Bone Biologics Corporation — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. Bone Biologics is a development-stage medical-device company developing NELL-1/DBX for bone regeneration in spinal fusion. It reported no product revenue.
Financial results and liquidity
| Metric | Q1 2017 | Q1 2016 / comparison |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $1.19 million | $4.68 million; down 74.5% |
| General and administrative expense | $0.97 million | $1.88 million; down 48.5% |
| Total operating expenses | $2.16 million | $6.56 million; down 67.1% |
| Net loss | $3.07 million | $6.98 million; loss narrowed 55.9% |
| Basic and diluted loss per share | $0.08 | $0.20 |
| Cash used in operating activities | $1.01 million | $2.53 million |
| Cash at period end | $1.61 million | $0.62 million at December 31, 2016 |
Gross profit and operating margins are not meaningful because the company had no revenue. The smaller net loss mainly reflects lower 2016 option-related compensation and lower operating expenses; net interest expense rose 122% to $0.91 million, including amortization of debt discounts and financing costs.
Total assets were $1.97 million and total liabilities were $10.24 million at March 31, 2017, compared with $0.97 million and $9.61 million, respectively, at year-end. Stockholders’ deficit was $8.27 million. Notes had $12.2 million of gross principal outstanding; their combined current and long-term carrying amounts were approximately $8.16 million after discounts and issuance costs. The company disclosed $3.2 million of principal payment requirements over the next 12 months.
Financing provided $2.0 million in Q1 from convertible notes issued in February. Cash increased by $0.99 million after operating cash use. Management attributed lower operating cash use partly to development-spending timing and compensation deferrals.
Material changes and developments
- Operating expenses and net loss fell substantially year over year, while interest expense increased due to additional borrowing and related noncash charges.
- In February 2017, the company issued $2.0 million of convertible notes to MTF and Hankey Capital. The notes bear 8.5% interest, mature December 31, 2017, and are convertible at $1.00 per share; specified financing or nonpayment conditions can trigger conversion.
- In January 2017, the maturity date for $1.2 million of October 2016 convertible notes was extended to December 31, 2017. The company’s notes generally carry 8.5% interest; several older notes mature in 2019.
- After quarter-end, the company terminated its professional-services agreements with three founders effective April 8, 2017. Unvested options under those agreements were to be forfeited; two founders resigned as directors and one resigned from the scientific advisory board on April 13. The company stated the UCLA license remained unchanged.
- Potential dilution is significant: 10.39 million warrants, 12.74 million options, and 8.90 million shares underlying convertible notes were disclosed as of March 31, 2017, in addition to 38.83 million common shares outstanding.
Outlook, risks, and contingencies
Management estimated operating expenditures of $5.9 million for the next 12 months and acknowledged that available cash was not sufficient to fund expected needs. The company intends to raise additional debt or equity, but gave no assurance that financing will be available or sufficient. It warned that a funding shortfall could require it to scale back or discontinue development, pursue strategic alliances that could involve giving up technology rights, or cease operations. The filing repeats the going-concern uncertainty noted in the prior-year audit.
Development and commercialization depend on clinical-trial progress and FDA and other regulatory authorization. The FDA had indicated that NELL-1/DBX would be regulated as a combination product with a device lead. The company also relies on its exclusive UCLA license, which has diligence requirements and milestone, royalty, and patent-cost obligations; failure to meet certain milestones could allow UCLA to terminate or reduce exclusivity. Management reported no pending legal proceedings and did not expect ordinary-course claims to have a material adverse effect.
Management deferred 20% of earned compensation, and directors deferred 50% of cash compensation until at least $5 million of cumulative funding from non-current stockholders is received. Proceeds from the October 2016 and February 2017 notes are restricted to essential research and development activities.
Important facts for investors to verify
- Whether the company can obtain enough financing to cover its stated spending needs and near-term debt principal requirements.
- The terms, conversion triggers, collateral, and potential dilution associated with outstanding notes, warrants, and options.
- Clinical, regulatory, and development milestones for NELL-1/DBX and the company’s ability to meet UCLA license diligence obligations.
- The status and operational impact of the founder agreement terminations and leadership departures.
- Cash burn, compensation deferrals, and the extent to which reported expenses and interest include noncash stock-based compensation and debt amortization.