Bone Biologics Corporation — Q2 2017 Form 10-Q
Reporting period: Three and six months ended June 30, 2017; financial statements are unaudited. Bone Biologics is a development-stage medical-device company developing NELL-1/DBX for bone regeneration in spinal fusion. The product is expected to be regulated by the FDA as a combination product with a device lead. The company reported no revenue and has not begun commercial operations.
Financial performance and position
- Revenue: $0 in both the three- and six-month periods, as in the comparable 2016 periods. Gross profit and margins are not meaningful without revenue.
- Q2 results: Reported net income was $864,621, compared with a $4.80 million net loss in Q2 2016. The reported result reflects a $3.629 million reversal of research-and-development expense related to forfeited founder options; R&D expense was reported as negative $3.094 million. It should not be read as evidence of product revenue or operating profitability. Net interest expense increased to $1.109 million from $512,000.
- First-half results: Net loss was $2.210 million, versus $11.778 million in the first half of 2016. Operating expenses were reported at $185,000, including negative R&D expense of $1.902 million, largely reflecting the founder-option forfeiture reversal. Net interest expense rose to $2.023 million from $923,000.
- Cash flow and liquidity: Cash used in operations was $1.837 million in the first half, down from $4.554 million a year earlier. The company received $2.0 million from convertible-note issuance, ending the period with $783,014 cash, compared with $620,375 at year-end 2016. Current assets were $1.140 million and current liabilities were $4.506 million.
- Debt: Convertible-note principal totaled $12.2 million, bearing 8.5% interest. Balance-sheet notes payable, net of discounts and issuance costs, were $8.993 million in total: $2.109 million current and $6.884 million noncurrent. Management identified $3.2 million of principal payments due in the next 12 months. The February 2017 notes added $2.0 million of debt and mature December 31, 2017; certain notes may convert into shares at $1.00 per share.
- Capitalization: 38,828,607 common shares were outstanding at June 30. The filing lists 10.39 million warrants, 8.59 million options and 8.90 million shares underlying convertible notes, representing potential dilution.
Changes, outlook and risks
- The improvement in reported year-over-year results was substantially affected by noncash option-forfeiture reversals. R&D and G&A expense otherwise remain part of ongoing development spending; interest expense increased following new borrowing and amortization of debt discounts and conversion features.
- Management estimated operating expenditures of $5.5 million over the next 12 months and stated that additional debt or equity financing is needed. It cautioned that financing may not be available in sufficient amounts. The filing notes the company’s approximately $49 million cumulative net loss and substantial doubt-related going-concern context; without funding, it may have to reduce or discontinue development, pursue strategic arrangements that could require relinquishing technology rights, or cease operations.
- Cash conservation included deferring 20% of management compensation and 50% of directors’ cash compensation until at least $5 million in cumulative funding from non-current stockholders is received. Convertible-note proceeds are restricted to essential R&D activities.
- The company met milestones to seek expansion of its UCLA license field of use to include osteoporosis and had begun good-faith discussions with UCLA; the filing does not report a completed expansion agreement. The license includes development milestones, royalties, fees and possible termination or loss of exclusivity if diligence deadlines are not met.
- Key risks include raising capital, clinical-trial execution, FDA authorization, product acceptance, reliance on third-party manufacturers and licensed technology, and intellectual-property protection. Management reported no pending legal proceedings, no material off-balance-sheet arrangements, and effective disclosure controls as of June 30, 2017.
Important facts for investors to verify
- How much of the reported earnings improvement reflects the noncash founder-option forfeiture reversal, and what are recurring operating costs?
- What financing is available to cover the $5.5 million estimated operating expenditures and $3.2 million of near-term principal requirements, given period-end cash of $783,014?
- What are the status and expected terms of the proposed UCLA osteoporosis field-of-use expansion and the company’s development milestones?
- What are the clinical and regulatory timelines for NELL-1/DBX, and what further trial, manufacturing or FDA requirements remain?
- What dilution could result from conversion of notes and exercise of outstanding warrants and options?