Bone Biologics Corporation — Q2 2015 Form 10-Q
Reporting period: Three and six months ended June 30, 2015. The company is a development-stage biotechnology company focused on Nell-1, a bone-regeneration technology for spinal fusion, licensed exclusively worldwide from UCLA. It had not generated revenue.
Financial performance and liquidity
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Research and development | $175,010 | $133,457 | $362,579 | $183,111 |
| General and administrative | $335,568 | $183,037 | $1,071,419 | $307,148 |
| Operating loss | $(510,578) | $(316,494) | $(1,433,998) | $(490,259) |
| Net loss | $(890,803) | $(427,569) | $(2,532,622) | $(751,215) |
| Net loss per share | $(0.03) | $(0.04) | $(0.10) | $(0.07) |
| Net cash used in operations | — | — | $(1,494,330) | $(288,752) |
- At June 30, cash was $3.17 million, versus $2.66 million at December 31, 2014. Total assets were $4.41 million; total liabilities were $5.31 million, leaving a stockholders’ deficit of $898,193.
- Notes payable, net of $1.73 million unamortized debt discount, were $5.27 million. The company had $7.0 million principal outstanding under Hankey Capital secured convertible notes bearing at least 8.5% interest. The notes are due in 2017 and 2018, are secured by company shares and license agreements, and are convertible at Hankey’s discretion under stated terms.
- In May, MTF converted $3.85 million of principal and accrued interest into 2,438,463 common shares. The company also raised $2.0 million through a new Hankey note. Six-month financing cash inflow was $2.0 million.
- Management estimated operating expenditures of $5.6 million for the next 12 months, stated there were no principal payment requirements in that period, and said additional debt or equity financing would be needed. It cautioned that financing might not be obtained in sufficient amounts. The filing repeats the going-concern uncertainty.
Changes versus prior periods
- Six-month net loss increased to $2.53 million from $751,215. Operating expenses rose 193%, including a 98% increase in R&D and a 249% increase in G&A.
- Management attributed higher R&D to Nell-1 development and increased personnel costs. Higher G&A reflected public-company legal, insurance and other costs, $324,532 of consultant warrant expense, and stock-based compensation.
- Six-month net interest expense increased to $1.10 million from $250,533, primarily because of the secured notes issued in October 2014 and May 2015 and related financing costs.
- Operating cash use increased to $1.49 million from $288,752. Non-cash financing-cost amortization, debt-discount amortization, stock compensation and warrant expense partly offset the reported net loss in the cash-flow reconciliation.
Outlook, risks and unusual items
- Nell-1 is expected to be regulated by the FDA as a combination product with a device lead and will require preclinical and clinical testing and regulatory authorization. The company disclosed limited experience managing such trials and no assurance of successful approval or commercialization.
- The UCLA license requires human clinical trials to commence no later than December 31, 2015. Management said it believed trials would not begin before expiration of the current license; the parties were discussing an amendment, with no assurance of agreement. UCLA may terminate or reduce the license to non-exclusive status if diligence milestones are missed.
- Other stated risks include dependence on additional financing, third-party manufacturing, intellectual-property protection, market acceptance and product-liability exposure. The filing reports no material off-balance-sheet arrangements.
- Disclosure controls and procedures were deemed ineffective as of June 30. Management described material weaknesses involving accounting resources and communication of non-routine transactions, and valuation of options and warrants; remediation was underway.
- An unresolved Cytovance contract dispute dates to 2008. Bone alleges it is owed more than $150,000; the company said the outcome could materially affect results of operations, although it did not expect a material effect on liquidity or financial position.
- After quarter-end, Stephen R. La Neve and Jeff Frelick were appointed CEO and COO effective August 17, 2015. Their agreements provide annual base salaries of $500,000 and $300,000, target bonuses of 70% and 50%, and options for 6% and 3% of outstanding shares, respectively, subject to vesting terms.
- August 2015 milestone side-letter agreements addressed 867,163 shares for each of AFH and MTF despite milestones not being met. AFH’s shares were conditioned on surrender of milestone-share claims; MTF’s agreement authorized issuance in consideration of its support and cooperation. Verify the final issuance and dilution treatment.
Important facts for investors to verify
- Cash runway and the timing, terms and availability of further financing relative to the stated $5.6 million next-12-month expenditure estimate.
- Debt terms, interest burden, conversion mechanics, collateral-share treatment and potential dilution from notes, warrants and options.
- Status of the UCLA license amendment, the December 31, 2015 clinical-trial milestone and regulatory development plans for Nell-1.
- Progress in remediating the disclosed control weaknesses and the final accounting and share impact of the AFH and MTF agreements.
- Resolution and potential financial effect of the Cytovance dispute.