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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended September 30, 2021

 

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)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common stock, $0.001 par value per share   BBLG   The Nasdaq Stock Market LLC

Warrants to Purchase Common stock, $0.001 par value per share

  BBLGW    The Nasdaq Stock Market LLC

 

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.

Yes ☐ No

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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).

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
Emerging growth company    

 

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 ☒ No

 

As of October 29, 2021, there were 10,298,725 shares of the issuer’s common stock, $0.001 par value, outstanding.

 

 

 

 
 

 

Bone Biologics Corporation

- INDEX -

 

  Page
PART I – FINANCIAL INFORMATION:  
   
Item 1. Financial Statements. 3
   
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-5
   
Notes to Unaudited Condensed Consolidated Financial Statements F-6
   
Item 2. Management’s Discussion and Analysis or Plan of Operation 5
   
Item 3. Quantitative and Qualitative Disclosures about Market Risk 9
   
Item 4. Controls and Procedures 9
   
PART II – OTHER INFORMATION:  
   
Item 1. Legal Proceedings 10
   
Item 1A. Risk Factors 11
   
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 11
   
Item 3. Defaults Upon Senior Securities 11
   
Item 4. Mine Safety Disclosures 11
   
Item 5. Other Information 11
   
Item 6. Exhibits 11
   
Signatures 12

 

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, 2020, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2021.

 

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

 

INDEX TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

 

Three and Nine Months Ended September 30, 2021 and 2020

 

 

Page

Number

   
Condensed Consolidated Balance Sheets – September 30, 2021 (Unaudited) and September 30, 2020 F-1
   
Condensed Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2021 and 2020 F-2
   
Condensed Consolidated Statements of Stockholders’ Equity (Unaudited) – Condensed Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2021 and 2020 F-3
   
Condensed Consolidated Statements of Cash Flows (Unaudited) – Condensed Consolidated Statements of Operations (Unaudited) – Three and Nine Months Ended September 30, 2021 and 2020 F-5
   
Notes to Condensed Consolidated Financial Statements (Unaudited) – Three and Nine Months Ended September 30, 2021 F-6

 

 4 
 

 

Bone Biologics Corporation

 

Condensed Consolidated Balance Sheets

 

   September 30, 2021   December 31, 2020 
   (unaudited)     
Assets          
           
Current assets          
Cash  $3,374   $- 
Other current assets   49,019   $- 
Total assets  $52,393   $- 
           
Liabilities and Stockholders’ Deficit          
           
Current liabilities          
Bank overdraft  $-   $10,609 
Accounts payable and accrued expenses   70,275    465,396 
Notes payable – related party   12,767,896    11,712,179 
Interest payable – related party   2,041,980    1,251,626 
Deferred compensation   297,500    252,500 
           
Total liabilities   15,177,651    13,692,310 
           
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, 2021 and December 31, 2020   -    - 
Common stock, $0.001 par value per share; 100,000,000 shares authorized; 12,273,036 shares issued and outstanding at September 30, 2021 and December 31, 2020   12,273    12,273 
Additional paid-in capital   55,160,339    55,160,339 
Accumulated deficit   (70,297,870)   (68,864,922)
           
Total stockholders’ deficit   (15,125,258)   (13,692,310)
           
Total liabilities and stockholders’ deficit  $52,393   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-1
 

 

Bone Biologics Corporation

 

Condensed Consolidated Statements of Operations

 

  

Three

Months

Ended

September 30,
2021

   Three
Months
Ended
September 30,
2020
  

Nine
Months

Ended

September 30,
2021

   Nine
Months
Ended
September 30,
2020
 
   (unaudited)   (unaudited)   (unaudited)   (unaudited) 
Revenues  $-   $-   $-   $- 
                     
Cost of revenues   -    -    -    - 
                     
Gross profit   -    -    -    - 
                     
Operating expenses                    
Research and development   -    142,877    47,516    318,978 
General and administrative   229,789    2,946    595,078    299,604 
                     
Total operating expenses   229,789    145,823    642,594    618,582 
                     
Loss from operations   (229,789)   (145,823)   (642,594)   (618,582)
                     
Other expenses                    
Interest expense, net – related party   (279,514)   (248,226)   (790,354)   (750,797)
                     
Loss before provision for income taxes   (509,303)   (394,049)   (1,432,948)   (1,369,379)
                     
Provision for income taxes   -    -    -    1,600 
                     
Net Loss  $(509,303)  $(394,049)  $(1,432,948)  $(1,370,979)
                     
Weighted average shares outstanding – basic and diluted   2,911,333    2,911,333    2,911,333    2,911,333 
                     
Loss per share – basic and diluted   $(0.17)  $(0.14)  $(0.49)  $(0.47)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-2
 

 

Bone Biologics Corporation

 

Consolidated Statement of Stockholders’ Deficit

For the three and nine months ended September 30, 2021

(unaudited)

 

   Shares   Amount   Capital   Deficit   Deficit 
   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Capital   Deficit   Deficit 
                     
Balance at December 31, 2020   12,273,036   $12,273   $55,160,339   $(68,864,922)  $(13,692,310)
                          
Net Loss   -    -    -    (431,747)   (431,747)
                          
Balance at March 31, 2021   12,273,036    12,273    55,160,339    (69,296,669)   (14,124,057)
                          
Net Loss   -    -    -    (491,898)   (491,898)
                          
Balance at June 30, 2021   12,273,036    12,273    55,160,339    (69,788,567)   (14,615,955)
                          
Net Loss   -    -    -    (509,303)   (509,303)
                          
Balance at September 30, 2021   12,273,036   $12,273   $55,160,339   $(70,297,870)  $(15,125,258)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-3
 

 

Bone Biologics Corporation

 

Consolidated Statement of Stockholders’ Deficit

For the three and nine months ended September 30, 2020

(unaudited)

 

   Common Stock   Additional
Paid-in
   Accumulated   Total
Stockholders’
 
   Shares   Amount   Capital   Deficit   Deficit 
                     
Balance at December 31, 2019   12,273,036   $12,273   $55,160,339   $(67,040,232)  $(11,867,620)
                          
Net Loss   -    -    -    (596,900)   (596,900)
                          
Balance at March 31, 2020   12,273,036    12,273    55,160,339    (67,637,132)   (12,464,520)
                          
Net Loss   -    -    -    (380,030)   (380,030)
                          
Balance at June 30, 2020   12,273,036    12,273    55,160,339    (68,017,162)   (12,844,550)
                          
Net Loss   -    -    -    (394,049)   (394,049)
                          
Balance at September 30, 2020   12,273,036   $12,273   $55,160,339   $(68,411,211)  $(13,238,599)

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-4
 

 

Bone Biologics Corporation

 

Condensed Consolidated Statements of Cash Flows

 

  

Nine Months

Ended

September 30,
2021

   Nine Months
Ended
September 30,
2019
 
         
Cash flows from operating activities          
Net loss  $(1,432,948)  $(1,370,979)
Adjustments to reconcile net loss to net cash used in operating activities:          
Interest payable – related party   790,354    750,796 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (49,019)   6,682 
Accounts payable and accrued expenses   (395,121)   267,261 
Deferred compensation   45,000    45,000 
           
Net cash used in operating activities   (1,041,734)   (301,240)
           
Cash flows from financing activities          
Bank overdraft   (10,609)   - 
           
Proceeds from credit facilities – related party   1,055,717    279,556 
           
Net cash provided by financing activities   1,045,108    279,556 
           
Net increase (decrease) in cash   3,374    (21,684)
           
Cash, beginning of period   -    24,145 
Cash, end of period  $3,374   $2,461 
           
Supplemental information          
Interest paid - related party  $-   $- 
Income taxes paid  $-   $- 

 

See accompanying notes to unaudited condensed consolidated financial statements.

 

F-5
 

 

Bone Biologics Corporation

Notes to Unaudited Condensed Consolidated Financial Statements

For the nine months ended September 30, 2021

 

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.

 

On July 16, 2018, the Company closed a rights offering in which Hankey Capital purchased 1,415,862 shares of the Company’s Common Stock and executed amendments (the “Amendments”) to the convertible promissory notes (the “Existing Convertible Notes”) payable to Hankey Capital and dated October 24, 2014, May 4, 2015 and February 24, 2016. The Amendments reduced the conversion price of the Existing Convertible Notes from $39.50 per share to $2.50 per share and extended the maturity date of the Existing Convertible Notes. As a result of the share issuance and Amendments, Hankey Capital and Don Hankey, the Chairman of the Company’s Board of Directors, acquired a majority of the voting common shares issued and outstanding and thus effective control of the Company.

 

On October 12, 2021, an amendment to our certificate of incorporation for a reverse split of the Company’s outstanding common stock at a ratio of 1 for 2.5 became effective. As a result of the October 2021 Primary Offering, our common stock became listed on the Nasdaq Capital Market on October 13, 2021. All share and per share amounts have been retroactively restated as if the reverse split occurred at the beginning of the earliest period presented.

 

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 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.

 

F-6
 

 

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.

 

Going Concern and Liquidity

 

The Company has no significant operating history and since inception to September 30, 2021 has incurred accumulated losses of approximately $70.3 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 $6.6 million. The accompanying consolidated financial statements for the period ended September 30, 2021 have been prepared assuming the Company will continue as a going concern. As reflected in the financial statements, the Company had a stockholders’ deficit of $15,125,258 at September 30, 2021, and incurred a net loss of $1,432,948, and used net cash in operating activities of $1,041,734 during the nine months ended September 30, 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. 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, 2020, 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 October 15, 2021, the Company completed a public offering (the “October 2021 Primary Offering”) of 1,510,455 units (the “Units”). Each Unit consists of one share of common stock of the Company, par value $0.001 per share (the “Common Stock”), and one warrant (a “Public Warrant”) to purchase one share of Common Stock for $6.30 per share. The Units were sold at a price of $5.25 per Unit, generating gross proceeds to the Company of $7,929,889. The Company granted to WallachBeth Capital LLC, the underwriter in the Offering a 45-day option to purchase up to 226,568 additional shares of Common Stock and/or 226,568 Public Warrants to cover over-allotments, if any. The underwriter has exercised its option with respect to the Public Warrants. 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.

 

For the past several years, we have depended on our relationship with Hankey Capital for working capital to fund our operations, which has been raised in the form of both debt and equity capital. Hankey Capital, directly and indirectly, controls approximately 70% of our issued and outstanding shares of common stock. In connection with the October 2021 Primary Offering, Hankey Capital converted the outstanding convertible notes ($12,767,894 in principal amount and $2,054,039 of accrued interest) into shares of our common stock and all collateral shares were cancelled. Don Hankey, the manager of Hankey Capital, serves as the Chairman of the Board. 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.

 

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. This stipulation was meet on October 14, 2021 with the closing of the October 2021 Primary Offering.

 

F-7
 

 

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, 2020 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 15, 2021 (the “2020 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, 2020 and notes thereto included in the 2020 Annual Report.

 

The results of operations for the three and nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the entire fiscal year ended December 31, 2021 or for any other period.

 

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.

 

Impact of the Novel Coronavirus (COVID-19) on the Company’s Business Operations

 

The global outbreak of the novel coronavirus (COVID-19) has led to severe disruptions in general economic activities worldwide, as businesses and governments have taken broad actions to mitigate this public health crisis. In light of the uncertain and continually evolving situation relating to the spread of COVID-19, this pandemic could pose a risk to the Company. The extent to which the coronavirus may impact the Company’s business operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. The Company intends to continue to monitor the situation and may adjust its current business plans as more information and guidance become available.

 

The coronavirus pandemic presents a challenge to medical facilities worldwide. As the Company’s clinical trials will be conducted on an outpatient basis, it is not currently possible to predict the full impact of this developing health crisis on such clinical trials, which could include delays in and increased costs of such clinical trials. Current indications from the clinical research organizations conducting the clinical trials for the Company are that such clinical trials are being delayed or extended for several months as a result of the coronavirus pandemic.

 

There is also significant uncertainty as to the effect that the coronavirus may have on the amount and type of financing available to the Company in the future.

 

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 nine 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:

 

F-8
 

 

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.

 

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 adopted ASU 2018-07, Improvements to Nonemployee Share-Based Payment Accounting, effective January 1, 2019, which aligns the accounting treatment of nonemployee awards with employee awards.

 

Collateral Shares

 

The Company accounts for the common shares issued as collateral for convertible promissory notes, whether upon original issuance or upon the required annual adjustment, as debt issuance costs in the form of a loan processing fee, which is determined by reference to the par value of the Company’s common stock, with a corresponding charge to operations when such collateral shares are issued. The collateral shares are subject to significant contractual restrictions limiting their sale or transfer. As these common shares have been issued to and are held by the lender, and are contingently returnable to the Company under certain conditions, such shares are considered as issued and outstanding on the Company’s balance sheet, but are not included in earnings per share calculations for all periods presented.

 

In the event of an uncured event of default, the Company will record a charge to operations to recognize that the collateral shares are no longer owned or controlled by the Company, and such prospective charge to operations would be based on the fair market value of the collateral shares at that time, and which would be classified as a cost of debt capital and recognized as a charge to 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. Shares issued for collateral for outstanding loans of 9,361,702 are excluded from weighted average 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.

 

Since the effects of outstanding options, warrants, and the conversion of convertible debt are anti-dilutive for the period ended September 30, 2021 and 2020, 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, 2021 and 2020:

 

   September 30, 
   2021   2020 
Warrants   -    94,841 
Stock options   192,281    226,418 
Convertible promissory notes   5,923,950    4,639,822 
    6,116,231    4,961,081 

 

F-9
 

 

New Accounting Standards

 

In August 2019, the FASB issued ASU 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06). ASU 2020-06 simplifies the accounting for convertible debt by eliminating the beneficial conversion and cash conversion accounting models. Upon adoption of ASU 2020-06, convertible debt proceeds, unless issued with a substantial premium or an embedded conversion feature that is not clearly and closely related to the host contract, will no longer be allocated between debt and equity components. This modification will reduce the issue discount and result in less non-cash interest expense in financial statements. ASU 2020-06 also updates the earnings per share calculation and requires entities to assume share settlement when the convertible debt can be settled in cash or shares. ASU 2020-06 will be effective January 1, 2024, and a cumulative-effect adjustment to the opening balance of retained earnings is required upon adoption. Early adoption is permitted, but no earlier than January 1, 2021, including interim periods within that year. The Company adopted ASU 2020-06 effective January 1, 2021. The adoption of ASU 2020-06 did not have any impact on the Company’s consolidated financial statement presentation or disclosures.

 

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. Notes Payable - Related Party

 

Hankey Capital LLC (Hankey Capital)

 

Hankey Capital holds certain convertible notes of the Company as discussed below. 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.

 

Note Type  Issue
Date
  Maturity
Date
  Interest
Rate
  

September 30,

2021

   December 31,
2020
 
                   
(A) First Secured Convertible Note  10/24/14  12/31/21   8.5%  $5,000,000   $5,000,000 
                      
(A) Second Secured Convertible Note  5/4/15  12/31/21   8.5%   2,000,000    2,000,000 
                      
(B) Third Secured Convertible Note  2/24/16  12/31/21   8.5%   2,000,000    2,000,000 
                      
(C) First Credit Facility  7/24/18  12/31/21   8.5%   2,000,000    2,000,000 
                      
(D) Second Credit Facility  9/19/19  12/31/21   8.5%   1,100,000    712,179 
                      
(E) Third Credit Facility  6/1/21  12/31/21   8.5%   667,896    - 
Notes payable             $12,767,896   $11,712,179 

 

F-10
 

 

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, 2021 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 $2.50 per share. The Company also issued warrants to Hankey Capital for an aggregate of 234,177 shares of Common Stock at an exercise price per share of $39.50 that expire five years from the dates of issuance. In connection with the Convertible Notes, the Company paid commitment fees in the amount of $210,000 (3.0% of the original principal amount of the loans) 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 fully amortized as of December 31, 2018. The notes are secured by 354,430 collateral shares as described below.

 

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 December 31, 2021 (the “Maturity Date”) and bears interest at an annual rate of interest at 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 Note into shares of the Company’s common stock (the “Conversion Shares”), at a conversion rate equal to $2.50 per share and issued a warrant to Hankey Capital for 58,537 shares of Common Stock at an exercise price per share of $51.25. The Warrant will expire on February 23, 2021. In connection with the Convertible Note, the Company paid a commitment fee in the amount of $40,000 (2.0% of the original principal amount of the Loan) and other offering costs totaling $77,532. The aggregate value of the warrant, beneficial conversion feature and offering costs of $2,000,000 was considered a debt discount upon issuance of the note and was fully amortized as of December 31, 2018. The note is secured by 101,266 collateral shares as described below.

 

During 2018, the Company issued an additional 7,203,878 collateral shares pursuant to the First, Second and Third Secured Convertible Notes.

 

First Credit Facility Convertible Secured Term Note

 

(C) On July 24, 2018, the Company and Hankey Capital entered into an agreement under which Hankey Capital provided a credit facility of $2,000,000 to the Company to be drawn down by the Company upon notice to Hankey Capital. The credit facility is evidenced by a convertible secured note convertible prior to the maturity date at $2.50 per share and due on December 31, 2021. 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. At December 31, 2020, the Company had used all funds available under the facility. The note is secured by collateral shares as described below.
   
  During 2020, the Company issued 1,702,128 Collateral Shares pursuant to the agreement.

 

Second Credit Facility Convertible Secured Term Note

 

(D) On September 19, 2019, the Company and Hankey Capital entered into an agreement under which Hankey Capital provided a credit facility of $1,100,000 to the Company to be drawn down by the Company upon notice to Hankey Capital. The credit facility is evidenced by a convertible secured note convertible prior to the maturity date at $2.50 per share and due on December 31, 2021. All personal property and assets of the Company secure the note. 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. At September 30, 2021, the Company had used all funds available under the facility. At December 31, 2020, the Company had been advanced $712,179 and had $387,821 available under the facility. At September 30, 2021, the Company had used all funds available under the facility. No Collateral Shares are required pursuant to this convertible secured note.

 

Third Credit Facility Convertible Secured Term Note

 

(E) On June 1, 2021, the Company and Hankey Capital entered into an agreement under which Hankey Capital provided a credit facility of $700,000 to the Company to be drawn down by the Company upon notice to Hankey Capital. The credit facility is evidenced by a convertible secured note convertible prior to the maturity date at $2.50 per share and due on December 31, 2021. All personal property and assets of the Company secure the note. 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. At September 30, 2021, the Company had used $667,896 of the facility. No Collateral Shares are required pursuant to this convertible secured note.

 

F-11
 

 

Collateral

 

The Convertible Notes (A), (B) and (C) are secured by an aggregate of 9,361,702 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 equal to 50% (the “Collateral Shares”) as of September 30, 2021 and December 31, 2020. The Collateral Shares shall be adjusted on a yearly basis. The principal amount of the loans are 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 and cancelled. Hankey Capital will also return Collateral Shares under the same terms in case of partial or full conversion of the Convertible Notes. All of the Company’s personal property further secure the aggregate Convertible Notes, including collateral assignments of all the Company’s license agreements and the MTF Sygnal Option Agreement.

 

Interest payable – related party on the above notes was $2,041,980 and $1,251,626 as of September 30, 2021 and December 31, 2020, respectively.

 

On October 15, 2021 in connection with the October 2021 Primary Offering, Hankey Capital converted the outstanding convertible notes ($12,767,894 in principal amount and $2,054,039 of accrued interest) into 5,928,774 shares of our common stock and all collateral shares were cancelled.

 

4. 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, 2021 and December 31, 2020, the Company had an aggregate of 12,273,036 shares of common stock outstanding.

 

Common Stock Warrants

 

A summary of warrant activity for the period ended September 30, 2021 is presented below:

 

   Number of   Weighted
Average
Exercise
   Weighted
Average
 
Subject to Exercise  Warrants   Price   Life (Years) 
Outstanding as of December 31, 2020   91,841   $14.88    0.34 
Granted – 2021   -    -    - 
Forfeited/Expired – 2021   (91,841)   -    - 
Exercised – 2021   -    -    - 
Outstanding as of September 30, 2021   -   $-    - 

 

F-12
 

 

There were no common stock warrants exercised and 91,841 warrants expired during the period ended September 30, 2021.

 

5. Stock-based Compensation

 

2015 Equity Incentive Plan

 

The Company has 560,000 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 is 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, 2021, 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, 2020   226,418   $37.00    4.60   $- 
Granted – 2021   -    -    -    - 
Forfeited/Expired – 2021   (34,137)   40.48    -    - 
Exercised – 2021   -    -    -            - 
Outstanding as of September 30, 2021   192,281   $39.75    4.65   $- 

 

F-13
 

 

As of September 30, 2021, the Company had outstanding stock options as follows all of which are vested:

 

Date Issued  Exercise Price   Number of Options   Expiration date
August 2015  $39.75    41,624   December 27, 2025
September 2015  $39.75    8,000   December 27, 2025
November 2015  $39.75    48,986   December 27, 2025
December 2015  $39.75    2,228   December 27, 2025
January 2016  $39.75    51,032   January 9, 2026
May 2016  $51.25    10,766   May 26, 2026
September 2016  $51.25    3,973   May 31, 2026
January 2017  $51.25    2,142   January 1, 2027
January 2018  $49.25    1,566   January 1, 2028
January 2019  $2.35    21,964   January 1, 2029
              
Total outstanding options at September 30, 2021        192,281    

 

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 none cancelled during the period ended September 30, 2021.

 

F-14
 

 

6. Deferred Compensation

 

Pursuant to an October 2016 Note Purchase Agreement, the Company’s management had agreed to defer 20% of earned compensation until at least $5,000,000 has been received in cumulative funding from non-current stockholders. This stipulation was meet on October 14, 2021 with the closing of the October 2021 Primary Offering.

 

As of September 30, 2021 and December 31, 2020, deferred compensation was $297,500 and $252,500, respectively.

 

7. Commitments and Contingencies

 

UCLA TDG Exclusive License Agreement

 

Effective April 9, 2019, the Company entered into an Amended and Restated Exclusive License Agreement dated as of March 21, 2019 (the “Amended License Agreement”) with the UCLA Technology Development Group on behalf of UC Regents (“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 the Company exclusive rights to develop and commercialize NELL-1 (the “Licensed Product”) for spinal fusion, 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 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 that 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 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.

 

F-15
 

 

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 September 30, 2021, none of the above milestones has been met.

 

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.

 

On August 13, 2020 the Company and UCLA TDG entered into a First Amendment to the Amended and Restated License Agreement pursuant to which the due dates for certain Development Milestones was updated to better reflect delays caused by the COVID-19 Pandemic and to address the Company’s failure to pay certain amounts with regard to patent prosecution, cost reimbursement, maintenance fees, and late fees, and in connection therewith, a revised payment schedule was set forth.

 

On June 30, 2021 the Company and UCLA TDG entered into a Second Amendment to the Amended and Restated License Agreement pursuant to which the due dates for certain Development Milestones was updated to better reflect delays caused by the COVID-19 Pandemic.

 

Payments to UCLA TDG under the Restated License Agreement for the nine months ended September 30, 2021 and 2020 were $45,500 and $-0-, respectively.

 

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.

 

In July 2019, Dr. Bessie (Chia) Soo and Dr. Kang (Eric) Ting (“Plaintiffs”) filed a complaint (the “Complaint”) in federal court in Massachusetts against the Company, Bruce Stroever (“Stroever”), John Booth (“Booth”), Stephen LaNeve (“LaNeve”, and together with Stroever and Booth, the “Individual Defendants”), and MTF Biologics (f/k/a The Musculoskeletal Transplant Foundation, Inc.) (“MTF”). The Complaint alleges claims for breach of contract against the Company and tortious interference with contract against the Individual Defendants and MTF arising from the termination of the Professional Service Agreements, dated as of January 8, 2016, between the Company and each of the Plaintiffs. The Individual Defendants have been sued for actions taken by them in connection with their service to the Company as directors and/or officers of the Company. As such, the Company has certain indemnification obligations to the Individual Defendants. The Company and the Individual Defendants intend 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.

 

8. Subsequent Events

 

On October 15, 2021, the Company completed a public offering (the “October 2021 Primary Offering”) of 1,510,455 units (the “Units”). Each Unit consists of one share of common stock of the Company, par value $0.001 per share (the “Common Stock”), and one warrant (a “Public Warrant”) to purchase one share of Common Stock for $6.30 per share. The Units were sold at a price of $5.25 per Unit, generating gross proceeds to the Company of $7,929,889. The Company granted to WallachBeth Capital LLC, the underwriter in the Offering a 45-day option to purchase up to 226,568 additional shares of Common Stock and/or 226,568 Public Warrants to cover over-allotments, if any. The underwriter has exercised its option with respect to the Warrants.

 

In connection with the October 2021 Primary Offering, Hankey Capital converted the outstanding convertible notes ($12,767,894 in principal amount and $2,054,039 of accrued interest) into 5,928,774 shares of our common stock. All collateral shares were cancelled.

 

F-16
 

 

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, 2020 and 2019 and the related notes included in our Annual Report on Form 10-K filed for the fiscal year ended December 31, 2020, with the SEC on April 15, 2021. 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 six-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.

 

 5 
 

 

UCLA TDG Exclusive License Agreement

 

Effective April 9, 2019, the Company entered into an Amended and Restated Exclusive License Agreement dated as of March 21, 2019 (the “Amended License Agreement”) with the UCLA Technology Development Group on behalf of UC Regents (“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 the Company exclusive rights to develop and commercialize NELL-1 (the “Licensed Product”) for spinal fusion, 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 to pay certain royalties to UCLA TDG under the Amended 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 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 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.

 

As of September 30, 2021, none of the above milestones has been met.

 

 6 
 

 

We are obligated to diligently proceed with developing and commercializing licensed products under UCLA patents set forth in the Amended 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 Amended License Agreement.

 

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.

 

The Amended License Agreement provided a PEGylated Licensed Product/Licensed Method (“Newly Added Patent Rights”) for which Company has agreed to assume a series of new development obligations, which conclude with a First Commercial Sale of such PEGylated Licensed Product/Licensed Method by the end of 2031.

 

The Amended License Agreement added the following financial terms with respect to Newly Added Patent Rights:

 

  30% sharing of any Sublicense Income received by the Company and attributable to those Newly Added Patent Rights;
     
  Four new Development Milestones corresponding to a PEGylated Licensed Product/Licensed Method that is covered by the Newly Added Patent Rights and
     
  3% royalty on Net Sales of such a Licensed Product/Licensed Method covered by the Newly Added Patent Rights

 

On August 13, 2020 the Company and UCLA TDG entered into a First Amendment to the Amended and Restated License Agreement pursuant to which the due dates for certain Development Milestones was updated to better reflect delays caused by the COVID-19 Pandemic and to address the Company’s failure to pay certain amounts with regard to patent prosecution, cost reimbursement, maintenance fees, and late fees, and in connection therewith, a revised payment schedule was set forth.

 

On June 30, 2021 the Company and UCLA TDG entered into a Second Amendment to the Amended and Restated License Agreement pursuant to which the due dates for certain Development Milestones was updated to better reflect delays caused by the COVID-19 Pandemic.

 

Results of Operations

 

Impact of the Novel Coronavirus (COVID-19) on the Company’s Business Operations

 

The global outbreak of the novel coronavirus (COVID-19) has led to severe disruptions in general economic activities worldwide, as businesses and governments have taken broad actions to mitigate this public health crisis. In light of the uncertain and continually evolving situation relating to the spread of COVID-19, this pandemic could pose a risk to the Company. The extent to which the coronavirus may impact the Company’s business operations will depend on future developments, which are highly uncertain and cannot be predicted at this time. The Company intends to continue to monitor the situation and may adjust its current business plans as more information and guidance become available.

 

The coronavirus pandemic presents a challenge to medical facilities worldwide. As the Company’s clinical trials will be conducted on an outpatient basis, it is not currently possible to predict the full impact of this developing health crisis on such clinical trials, which could include delays in and increased costs of such clinical trials. Current indications from the clinical research organizations conducting the clinical trials for the Company are that such clinical trials are being delayed or extended for several months as a result of the coronavirus pandemic.

 

There is also significant uncertainty as to the effect that the coronavirus may have on the amount and type of financing available to the Company in the future.

 

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 September 30, 2021 compared to the Three Months ended September 30, 2020

 

  

Three-months

ended

September 30,
2021

   Three-months
ended
September 30,
2020
   % Change 
Operating expenses               
Research and development  $-   $142,877    (100.00)%
General and administrative   229,789    2,946    7700.03%
                
Total operating expenses   229,789    145,823    57.58%
                
Loss from operations   (229,789)   (145,823)   57.58%
                
Interest expense, related party   (279,514)   (248,226)   12.60%
                
Net loss  $(509,303)  $(394,049)   29.25%

 

During 2020, Bone Biologics had to curtail operations due to lack of necessary funds, which the company hopes to address with future financing.

 

 7 
 

 

The lack of capital occurring simultaneously during the COVID-19 pandemic has caused a delay in R&D activities, and a scale back in all operations other than fund raising. As a result, the company engaged in cost-cutting measures in an attempt to extend our cash resources as long as possible.

 

The source, timing and availability of any future financing will depend principally upon market conditions and the status of our scientific development programs.

 

Research and Development

 

Our research and development decreased from $142,877 during the three months ended September 30, 2020 to $-0- during the three months ended September 30, 2021. The $142,877 decrease was due to the curtailing of operations during 2021. We will continue to incur significant expenses for development activities for NELL-1 in the future.

 

General and Administrative

 

Our general and administrative expenses increased from $2,946 during the three months ended September 30, 2020 to $229,789 during the three months ended September 30, 2021. The $226,843 increase was due to resuming operations and costs associated with our registration statement.

 

Interest Expense

 

Our interest expense increased from $248,226 for the three months ended September 30, 2020 to $279,514 during the three months ended September 30, 2021. The increase of $31,288 resulted from increased debt.

 

Nine Months ended September 30, 2021 compared to the Nine Months ended September 30, 2020

 

  

Nine-months

ended

September 30, 2021

   Nine -months
ended
September 30, 2020
    % Change 
Operating expenses                
Research and development  $47,516   $318,978     (85.10)%
General and administrative   595,078    299,604     98.62%
                 
Total operating expenses   642,594    618,582     3.88%
                 
Loss from operations   (642,594)   (618, 582)    3.88%
                 
Interest expense, related party   (790,354)   (750,797)    5.27%
                 
Provision for income taxes   -    (1,600)    (100.00)%
                 
Net loss  $(1,432,948)  $(1,370,979)    4.52%

 

Research and Development

 

Our research and development decreased from $318,978 during the nine months ended September 30, 2020 to $47,516 during the nine months ended September 30, 2021. The $271,462 decrease was due to the curtailing of operations during 2021. We will continue to incur significant expenses for development activities for NELL-1 in the future.

 

General and Administrative

 

Our general and administrative expenses increased from $299,604 during the nine months ended September 30, 2020 to $595,078 during the nine months ended September 30, 2021. The $295,474 increase was due to resuming operations, bringing the Company’s filings current and our registration statement.

 

Interest Expense

 

Our interest expense increased from $750,797 for the nine months ended September 30, 2020 to $790,354 during the nine months ended September 30, 2021. The increase of $39,557 resulted from increased debt.

 

Liquidity and Capital Resources

 

The Company has no significant operating history and since inception to September 30, 2021 has incurred accumulated losses of approximately $70.3 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 $6.6 million. The accompanying consolidated financial statements for the period ended September 30, 2021 have been prepared assuming the Company will continue as a going concern. As reflected in the financial statements, the Company had a stockholders’ deficit of $15,125,258 at September 30, 2021, and incurred a net loss of $1,432,948, and used net cash in operating activities of $1,041,734 during the nine months ended September 30, 2021. These factors raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date that the financial statements are issued. 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, 2020, 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.

 

 8 
 

 

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.

 

On October 15, 2021, the Company completed a public offering (the “October 2021 Primary Offering”) of 1,510,455 units (the “Units”). Each Unit consists of one share of common stock of the Company, par value $0.001 per share (the “Common Stock”), and one warrant (a “Public Warrant”) to purchase one share of Common Stock for $6.30 per share. The Units were sold at a price of $5.25 per Unit, generating gross proceeds to the Company of $7,929,889. The Company granted to WallachBeth Capital LLC, the underwriter in the Offering a 45-day option to purchase up to 226,568 additional shares of Common Stock and/or 226,568 Public Warrants to cover over-allotments, if any. The underwriter has exercised its option with respect to the Warrants.

 

For the past several years, we have depended on our relationship with Hankey Capital for working capital to fund our operations, which has been raised in the form of both debt and equity capital. Hankey Capital, directly and indirectly, controls approximately 70% of our issued and outstanding shares of common stock. In connection with the October 2021 Primary Offering, Hankey Capital converted the outstanding convertible notes ($12,767,894 in principal amount and $2,054,039 of accrued interest) into 5,928,774 shares of our common stock and call collateral shares were cancelled. Representatives of Hankey Capital also currently serve as directors of the Company. 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.

 

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. This stipulation was meet on October 14, 2021 with the closing of the October 2021 Primary Offering.

 

As of September 30, 2021 and December 31, 2020, we had cash of $3,374 and $-0-, respectively.

 

As a result of the October 2021 Primary Offering, we anticipate that it will require approximately $10 million to complete first in man studies, and an estimated additional $27 million to achieve FDA approval for a spine interbody fusion indication.

 

Cash Flows

 

Operating activities

 

During the nine months ended September 30, 2021 and 2020, cash used in operating activities was $1,041,734 and $301,240 respectively. Cash expenditures for the nine months ended September 30, 2021 increased primarily due to resuming operations, bringing the Company’s filings current and costs associated with the October 2021 Primary Offering.

 

Financing activities

 

During the nine months ended September 30, 2021, cash provided by financing activities of $1,045,108 resulted primarily from draws on our second and third credit facilities with Hankey Capital. During the nine months ended September 30, 2020, cash provided by financing activities of $279,556 resulted from draws on our second credit facility with Hankey Capital.

 

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, 2021. Based upon that evaluation, our Chief Financial Officer and Chief Executive Officer concluded that as of September 30, 2021, our disclosure controls and procedures were not effective.

 

As of September 30, 2021, management assessed the effectiveness of our internal control over financial reporting and based on that assessment, we identified a material weakness in internal controls over financial reporting as of September 30, 2021 as further described below.

 

 9 
 

 

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

 

Insufficient staffing for the preparation and review procedures of the Company’s financial statements and required SEC filings. During 2020, Bone Biologics had to curtail operations due to lack of necessary funds. The lack of capital occurring simultaneously during the COVID-19 pandemic has caused a scale back in operations. As a result, the company engaged in cost-cutting measures in an attempt to extend our cash resources as long as possible. We do not have sufficient staffing for the preparation and review procedures of the Company’s financial statements and required SEC filings. As a result, the Company was not timely with the interim filings. During the nine months ended September 30, 2021, we had limited personnel that performed nearly all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. As a result of the October 2021 Primary Offering, the Company will engage the current Chief Financial Officer on a full-time basis.

 

Changes in Internal Controls

 

There were no changes in our internal control over financial reporting that occurred during the quarter ended September 30, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings.

 

In July 2019, Dr. Bessie (Chia) Soo and Dr. Kang (Eric) Ting (“Plaintiffs”) filed a complaint (the “Complaint”) in federal court in Massachusetts against the Company, Bruce Stroever (“Stroever”), John Booth (“Booth”), Stephen LaNeve (“LaNeve”, and together with Stroever and Booth, the “Individual Defendants”), and MTF Biologics (f/k/a The Musculoskeletal Transplant Foundation, Inc.) (“MTF”). The Complaint alleges claims for breach of contract against the Company and tortious interference with contract against the Individual Defendants and MTF arising from the termination of the Professional Service Agreements, dated as of January 8, 2016, between the Company and each of the Plaintiffs. The Individual Defendants have been sued for actions taken by them in connection with their service to the Company as directors and/or officers of the Company. As such, the Company has certain indemnification obligations to the Individual Defendants. The Company and the Individual Defendants intend 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.

 

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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.

 

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, 2021.*
     
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, 2021.*
     
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

 

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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 15, 2021 By: /s/ Jeffrey Frelick
  Name: Jeffrey Frelick
  Title: Chief Executive Officer

 

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