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, 2021 and 2020 and the related notes included in our Annual
Report on Form 10-K filed for the fiscal year ended December 31, 2021 with the
SEC on March 15, 2022. 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/DBM. The
NELL-1/DBM 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/DBM 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.
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.
The negative impact of the COVID-19 pandemic and the impact on the global
economy and capital markets resulting from the geopolitical instability caused
in part by the ongoing military conflict between Russia and Ukraine, including
inflation and Federal Reserve interest rate increases, have contributed to
global supply chain issues and economic uncertainty, which could negatively
affect our operations. Additionally, the general consensus among economists
suggests that we should expect a higher recession risk to continue over the next
year, which could result in further economic uncertainty and volatility in the
capital markets in the near term, and could negatively affect our operations.
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 and amended through three
sets of amendments (as so amended 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, UCLA TDG has 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.
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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 through the life of the
patents. 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 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.
The Company's obligation to pay the Diligence Fee will survive termination or
expiration of the agreement and the Company is prohibited from assigning,
selling, or otherwise transferring any of its assets related to any Licensed
Product unless the Company's foregoing Diligence Fee obligation is assigned,
sold, or transferred along with such assets, or unless the Company pays 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 September 30, 2022, none of the above milestones has 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. 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.
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Results of Operations
Impact of the Novel Coronavirus (COVID-19) and other Macroeconomic Factors 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 which will conduct 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.
Macroeconomic factors such as inflation, rising interest rates, governmental
responses there to and possible recession caused thereby also add significant
uncertainty to our operations and possible effects to 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, 2022 compared to the Three Months ended
September 30, 2021
Three-months Three-months
ended ended
September 30, September 30,
2022 2021 % Change
Operating expenses
Research and development $ 769,410 $ - 100.00 %
General and administrative 449,867 229,789 95.77 %
Total operating expenses 1,219,277 229,789 430.61 %
Loss from operations (1, 219,277 ) (229,789 ) 430.61 %
Interest expense, related party - (279,514 ) (100.00 )%
Net loss $ (1, 219,277 ) $ (509,303 ) 139.40 %
Research and Development
Our research and development expense increased from $-0- during the three months
ended September 30, 2021 to $769,410 during the three months ended September 30,
2022. We continue to implement research activities after curtailing our
operations during 2021. We will continue to incur significant expenses for
development activities for NELL-1 in the future.
6
General and Administrative
Our general and administrative expenses increased from $229,789 during the three
months ended September 30, 2021 to $449,867 during the three months ended
September 30, 2022. The $220,078 increase was due to resuming operations in
2022. Significant expenses incurred during 2022 were Directors and Officers
insurance, directors' compensation, the revised CFO employment agreement for
full-time services and the services of an investor relations firm. We also
incurred stock based compensation expense for our directors and management team
totaling $32,534.
Interest Expense
Our interest expense decreased from $279,514 for the three months ended
September 30, 2021 to $-0- during the three months ended September 30, 2022. All
the outstanding convertible notes were converted in October 2021.
Nine Months ended September 30, 2022 compared to the Nine Months ended September
30, 2021
Nine-months Nine-months
ended ended
September 30, September 30,
2022 2021 % Change
Operating expenses
Research and development $ 823,410 $ 47,516 1632.91 %
General and administrative 1,553,070 595,078 160.99 %
Total operating expenses 2,376,480 642,594 269.83 %
Loss from operations (2, 376,480 ) (642,594 ) 269.83 %
Interest expense, related party - (790,354 ) (100.00 )%
Provision for income taxes 1,600 - 100.00 %
Net loss $ (2,378,080 ) $ (1,432,948 ) 65.96 %
Research and Development
Our research and development expense increased from $47,516 during the nine
months ended September 30, 2021 to $823,410 during the nine months ended
September 30, 2022. We continue to implement research activities after
curtailing our 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 $595,078 during the nine
months ended September 30, 2021 to $1,553,070 during the nine months ended
September 30, 2022. The $957,992 increase was due to resuming operations in
2022. Significant expenses incurred during 2022 were Directors and Officers
insurance, directors' compensation, the revised CFO employment agreement for
full-time services and the services of an investor relations firm. We also
incurred stock based compensation expense for our directors and management team
totaling $204,126.
Interest Expense
Our interest expense decreased from $790,354 for the nine months ended September
30, 2021 to $-0- during the nine months ended September 30, 2022. All the
outstanding convertible notes were converted in October 2021.
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Liquidity and Capital Resources
The Company has no significant operating history and since inception to
September 30, 2022 has incurred accumulated losses of approximately $72.9
million. The Company will continue to incur significant expenses for development
activities for their lead product NELL-1/DBM. Operating expenditures for the
next twelve months are estimated at $11.5 million. The accompanying consolidated
financial statements for the nine months ended September 30, 2022 have been
prepared assuming the Company will continue as a going concern. As reflected in
the financial statements, the Company incurred a net loss of $2,378,080, and
used net cash in operating activities of $1,616,122 during the nine months ended
September 30, 2022. 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 the 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 10K for
the year ended December 31, 2021, 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.
At September 30, 2022, we had cash of $5,059,243. On October 12, 2022, the
Company completed a public offering generating gross proceeds to the Company of
$5,100,000, and net proceeds, after underwriters discounts and expenses of
approximately $4,454,000. Available cash is expected to fund up to commencement
of our pilot clinical study. We anticipate that it will require approximately
$15 million to complete first in man studies, and an estimated additional $27
million to achieve FDA approval for a spine interbody fusion indication.
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.
However, no assurance can be given that any future financing from Hankey Capital
will be available or, if available, that it will be on terms that are
satisfactory to the Company. In the absence of financing from other sources, the
inability to obtain additional financing from Hankey Capital will result in the
scaling back or discontinuance of our product development programs or operations
entirely.
Cash Flows
Operating activities
During the nine months ended September 30, 2022 and 2021, cash used in operating
activities was $1,616,122 and $1,041,734, respectively. Cash expenditures for
the nine months ended September 30, 2022 increased primarily due to directors'
compensation, the revised CFO employment agreement for full-time services and
investor relation services.
Financing activities
During the nine months ended September 30, 2022, there were no 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.
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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 Estimates
In preparing our condensed consolidated financial statements in accordance with
accounting principles generally accepted in the United States of America
("GAAP") and pursuant to the rules and regulations of the SEC, we make
assumptions, judgments and estimates that affect the reported amounts of assets,
liabilities, revenue and expenses, and related disclosures of contingent assets
and liabilities. We base our assumptions, judgments and estimates on historical
experience and various other factors that we believe to be reasonable under the
circumstances. Actual results could differ materially from these estimates under
different assumptions or conditions. We evaluate our assumptions, judgments and
estimates on a regular basis. We also discuss our critical accounting policies
and estimates with the Audit Committee of the Board of Directors.
We believe that the assumptions, judgments and estimates involved in the
accounting for revenue recognition, business combinations and income taxes have
the greatest potential impact on our condensed consolidated financial
statements. These areas are key components of our results of operations and are
based on complex rules requiring us to make judgments and estimates, and
consequently, we consider these to be our critical accounting policies.
Historically, our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual results.
There have been no significant changes in our critical accounting policies and
estimates during the nine months ended September 30, 2022, as compared to the
critical accounting policies and estimates disclosed in Management's Discussion
and Analysis of Financial Condition and Results of Operations included in our
Annual Report on Form 10-K for the year ended December 31, 2021.
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BONE BIOLOGICS CORPORATION 