Bone Biologics Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018; financial statements are unaudited. Bone Biologics is a pre-revenue medical-device company developing NELL-1/DBX for bone regeneration in spinal fusion. The company says the FDA has classified the product as a combination product with a device lead.
Financial summary
| Metric | Q3 2018 | Nine months 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Net loss | $241,744 | $2,959,711 |
| Net loss per share, basic and diluted | $0.03 | $0.55 |
| Net cash used in operating activities | Not separately stated | $2,766,140 |
- Operating results: Q3 reported a $404,791 operating income, although there was no revenue. Research and development was reported as a $1,049,257 credit, which the company attributed mainly to a decrease in the estimated fair value of options for services; this more than offset current development costs. Q3 G&A was $644,466. For the nine months, operating expenses were $1,552,083, including a $444,947 R&D credit and $1,997,030 of G&A.
- Other expense: Q3 interest expense was $238,234; nine-month interest expense was $997,727. The nine-month results also included a $408,294 loss on extinguishment of related-party debt following note amendments.
- Cash and liquidity: Cash was $2,294,118 at September 30, up from $690,279 at December 31, 2017. Current assets were $2,350,229 and current liabilities $524,794. Cash used in operations was $2,766,140 for the first nine months, compared with $2,398,396 in the prior-year period.
- Debt and financing: Related-party notes payable totaled $9.0 million, carry a minimum 8.5% interest rate, are secured, and were amended to mature December 31, 2019 and convert at $1.00 per share after the reverse split. The company reported no borrowings on its separate $2 million Hankey Capital credit facility. Financing cash inflows were $4,369,979, principally from equity transactions; July share sales raised $3,869,979.
- Margins: Gross margin is not meaningful because the company reported no revenue or cost of revenue.
Material changes versus prior comparable periods
- Q3 net loss narrowed from $2,375,739 in 2017 to $241,744 in 2018. The company attributed lower interest expense in part to note conversion and reduced debt-discount amortization; the R&D fair-value credit also materially affected the comparison.
- Nine-month net loss narrowed from $4,281,963 to $2,959,711. Management cited lower interest expense and lower G&A, partly offset by higher development spending associated with commencement of a large-animal pivotal study.
- Cash increased during the period following equity financing, while operating cash use exceeded the prior-year amount. Common shares outstanding rose from 4,328,080 at December 31, 2017 to 8,439,185 at September 30, 2018, reflecting financing and other issuances.
Outlook, risks and unusual items
- Management estimated operating expenditures of $8.2 million for the next 12 months and said additional debt or equity financing would be needed. The filing states that substantial doubt exists about the company’s ability to continue as a going concern; the prior-year auditor had also raised substantial doubt. No assurance is given that sufficient financing will be available. Failure to obtain funding could require reducing or discontinuing development or operations, and equity financing could dilute shareholders.
- Development, clinical-trial completion and FDA authorization remain uncertain. The company also relies on its UCLA license and third-party manufacturing, and identifies patent protection, product acceptance and financing among its risks.
- A shareholder derivative lawsuit filed August 3, 2018 alleges securities-law violations and breach of fiduciary duty and seeks, among other relief, rescission of the July 2018 reverse split. The company intends to defend the case; the potential loss could not be estimated.
- Disclosure controls and procedures were deemed ineffective as of September 30, 2018. Management was working on remediation, including third-party review of non-routine transactions.
- The 1-for-10 reverse split became effective July 24, 2018. The filing also describes significant related-party financing and amendments to Hankey Capital’s notes.
Key facts for investors to verify
- Funding needs, cash burn and the company’s ability to continue as a going concern.
- Progress, timing and costs of the NELL-1/DBX pivotal study and regulatory pathway.
- Terms and potential dilution from related-party convertible notes, future facility draws and additional financing.
- Status and potential consequences of the lawsuit seeking rescission of the reverse split.
- Remediation of ineffective disclosure controls and the reported share-count discrepancy: one note states 8,429,185 shares at September 30, while the balance sheet and cover page state 8,439,185.