Bone Biologics Corporation — Q3 2015 Form 10-Q
Business context and reporting period
Unaudited results for the quarter and nine months ended September 30, 2015. Bone Biologics is a development-stage biotechnology company focused on Nell-1, a bone-regeneration product for spinal fusion licensed exclusively from UCLA. The company reported no revenue and has not begun commercial operations.
Financial results and liquidity
| Metric | Q3 2015 | Q3 2014 | Nine months 2015 | Nine months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $302,662 | $256,464 | $665,241 | $439,575 |
| General and administrative | $2,665,788 | $600,140 | $3,737,207 | $907,288 |
| Total operating expenses | $2,968,450 | $1,734,380 | $4,402,448 | $2,224,639 |
| Net loss | $3,363,022 | $2,612,884 | $5,895,644 | $3,364,100 |
| Loss per share, basic and diluted | $0.11 | $0.20 | $0.21 | $0.29 |
At September 30, cash was $2.13 million, down from $2.66 million at December 31, 2014. Current assets were $3.29 million and current liabilities $58,191; total liabilities were $5.50 million. Notes payable were $7.0 million face value, reported net of $1.56 million unamortized debt discount, or $5.44 million. The notes are secured, convertible, and carry a minimum 8.5% interest rate. The company reported no principal payment requirements for the next 12 months.
For the first nine months, operating cash use was $2.53 million, investing cash use $504, and financing cash provided $2.0 million. The financing was a May 2015 Hankey Capital convertible note. MTF converted $3.85 million of related-party debt and accrued interest into 2,438,463 shares in May; this was a non-cash transaction.
Material changes versus the prior comparable period
- Q3 net loss increased 28.7% and nine-month net loss increased 75.3% year over year. Nine-month operating expenses rose 97.9%.
- Nine-month G&A increased by $2.83 million, primarily reflecting $1.37 million of share-based expense associated with the revised MTF milestone agreement, new executive compensation and equity awards, and director compensation.
- Nine-month R&D increased 51.3%, mainly due to greater Nell-1 development activity and higher personnel costs.
- Nine-month interest expense rose 31.6%, reflecting the secured convertible notes issued in October 2014 and May 2015; Q3 interest expense declined year over year because of a prior-period non-cash warrant charge.
Outlook, risks, contingencies and unusual items
- Management estimated operating expenditures of $5.8 million for the next 12 months and said additional debt and/or equity financing is needed. The filing states there is no assurance financing will be obtained in sufficient amounts. The company disclosed substantial going-concern uncertainty; its auditor had included a going-concern notation in the 2014 annual statements.
- The license agreement calls for human clinical trials to commence by December 31, 2015. Management said it believed trials would not begin before the current license expires; the parties were discussing an amendment, with no assurance of agreement. UCLA may terminate or reduce the license’s exclusivity if diligence milestones are missed.
- FDA guidance classifies Nell-1 as a combination product with a device lead. Clinical success, regulatory authorization, manufacturing, intellectual property, market acceptance and the ability to raise capital are significant risks. The filing provides no revenue or profit guidance.
- At September 30, 2015, common shares outstanding were 31.16 million. The company also reported 9.62 million warrants, 4.18 million options and 4.43 million shares underlying convertible notes, excluded from diluted loss per share as anti-dilutive. Hankey Capital’s notes are supported by 8.86 million collateral shares, subject to the agreements’ return and cancellation provisions.
- Disclosure controls and procedures were determined to be ineffective. Management described prior weaknesses in accounting resources and complex option and warrant valuation, and noted options had been granted in excess of the stock-plan reserve; remediation was underway.
- Subsequent to quarter-end, the company agreed to issue founders an aggregate 1,153,846 shares for past Nell-1 work product and data, to be expensed as R&D. It also issued AFH 915,614 shares and warrants for 158,229 shares, and paid $275,000 for advisory services. A separate Cytovance contract dispute remains unresolved; management said it did not expect a material liquidity or financial-position effect, though results of operations could be affected.
Important facts for investors to verify
- Available cash, actual monthly cash burn, and whether financing has been secured to meet the stated $5.8 million next-12-month expenditure estimate.
- Status and terms of any UCLA license amendment, applicable diligence milestones, and the clinical-trial timeline.
- Fully diluted share count and potential dilution from warrants, options, convertible notes, collateral arrangements and post-quarter share commitments.
- Progress in remediating ineffective disclosure controls and addressing the option-plan reserve issue.
- Current status and potential financial impact of the Cytovance dispute and other disclosed commitments.