Bone Biologics Corporation — Q1 2018 Form 10-Q
Reporting period: Three months ended March 31, 2018; unaudited. Bone Biologics is a pre-revenue medical-device company developing NELL-1/DBX for bone regeneration, initially targeting spinal fusion. Its product is expected to be regulated by the FDA as a combination product with a device lead.
Financial performance and position
| Metric | Q1 2018 | Q1 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.097 million | $2.160 million |
| Operating loss | $1.097 million | $2.160 million |
| Net loss | $1.455 million | $2.923 million |
| Net loss per share | $0.03 | $0.08 |
| Cash used in operating activities | $818,875 | $1.008 million |
- Gross margin is not meaningful because the company had no revenue or cost of revenue.
- Cash was $371,404 at quarter-end, versus $690,279 at December 31, 2017; prepaid expenses were $98,969. The filing’s liquidity discussion separately states cash of $371,429, so the exact reported amount is inconsistent.
- Working capital deficit was $137,924; total liabilities were $9.005 million and stockholders’ deficit was $8.534 million. Related-party notes had $9.0 million principal and a carrying value of $8.396 million, net of discounts and issuance costs. The notes bear interest at a minimum 8.5% annually; management cited monthly interest payments of approximately $65,875.
- March financing provided $500,000 from a common-stock sale. No principal payments were required during the next 12 months, according to management.
Changes versus the prior comparable period
- Net loss fell 50.2%, primarily reflecting lower stock-based compensation and a $404,435 reduction in net interest expense. Interest expense declined following the conversion of $3.9 million of notes at December 31, 2017.
- Operating expenses fell 49.2%. Research and development trade expense was broadly stable; related-party R&D expense fell to zero after founder service agreements ended. General and administrative expense declined 28.3%, primarily because of lower amortization of management-option fair value.
- Operating cash use improved by about $189,000, attributed to timing of development work and cash-conservation measures. Q1 2018 financing was $500,000 of equity, compared with $2.0 million of note proceeds in Q1 2017.
Outlook, risks, and unusual items
- Management estimated operating expenditures of $7.2 million for the next 12 months and said it expects continued significant NELL-1 development costs. The company plans to seek additional debt and/or equity financing; availability and terms are uncertain.
- The filing states that substantial doubt exists about the company’s ability to continue as a going concern. It reported a $1.455 million quarterly loss, $818,875 operating cash use, and only $371,404 of cash on the balance sheet. Cash was reported at $191,771 as of May 1, 2018. The statements contain no adjustments that might be required if the company cannot continue as a going concern.
- On May 1, Hankey Capital deferred the May interest payment until the earlier of qualifying equity funding or June 1, 2018. On May 14, the company issued Hankey Capital a secured $600,000 note, due December 31, 2018, at 8.5%; it may convert into notes in a qualified financing of at least $2.0 million, inclusive of this note.
- Funding shortfalls could force the company to reduce or discontinue development or operations, or seek strategic alliances that could require surrendering technology rights. Equity funding may dilute shareholders; debt may restrict operations. Other key risks include clinical-trial success, FDA authorization, reliance on third-party manufacturers, and protection of licensed intellectual property.
- The UCLA license includes annual maintenance fees, royalties, development milestones, and diligence requirements; failure to meet certain milestones could result in termination or conversion to a non-exclusive license.
- Disclosure controls and procedures were assessed as ineffective at March 31, 2018. Management was working on remediation, including third-party review of non-routine transactions. The filing reports no pending legal proceedings and no material off-balance-sheet arrangements.
Important facts for investors to verify
- Reconcile the filing’s quarter-end cash figures of $371,404 and $371,429, and confirm subsequent cash and financing status.
- Assess near-term liquidity against the $7.2 million projected operating expenditures, recurring interest obligations, and substantial going-concern uncertainty.
- Review the terms, collateral, conversion provisions, and related-party nature of Hankey Capital debt, including the May 2018 $600,000 note.
- Track clinical and regulatory milestones for NELL-1/DBX and compliance with UCLA license diligence requirements.
- Consider potential dilution: 43,929,330 common shares were outstanding at March 31, 2018, alongside 9,242,308 warrants and 8,449,434 options; the filing also reports 1,153,846 shares to be issued to founders.
- Monitor remediation of ineffective disclosure controls and the material weakness referenced from the 2017 annual report.