Bone Biologics Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. The filing was signed March 29, 2019. This is an annual report, not a standalone fourth-quarter report.
Business context
Bone Biologics is a development-stage medical-device company with no product revenue. Its lead candidate, NELL-1/DBX, combines a recombinant human protein with demineralized bone matrix and is being developed for lumbar spinal fusion. The company holds an exclusive worldwide UCLA license. The FDA has indicated the product is a combination product regulated under device authorities, with the device center as lead; the company expects a Class III pathway requiring premarket approval.
The filing reports successful small-scale protein manufacturing work and animal-model research, and says a pivotal animal study was initiated. The proposed initial indication is one-level lumbar fusion in skeletally mature patients. The filing also says the company filed for a Phase I clinical study outside the United States; it does not establish that human trials had begun.
Financial results and liquidity
| Metric | 2018 | 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $2.79 million | $2.63 million |
| Operating loss | $2.79 million | $2.63 million |
| Interest expense | $1.23 million | $4.42 million |
| Loss on debt extinguishment | $408,294 | $0 |
| Net loss | $4.43 million | $7.05 million |
| Loss per share, basic and diluted | $0.88 | $1.81 |
| Cash used in operating activities | $4.10 million | $3.33 million |
| Cash at year-end | $955,374 | $690,279 |
Gross margin and profitability margins are not meaningful because the company had no revenue. R&D expense was reported at $104,490 in 2018 versus $1.42 million in 2017; the 2017 presentation included a $2.74 million credit related to forfeited founder options, and 2018 included a $1.13 million credit from consultant-option valuation. Management attributes lower interest expense primarily to conversion of $3.9 million of notes and lower debt-discount amortization. G&A fell 32% to $2.69 million, mainly due to lower management-option amortization.
At December 31, 2018, total assets were $1.04 million, including $955,374 cash; current liabilities were $9.64 million, including $9.0 million of related-party notes. Stockholders’ deficit was $8.60 million and accumulated deficit was $63.62 million. The company had $9.0 million principal outstanding to Hankey Capital, secured by company assets and collateral shares. The notes bear 9.25% in the debt table and mature December 31, 2019; conversion is available at $1.00 per share. A separate $2.0 million secured credit facility was undrawn at year-end; the company drew $700,000 in March 2019. The filing says all notes and facility obligations mature December 31, 2019, requiring extension, refinancing, or replacement funding.
Operating cash outflow exceeded year-end cash. The company reported a going-concern warning from its auditor: recurring losses, cash use, and stockholders’ deficit raise substantial doubt about its ability to continue for one year after the financial statements were issued. The financial statements include no adjustments for a possible failure to continue as a going concern.
Changes, financing, and governance
- Net loss narrowed by 37% from 2017, largely reflecting lower interest expense and changes in noncash stock-based compensation; operating expenses increased 6%.
- 2018 financing activities provided $4.37 million, mainly from equity transactions. A July rights offering and related Hankey Capital share purchase raised $3.87 million; proceeds partly repaid a $600,000 note, with the balance intended for working capital and development.
- In July 2018, the conversion price on Hankey Capital’s existing notes was reduced from $15.80 to $1.00 per share, and a note maturity was extended. The company recorded a $408,294 extinguishment loss. A 1-for-10 reverse stock split took effect July 24, 2018.
- The financing and note amendments gave Hankey Capital and its affiliate Don Hankey effective control. The filing reports approximately 88% beneficial ownership for Hankey Capital in the March 2019 ownership table, including voting rights over collateral shares. This concentration creates related-party and control risks.
- Cash compensation was deferred in part: management deferred 20% of earned compensation, and directors deferred 50% of cash compensation until specified outside funding thresholds were met.
Outlook, risks, and unusual items
- Management estimates $10.3 million of operating expenditures for the next 12 months. It estimates an additional $11 million to complete protein synthesis, animal studies, and commence first-in-human studies, plus approximately $62 million to reach a spine interbody fusion product launch. No assurance is given that funding will be available.
- The company has no established revenue stream and depends heavily on Hankey Capital for financing. Inadequate funding could force it to reduce or stop development or operations, or seek strategic arrangements that may require giving up technology rights.
- Product development remains subject to animal and human testing, clinical-trial execution, manufacturing readiness, and FDA review. Approval, timing, safety, efficacy, commercialization, reimbursement, and market acceptance are uncertain. The company relies on third parties for manufacturing, research, regulatory support, and technical assistance.
- The filing identifies a material weakness in internal control over financial reporting involving accounting for complex, non-routine transactions. Disclosure controls were deemed ineffective as of year-end. Management implemented third-party review of non-routine transactions during the fourth quarter but did not report that the weakness was remediated.
- A shareholder lawsuit challenges the 2018 financing and reverse split and alleges securities-law and fiduciary-duty violations, among other claims. The company and certain defendants moved to dismiss; the company intends to defend the case. The potential loss cannot be estimated at this early stage, and the company may have indemnification obligations.
- The 2018 decline in the estimated common-stock fair value from $20.00 to $0.94 per share resulted in reversals of consultant stock-option compensation and affected reported expense. The filing notes that its shares lacked an established trading market.
- UCLA license obligations include a $10,000 annual maintenance fee, 3% royalties on net sales, sublicense-income sharing, and milestone payments. No milestones had been met as of December 31, 2018. Failure to meet diligence deadlines could jeopardize exclusivity.
Key facts for investors to verify
- Whether the company obtained sufficient financing and extended or refinanced the Hankey Capital obligations due December 31, 2019.
- Current cash, burn rate, and runway relative to management’s $10.3 million next-12-month expenditure estimate.
- Actual regulatory and clinical status of NELL-1/DBX, including the status and jurisdiction of the reported Phase I filing and progress of animal studies.
- Progress in remediating the material weakness and restoring effective disclosure and financial-reporting controls.
- Status and potential cost of the shareholder litigation, including any settlement, judgment, or indemnification exposure.
- Voting control, conversion rights, collateral-share treatment, and potential dilution associated with Hankey Capital’s financing.
- Reconciliation of reported R&D expense and stock-option valuation credits, given their significant effect on period-to-period comparisons.