluntarily, at its own expense, or, at our expense, be joined involuntarily to the action. We are required to indemnify UCLA TDG against any third party claims arising out of our exercise of the rights under the Restated License Agreement or any sublicense.

 

Results of Operations

 

Since our inception, we devoted substantially all of our efforts and funding to the development of the NELL-1 protein and raising capital. We have not yet generated revenues from our planned operations.

 

 5 
 

 

Three Months ended September 30, 2018 compared to the Three Months ended September 30, 2017

 

   

Three Months

ended

September 30,

2018

    Three Months
ended
September 30,
2017
    % Change  
Operating expenses                        
                         
Research and development   $ (1,049,257   $ 234,264       (547.90 )%
General and administrative     644,466       896,512       (28.11 )%
                         
Total operating expenses     (404,791     1,130,776       (135.80 )%
                         
Income (Loss) from operations     404,791       (1,130,776 )     (135.80 )%
                         
Interest expense, net     (238,234 )     (1,244,963 )     (80.86 )%
Loss on debt extinguishment – related party     (408,294 )     -       100.00 %
                         
Total other expenses     (646,528 )     (1,244,963 )     48.07 %
                         
Loss before provision for income taxes     (241,737 )     (2,375,739 )     (89.82  )%
                         
Provision for income taxes     7       -       100.00 %
                         
Net loss   $ (241,744 )   $ (2,375,739 )     (89.82 )%

 

Research and Development

 

Our research and development expenses decreased from $234,264 during the three months ended September 30, 2017 to $(1,049,257) during the three months ended September 30, 2018. The $1,283,521 decrease was due to the adjustment to the fair value of options for services provided by our chief scientific advisor offset by costs associated with our large animal pivotal study. We will continue to incur significant expenses for development activities for NELL-1.

 

General and Administrative

 

Our general and administrative expenses decreased from $896,512 during the three months ended September 30, 2017 to $644,466 during the three months ended September 30, 2018. The $252,046 decrease was primarily due to a decrease in the required amortization of the fair value of management options.

 

Interest Expense

 

Our net interest expense decreased from $1,244,963 for the three months ended September 30, 2017 to $238,234 during the three months ended September 30, 2018. The decrease in interest of $1,006,729 resulted from the conversion of $3,900,000 of notes and decreased amortization of debt discount costs due to the debt extinguishment.

 

Loss on debt extinguishment

 

In connection with the financing that closed on July 16, 2018 (Note 6), the Company and Hankey Capital executed amendments (the “Amendments”) to the First, Second and Third convertible secured term notes (the “Existing Convertible Notes”). The Amendments change Hankey Capital’s conversion price from $15.80 per share to $1.00 per share on a post reverse stock split basis on the Existing Convertible Notes and extends the maturity date of the Third Convertible Note from February 24, 2019 to December 31, 2019. The Amendments became effective on the closing of the rights offering, July 16, 2018. The Company determined that the change in the conversion prices of the Existing Convertible Notes and extension of the Third Convertible Note’s maturity date resulted in debt extinguishments for accounting purposes since the change in fair value of the conversion options was more than 10% of the original value of the Existing Convertible Notes. The Company recorded a loss on extinguishment of debt totaling $408,294 for the remaining unamortized debt discount.

 

 6 
 

 

Nine Months ended September 30, 2018 compared to the Nine Months ended September 30, 2017

 

   

Nine Months

ended

September 30,

2018

    Nine Months
ended
September 30,
2017
    % Change  
Operating expenses                        
Research and development                        
Trade   $ (444,947   $ 1,070,342       (141.57 )%
Related party     -       (2,744,749 )     (100.00 )%
General and administrative     1,997,030       2,990,393       (33.22 )%
                         
Total operating expenses     1,552,083       1,315,986       17.94 %
                         
Loss from operations     (1,552,083 )     (1,315,986 )     17.94 %
                         
Interest expense, net     (997,727 )     (2,964,377 )     (66.34 )%
Loss on debt extinguishment – related party     (408,294 )     -       100.00 %
                         
Total other expenses     (1,406,021 )     (2,964,377 )     52.57 %
                         
Loss before provision for income taxes     (2,958,104 )     (4,280,363 )     (30.89  )%
                         
Provision for income taxes     1,607       1,600       0.44 %
                         
Net loss   $ (2,959,711 )   $ (4,281,963 )     (30.88 )%

 

Research and Development

 

Our research and development related party expenses decreased from $(2,744,749) during the nine months ended September 30, 2017 to $-0- during the nine months ended September 30, 2018. The $2,744,749 decrease was due to the options forfeited with the termination of the Professional Services Agreements with each of the Founders in April 2017. Our trade research and development decrease between September 30, 2018 and 2017 was due to an adjustment to the fair value of options for services provided by our chief scientific advisor offset by costs related to the commencement of our large animal pivotal study. We will continue to incur significant expenses for development activities for NELL-1.

 

General and Administrative

 

Our general and administrative expenses decreased from $2,990,393 during the nine months ended September 30, 2017 to $1,997,030 during the nine months ended September 30, 2018. The $993,363 decrease was primarily due to a decrease in the required amortization of the fair value of management options.

 

Interest Expense

 

Our net interest expense decreased from $2,964,377 for the nine months ended September 30, 2017 to $997,727 during the nine months ended September 30, 2018. The decrease in interest of $1,966,650 resulted from the conversion of $3,900,000 of notes and decreased amortization of debt discount costs due to the debt extinguishment.

 

Loss on debt extinguishment

 

In connection with the financing that closed on July 16, 2018 (Note 6), the Company and Hankey Capital executed amendments (the “Amendments”) to the First, Second and Third convertible secured term notes (the “Existing Convertible Notes”). The Amendments change Hankey Capital’s conversion price from $15.80 per share to $1.00 per share on a post reverse stock split basis on the Existing Convertible Notes and extends the maturity date of the Third Convertible Note from February 24, 2019 to December 31, 2019. The Amendments became effective on the closing of the rights offering, July 16, 2018. The Company determined that the change in the conversion prices of the Existing Convertible Notes and extension of the Third Convertible Note’s maturity date resulted in debt extinguishments for accounting purposes since the change in fair value of the conversion options was more than 10% of the original value of the Existing Convertible Notes. The Company recorded a loss on extinguishment of debt totaling $408,294 for the remaining unamortized debt discount.

 

 7 
 

 

Liquidity and Capital Resources

 

We have no significant operating history and since inception to September 30, 2018 has incurred accumulated losses of approximately $62.1 million. The Company will continue to incur significant expenses for development activities for their lead product NELL-1/DBX®. Operating expenditures for the next twelve months are estimated at $8.2 million. The accompanying condensed consolidated financial statements for the period ended September 30, 2018 have been prepared assuming the Company will continue as a going concern. As reflected in the condensed consolidated financial statements, the Company had a stockholders’ deficit of $7,174,491 at September 30, 2018, and incurred a net loss of $2,959,711, and used net cash in operating activities of $2,766,140 during the nine-month period ended September 30, 2018. These factors raise substantial doubt about the Company’s ability to continue as a going concern. In addition, our independent accounting firm, in its audit report to the financial statements included in our Annual Report for the year ended December 31, 2017, expressed substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

 

The Company will continue to attempt to raise additional debt and/or equity financing to fund future operations and to provide additional working capital. However, there is no assurance that such financing will be consummated or obtained in sufficient amounts necessary to meet the Company’s needs. If cash resources are insufficient to satisfy the Company’s on-going cash requirements, the Company will be required to scale back or discontinue its product development programs, or obtain funds if available (although there can be no certainties) through strategic alliances that may require the Company to relinquish rights to its technology, substantially reduce or discontinue its operations entirely. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

 

The Company closed on $500,000 of equity financing in March 2018 and $600,000 of debt financing in May 2018. On July 16, 2018, the Company closed a Rights Offering (“Rights Offering”) to existing shareholders (including certain related parties) and, on July 24, 2018, a private placement with Hankey Capital LLC (“Hankey Capital”) in the aggregate amount of $3,869,979 and secured a credit facility with Hankey Capital for $2,000,000. In the Rights Offering the Company issued 330,325 shares to four shareholders, including 329,674 shares to two related parties (the “Rights Shares”) and issued 3,539,654 shares to Hankey Capital (the “Hankey Shares”) pursuant to a Securities Purchase Agreement.

 

The proceeds from the sale of the Rights Shares and the Hankey Shares of $3,869,979 were used to repay the promissory note for $600,000 and the remaining proceeds have been and will be used for working capital, protein development, animal testing, regulatory and clinical expenses, as well as for other purposes not presently contemplated herein but which are related directly to growing the Company’s current business, research and development

 

Pursuant to our October 2016 and February 2017 Convertible Notes, which were subsequently converted into shares of common stock on December 31, 2017, the Company may only use the proceeds from the issuance of these Convertible Notes to focus on prioritizing operations on essential research and development activities. Also pursuant to the October 2016 Note Purchase Agreement, the Company’s management has agreed to defer 20% of earned compensation and the Board of Directors has authorized a change in director compensation to defer 50% of the directors’ cash compensation until at least $5,000,000 has been received in cumulative funding from non-current stockholders.

 

As of September 30, 2018 and December 31, 2017, we had cash of $2,294,118 and $690,279, respectively.

 

Cash Flows

 

Operating activities

 

During the nine months ended September 30, 2018 and 2017, cash used in operating activities was $2,766,140 and $2,398,396 respectively. Cash expenditures for the nine months ended September 30, 2018 increased primarily due to the commencement of our large animal pivotal study. Management continues a 20% deferral of wages and the Board a 50% deferral of cash compensation.

 

 8 
 

 

Financing activities

 

During the nine months ended September 30, 2018, cash provided by financing activities of $4,369,979 resulted from the March 2018 equity purchase of common stock and the July 2018 Rights Offering and the private placement with Hankey Capital. During the nine months ended September 30, 2017, cash provided in financing activities of $3,400,000 resulted from the February and August 2017 convertible notes and the equity purchase of $700,000 of common stock.

 

Off-Balance Sheet Arrangements

 

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on the Company’s financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that is material to investors.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

Not applicable.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Financial Officer and Chief Executive Officer, we evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of September 30, 2018. Based upon that evaluation, our Chief Financial Officer and Chief Executive Officer concluded that as of September 30, 2018, our disclosure controls and procedures were not effective.

 

Changes in Internal Controls

 

Management has been actively engaged in developing remediation plans to address the material weakness disclosed on our Form 10K for the year ended December 31, 2017. The remediation efforts in process or expected to be implemented include the implementation of procedures requiring a third-party review of all non-routine transactions.

 

We believe that the controls that we are implementing will improve the effectiveness of our internal control over financial reporting. As we continue to evaluate and work to improve our internal control over financial reporting, we may determine to take additional measures to address the material weakness or determine to supplement or modify certain of the remediation measures described above.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

On August 3, 2018, a shareholder derivative complaint was filed against the Company, as nominal defendant, The Musculoskeletal Transplant Foundation, Inc., one of our stockholders, and certain of our directors. The complaint alleges, among other things, violation of Section 14(c) of the Securities Exchange Act and Rule 14c-6 and breach of fiduciary duty. The complaint also seeks rescission of the reverse split which was effective as July 24, 2018.

 

The Company intends to vigorously defend against the allegations in the complaint. Based on the very early stage of the litigation, it is not possible to estimate the amount or range of any possible loss arising from the expenditure of defense fees, a judgment or settlement of the matter.

 

In the normal course of our business, we may periodically become subjected to various lawsuits. However, there are currently no legal actions pending against us or, to our knowledge, are any such proceedings contemplated.

 

Item 1A. Risk Factors.

 

Not applicable.

 

 9 
 

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 

None

 

Item 3. Defaults Upon Senior Securities.

 

None

 

Item 4. Mine Safety Disclosures.

 

Not Applicable

 

Item 5. Other Information.

 

None

 

Item 6. Exhibits.

 

(a) Exhibits required by Item 601 of Regulation S-K.

 

Exhibit   Description
     
31.1   Certification of the Company’s Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Report on Form 10-Q for the quarter ended September 30, 2018.*
     
31.2   Certification of the Company’s Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, with respect to the registrant’s Report on Form 10-Q for the quarter ended September 30, 2018.*
     
32.1   Certification of the Company’s Principal Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
32.2   Certification of the Company’s Principal Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
     
101.INS   XBRL Instance Document*
101.SCH   XBRL Taxonomy Extension Schema Document*
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document*
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document*
101.LAB   XBRL Taxonomy Extension Label Linkbase Document*
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document*

 

* Filed Herewith

 

 10 
 

 

SIGNATURES

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  BONE BIOLOGICS CORPORATION
     
Dated: November 16, 2018 By: /s/ Stephen R. LaNeve
  Name: Stephen R. LaNeve
  Title: Chief Executive Officer

 

 11