Bone Biologics Corp: Form 10-Q for the period ended Mar 31, 2024

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, 2023 and 2022 and the related notes included in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2023, with the SEC on February 21, 2024. 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.

Company 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. NELL-1 in combination with DBM, demineralized bone matrix, is an osteopromotive recombinant protein that provides target specific control over bone regeneration. The NELL-1 technology platform has been licensed exclusively for worldwide applications to us through a technology transfer from the UCLA Technology Development Group on behalf of UC Regents (“UCLA TDG”). UCLA TDG and the Company received guidance from the Food and Drug Administration (“FDA”) that NELL-1/DBM will be classified as a device/drug combination product that will require an FDA-approved pre-market approval application before it can be commercialized in the United States.

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

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, rendered unenforceable, or circumvented, or that the rights granted thereunder will provide proprietary protection or competitive advantages to us.

UCLA TDG Exclusive License Agreement

Effective April 9, 2019, we entered into an Amended and Restated Exclusive License Agreement dated as of March 21, 2019, which was subsequently amended through three sets of amendments (as so amended the “Amended License Agreement”) with the UCLA TDG. The Amended License Agreement amends and restates the Amended and Restated Exclusive License Agreement, dated as of June 19, 2017 (the “2017 Agreement”). The 2017 Agreement amended and restated the Exclusive License Agreement, effective March 15, 2006, between the Company and UCLA TDG, as amended by ten amendments. Under the terms of the Amended License Agreement, the Regents have continued to grant us exclusive rights to develop and commercialize NELL-1 (the “Licensed Product”) for spinal fusion by local administration, osteoporosis and trauma applications. The Licensed Product is a recombinant human protein growth factor that is essential for normal bone development.

We have agreed to pay an annual maintenance fee to UCLA TDG of $10,000 as well as pay certain royalties to UCLA TDG under the Amended License Agreement at the rate of 3.0% of net sales of licensed products or licensed methods. We must pay the royalties to UCLA TDG on a quarterly basis. Upon a first commercial sale, we also must pay a minimum annual royalty 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 UCLA TDG 10% to 20% of the sublicensing income we receive from such sublicense.

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 pay to UCLA TDG a fee (the “Diligence Fee”) of $8,000,000 upon the sale of any Licensed Product (the “Triggering Sale Date”) in accordance with the payment schedule below:

• Due upon cumulative Net Sales equaling $50,000,000 following the Triggering Sale Date - $2,000,000;
• Due upon cumulative Net Sales equaling $100,000,000 following the Triggering Sale Date - $2,000,000; and
• Due upon cumulative Net Sales equaling $200,000,000 following the Triggering Sale Date - $4,000,000.

Our obligation to pay the Diligence Fee will survive termination or expiration of the Amended License Agreement and we are prohibited from assigning, selling, or otherwise transferring any of its assets related to any Licensed Product unless our Diligence Fee obligation is assigned, sold, or transferred along with such assets, or unless we pay UCLA TDG the Diligence Fee within ten (10) days of such assignment, sale or other transfer of such rights to any Licensed Product.

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, 2016) such payment to equal the greater of:

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

As of March 31, 2024, none of the above milestones have been met.

We are obligated to diligently proceed with developing and commercializing licensed products under UCLA TDG patents set forth in the Amended License Agreement. We are required to meet certain diligence milestone deadlines pursuant to the Amended License Agreement. Applicable for the current year, we are required to spend at least $1,000,000 per calendar year on pre-clinical or clinical development until the date that we complete a Phase III pivotal study. If we fail to meet this or the other diligence milestone deadlines, UCLA TDG has the right to either terminate the license or reduce the license to a non-exclusive license.

We must reimburse or pre-pay UCLA TDG for patent prosecution and maintenance costs incurred during the term of the Amended License Agreement. We have the right to bring infringement actions against third party infringers of the Amended 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 Amended License Agreement or any sublicense.

Payments to UCLA TDG under the Amended License Agreement for the three months ended March 31, 2024 and 2023 were $10,484 and $16,606, respectively.

March 2024 Offering

On March 6, 2024, we sold and issued, in a public offering (the “March Offering”), 119,000 shares of common stock together with warrants to purchase 119,000 shares of common stock, expiring on March 6, 2029, at a combined public offering price of $2.56 per share of common stock and accompanying warrant, and (ii) pre-funded warrants to purchase 662,251 shares of common stock, together with warrants to purchase 662,251 shares of common stock at a combined public offering price of $2.559 per pre-funded warrant and accompanying warrant. In addition, we issued warrants to purchase up to an aggregate of 46,875 shares of common stock (equal to 6.0% of the aggregate number of shares sold in the March Offering) to H.C. Wainwright & Co., LLC, and its affiliates, as the placement agent, as compensation in connection with the March Offering. The warrants issued to the placement agent in the March Offering have substantially the same terms and conditions as the warrants issued in the March Offering, except that they have an exercise price of $3.20 per share.

NASDAQ Panel Decision

On September 27, 2023, we received a written notice from the Nasdaq notifying us that it was not in compliance with the $1.00 per share minimum bid price requirement set forth in Nasdaq Listing Rule 5550(a)(2) and that Nasdaq’s staff had determined to delist the Company’s securities. On December 11, 2023, a Nasdaq Hearings Panel granted our request for continued listing on Nasdaq subject to the Company demonstrating compliance with the minimum bid price requirement prior to January 12, 2024. We received notice from Nasdaq on January 9, 2024 that we had regained compliance with the minimum bid price requirement. We will remain under a Nasdaq discretionary panel monitor until June 28, 2024.

Chief Executive Officer Amended and Restated Letter Agreement

On March 12, 2024, we entered into an amended and restated letter agreement with Jeffrey Frelick, effective as of January 1, 2024 (the “Frelick Agreement”). The Frelick Agreement replaces and supersedes the letter agreement entered into between us and Jeffrey Frelick on June 8, 2015 as described in our filings with the Securities and Exchange Commission. Pursuant to the Frelick Agreement, Mr. Frelick will continue to serve as our Chief Executive Officer.

The Frelick Agreement continues to be automatically renewable for successive one-year periods on January 1st of each calendar year, unless either party provides notice of non-renewal to the other no later than July 9th during any term. The Frelick Agreement continues to provide Mr. Frelick: (i) an annual base salary of $300,000, (ii) the opportunity to earn an annual bonus targeted at 50% of the then-current salary based on reasonably achievable key performance indicators, (iii) eligibility to participate in our benefit plans, and (iv) reimbursement for expenses necessarily and properly incurred in accordance with our policies on the same. Under the terms of the Frelick Agreement, Mr. Frelick is eligible to receive a transaction bonus of 1% to 2% of the transaction value depending on the size of the transaction in the event we are acquired. The Frelick Agreement contains standard restrictive covenants, including non-competition and non-solicitation, and terms and conditions customarily found in similar agreements.

Pursuant to the Frelick Agreement, if Mr. Frelick is terminated without cause, he will receive, in addition to any accrued compensation and benefits, a severance payment equal to one year of his then-current base salary, insurance coverage or reimbursement of COBRA payments for a term of one year, and will be eligible, subject to the Board of Directors’ discretion, for a pro-rata annual bonus.

Amendment to Chief Financial Officer Letter Agreement

On March 12, 2024, we entered into an amendment to the letter agreement between us and Deina Walsh, our Chief Financial Officer, dated December 17, 2021. The amendment became effective as of March 11, 2024. Under the terms of the amendment, Ms. Walsh is eligible to receive a transaction bonus of 0.5% to 1% of the transaction value depending on the size of the transaction in the event we are acquired.

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.

Three Months ended March 31, 2024 compared to the Three Months ended March 31, 2023

Research and Development

Our research and development expenditures saw a notable decline, dropping from $2,590,645 for the three months ending March 31, 2023, to $245,625 for the same period in 2024, marking a decrease of $2,345,020. The decrease in costs can be attributed to the significant expenses incurred in 2023 for the production of the NELL-1 protein necessary for our initial clinical study. Moving forward, we anticipate continued substantial investment in development activities for NELL-1 as we prepare for our pivotal clinical study in the future.

General and Administrative

Our general and administrative costs rose from $556,892 for the three months ending March 31, 2023, to $657,911 for the corresponding period in 2024, reflecting a $101,019 increase. This increase can mainly be attributed to legal expenses stemming from settling ongoing litigation.

Change in fair value of warrant liability

In October 2022, we completed a public equity offering, which included the issuance of 54,174 warrants. The warrants provide for a Black Scholes value calculation in the event of certain transactions (“Fundamental Transactions,” as defined), which includes a floor on volatility utilized in the value calculation at 100% or greater. We have determined that this provision introduces leverage to the holders of the warrants that could result in a value that would be greater than the settlement amount of a fixed-for-fixed option on the Company’s own equity shares. Accordingly, pursuant to ASC 815, we have classified the fair value of the warrants as a liability to be re-measured at the end of every reporting period with the change in value reported in the statement of operations.

The change in fair value of warrant liability represents the re-measurement of the outstanding warrants at March 31, 2024.

Liquidity and Capital Resources

Going Concern and Liquidity

Since inception to March 31, 2024, we have incurred accumulated losses of approximately $81.8 million. We will continue to incur significant expenses for development activities for our lead product NELL-1/DBM. Operating expenditures for the next twelve months are estimated at $6.9 million. The accompanying consolidated financial statements for the three months ended March 31, 2024 have been prepared assuming the Company will continue as a going concern. As reflected in the financial statements, we incurred a net loss of $0.9 million, and used net cash in operating activities of $1.3 million during the three months ended March 31, 2024. These factors raise substantial doubt about the Company’s ability to continue as a going concern within a reasonable period of time, which is considered to be one year from the issuance date of these financial statements. In addition, our independent registered public accounting firm, in its audit report to the financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2023, expressed substantial doubt about our ability to continue as a going concern. The 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.

On March 6, 2024, we sold and issued, in a public offering (the “March Offering”), 119,000 shares of common stock together with warrants to purchase 119,000 shares of common stock, expiring on March 6, 2029, at a combined public offering price of $2.56 per share of common stock and accompanying warrant, and (ii) pre-funded warrants to purchase 662,251 shares of common stock, together with warrants to purchase 662,251 shares of common stock at a combined public offering price of $2.559 per pre-funded warrant and accompanying warrant. In addition, we issued warrants to purchase up to an aggregate of 46,875 shares of common stock (equal to 6.0% of the aggregate number of shares sold in the March Offering) to H.C. Wainwright & Co., LLC, and its affiliates, as the placement agent, as compensation in connection with the March Offering. The warrants issued to the placement agent in the March Offering have substantially the same terms and conditions as the warrants issued in the March Offering, except that they have an exercise price of $3.20 per share.

We 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 our needs. If cash resources are insufficient to satisfy our on-going cash requirements, we will be required to scale back or discontinue our product development programs, or obtain funds if available (although there can be no certainties) through strategic alliances that may require us to relinquish rights to our technology or substantially reduce or discontinue our 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 us. Even if we are 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.

At March 31, 2024 and December 31, 2023, we had cash of $3,227,634 and $3,026,569, respectively.

Available cash is expected to fund our operations through the third quarter of 2024.

We anticipate that we will require approximately $5 million to complete first-in-man studies, and an estimated additional $24 million in scientific expenses to achieve FDA approval, if possible, for a spine interbody fusion indication.

Cash Flows

Operating activities

During the three months ended March 31, 2024 and 2023, cash used in operating activities was $1,303,411 and $1,349,993, respectively. Cash expenditures for the three months ended March 31, 2024 decreased as a result of development activities in 2023 for our NELL-1 protein as we prepared for our pilot clinical study. We commenced our first-in-man pilot clinical study in December 2023.

Financing activities

During the three months ended March 31, 2024, cash provided by financing activities of $1,504,476 resulted from the net proceeds of the March Offering.

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.

Critical Accounting Policies and Use of Estimates

See our most recent Annual Report on Form 10-K for the fiscal year ended December 31, 2023 for a discussion of our critical accounting policies and use of estimates. There have been no material changes to our critical accounting policies and use of estimates discussed in such report.

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, as amended (the “Exchange Act”)) as of March 31, 2024. Based upon that evaluation, our Chief Financial Officer and Chief Executive Officer concluded that as of March 31, 2024, our disclosure controls and procedures were effective.

Changes in Internal Controls

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(d) and 15d-15(d) under the Exchange Act) that occurred during the quarter ended March 31, 2024 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

For a discussion of the Company’s potential risks or uncertainties, please see “Part I—Item 1A—Risk Factors” and “Part II—Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC, and “Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations” herein. There have been no material changes from the risk factors as previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2023 except as noted herein.