Bone Biologics Corp. — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; comparative period is Q1 2014. Bone Biologics is a development-stage biotechnology company developing Nell-1, a recombinant protein for bone regeneration in spinal fusion. The FDA has indicated Nell-1 is a combination product with a device lead. The company reported no product revenue.
Key financial metrics
| Metric | Q1 2015 / March 31, 2015 | Comparable / prior balance |
|---|---|---|
| Revenue | $0 | $0 in Q1 2014 |
| Gross profit | $0; gross margin not meaningful | $0 in Q1 2014 |
| Operating expenses | $923,420 | $173,765 in Q1 2014 |
| Net loss | $1,641,819; loss per share $0.07 | $323,647; loss per share $0.03 in Q1 2014 |
| Cash used in operating activities | $491,814 | $3,016 in Q1 2014 |
| Cash | $2,169,078 | $2,661,396 at December 31, 2014 |
| Total assets | $3,215,983 | $3,821,391 at December 31, 2014 |
| Total liabilities | $7,799,582 | $7,519,911 at December 31, 2014 |
| Stockholders’ deficit | $4,583,599 | $3,698,520 at December 31, 2014 |
Current liabilities of $4,034,846 exceeded current assets of $3,204,429, a working-capital deficit of approximately $830,000. The balance sheet included a $3,659,328 current note payable to related party and $3,764,736 of other notes payable, net of debt discount. Interest expense was $716,799 in Q1 2015. No principal payments were expected in the next 12 months, according to management.
Material changes versus Q1 2014
- Operating expenses increased 431%: research and development rose to $188,288 from $49,654, and general and administrative expense rose to $735,132 from $124,111.
- Management attributed higher R&D expense to Nell-1 development, patent costs, increased wages, and $51,735 of stock-based compensation related to the President and Chief Technology Officer. Higher general and administrative costs reflected public-company legal, accounting and consulting costs, $324,532 of warrant-related expense, and $16,971 of CFO stock compensation.
- Net interest expense increased to $716,799 from $147,598, primarily associated with the October 2014 secured convertible note and warrants issued in February 2015. The larger reported loss included substantial non-cash financing-cost and equity-compensation charges.
- Cash declined by $492,318 during the quarter. The filing reports no financing cash flows in Q1 2015.
Outlook, risks and unusual items
- Funding and going concern: The company had accumulated losses of approximately $13 million and estimated operating expenditures of $4.6 million for the next 12 months. Management stated additional debt and/or equity financing would be needed and warned there was no assurance sufficient financing could be obtained. The 2014 audit included a going-concern notation.
- Subsequent financing and conversion: On May 4, 2015, after quarter-end, MTF converted $3,659,328 of principal plus $193,443 of accrued interest into 2,438,463 common shares. The company also issued Hankey Capital a $2 million convertible note bearing at least 8.5% annual interest, with conversion terms linked to the share price, a warrant for 1,898,734 shares at $1.58, and collateral shares. Management said proceeds were for working capital and general corporate purposes. The filing also disclosed an existing $5 million Hankey Capital note, warrants and collateral arrangements.
- Product and regulatory risk: Nell-1 must undergo preclinical and human clinical testing and FDA review; success, timing and market acceptance are uncertain. The company depends on its UCLA license and third-party manufacturing capabilities.
- License milestone: The UCLA license amendment stipulated that human clinical trials commence no later than December 31, 2015. Management said it believed trials would not commence before expiration of the current license; discussions to amend the agreement were ongoing, with no assurance an amendment would be reached. The Regents may terminate or reduce the license for failure to meet diligence milestones.
- Dilution and secured debt: At March 31, 2015, the company reported 7,722,501 warrants, 757,977 options and 6,988,354 shares underlying convertible notes. Hankey’s note was secured by collateral shares and assignments of the company’s license agreements; the conversion formula and warrants could increase dilution.
- Controls and legal matter: Management concluded disclosure controls were ineffective as of March 31, citing material weaknesses involving accounting resources, non-routine transactions, and valuation of options and warrants. An unresolved Cytovance dispute could affect results of operations, although management did not expect a material effect on liquidity or financial position.
- The filing identifies no material off-balance-sheet arrangements and states that other claims in the ordinary course were not expected to have a material adverse effect.
Important facts for investors to verify
- Whether financing beyond the May 2015 $2 million note was secured, and how long available cash would fund operations against the $4.6 million annual expenditure estimate.
- Completion and terms of the MTF debt conversion, and the resulting fully diluted share count, including conversion, warrant and collateral-share effects.
- Whether the UCLA license was amended, remained in force, and allowed the company to meet the stated clinical-trial milestone.
- Clinical, manufacturing and FDA progress for Nell-1, including any updated trial timetable.
- Remediation of the disclosed control weaknesses and any subsequent developments in the Cytovance dispute.