Bone Biologics Corporation — Q2 2019 Form 10-Q
Business context and period: Unaudited results for the quarter and six months ended June 30, 2019. Bone Biologics is a pre-revenue medical-device company developing NELL-1/DBX for spinal fusion and other bone-regeneration applications. Its lead product is an FDA-regulated combination product; the company has not yet generated revenue from planned operations.
Financial results and liquidity
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $417,565 | $187,460 | $981,898 | $556,469 |
| General and administrative | $261,692 | $672,690 | $886,597 | $1,400,404 |
| Total operating expenses | $679,257 | $860,150 | $1,868,495 | $1,956,873 |
| Net loss | $925,552 | $1,263,326 | $2,332,245 | $2,717,966 |
| Loss per share, basic and diluted | $0.13 | $0.29 | $0.32 | $0.62 |
- Margins: No revenue was reported, so operating and gross margins are not meaningful.
- Cash flow: Six-month operating cash use was $2.479 million, versus $1.486 million in 2018. Financing provided $1.700 million from related-party credit-facility draws, compared with $1.100 million in 2018 from stock issuance and a term note. Cash fell by $779,002 to $176,372.
- Balance sheet at June 30: Total assets were $266,395, including $176,372 cash; current liabilities were $11.122 million, including $10.700 million of related-party notes. Stockholders’ deficit was $10.855 million; accumulated deficit was $65.948 million.
- Debt and liquidity: Related-party notes bear 9.5% interest and mature December 31, 2019. The company reported $300,000 available under Hankey Capital’s credit facility at June 30. It subsequently drew $40,000 in July and $260,000 on August 2. The filing estimates operating expenditures of $4.6 million over the next 12 months.
Changes versus prior comparable periods
- Q2 R&D expense rose 123% year over year, primarily from costs related to the large-animal pivotal study. Six-month R&D increased 76% for the same reason.
- G&A expense declined 61% for Q2 and 37% for the six-month period. Management attributed the decreases primarily to a $379,167 write-off of deferred compensation and lower required amortization of management options.
- Net loss narrowed 27% in Q2 and 14% for the six-month period. Related-party interest expense also declined, mainly because less debt-discount amortization was recorded following a 2018 debt modification treated as an extinguishment.
- Cash used in operations increased year over year, which management attributed primarily to the timing of development activity with its contract manufacturer.
Outlook, risks and notable items
- Going concern: Management states that the cash position, operating losses, stockholders’ deficit, and expected development spending raise substantial doubt about the company’s ability to continue as a going concern within one year after issuance. The prior-year auditor also expressed substantial doubt. Additional financing is not assured; without it, the company may need to reduce or discontinue development or operations. Financing could dilute shareholders or restrict operations.
- Funding and control concentration: Hankey Capital and related parties control approximately 88% of common shares, including collateral shares, and are the company’s principal source of financing. Hankey Capital-affiliated representatives serve as directors. Notes are secured by company assets, including assignments of license agreements, and by collateral shares.
- Development and regulatory risks: Success depends on completing clinical studies, obtaining FDA and other regulatory approvals, maintaining intellectual-property rights, and securing financing. The filing provides no assurance of successful trials or authorization to market.
- UCLA license: An amended agreement effective April 9, 2019 continues exclusive NELL-1 rights for specified applications and adds PEGylated-product obligations. Terms include a 3% royalty on net sales, milestone payments, and sharing of certain sublicense income; failure to meet diligence milestones may jeopardize exclusivity.
- Management and litigation: The CEO and CFO employment letter agreements were not renewed effective June 28, 2019; both entered into independent-contractor agreements. A new July 2019 lawsuit alleges contract breach and tortious interference; the company intends to defend, and potential loss could not be estimated. A separate shareholder suit concerning the 2018 financing was dismissed in July 2019.
- Other: The company reported no material off-balance-sheet arrangements and concluded disclosure controls were effective as of June 30, 2019. Management indicated no material changes to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Current cash, financing availability, and the company’s ability to meet its stated $4.6 million next-12-month spending estimate.
- Status, timing, cost, and results of the large-animal pivotal study and subsequent clinical and regulatory milestones.
- Repayment, extension, or conversion of the $10.7 million related-party notes due December 31, 2019, and the terms of any new funding.
- Hankey-related ownership, collateral-share arrangements, and resulting control and dilution implications.
- Developments in the July 2019 lawsuit, potential defense costs, and the company’s indemnification obligations.