Bone Biologics Corp. — Q3 2014 Form 10-Q
Reporting period: Three and nine months ended September 30, 2014; unaudited. The September 2014 reverse merger brought Bone Biologics, Inc. under the public company, which changed its name to Bone Biologics Corp. on September 22. The statements reflect the operating business and are not fully comparable with the pre-merger public shell’s history.
Business context and financial performance
- Bone Biologics is a development-stage biotechnology company focused on Nell-1, a licensed recombinant protein for bone regeneration in spinal fusion. The FDA advised that Nell-1 would be classified as a combination product with a device lead. The company had generated no revenue.
- Q3 2014 revenue was $0 and net loss was $2.613 million, versus $0 revenue and a $238,224 net loss in Q3 2013. Nine-month revenue was $0 and net loss was $3.364 million, versus $723,698 in the first nine months of 2013.
- Nine-month operating expenses rose to $2.225 million from $431,339: R&D was $439,575 (prior year $117,956), G&A was $907,288 (prior year $313,383), and transaction costs were $877,776 (none in the prior period). Net interest expense increased to $1.128 million from $291,559.
- For Q3, operating expenses were $1.734 million, including $877,776 of transaction costs; net interest expense was $877,704. No gross margin is meaningful because there was no revenue or cost of revenue.
- At September 30, cash was $15,013; total assets were $420,131 and current liabilities were $4.772 million. The company reported a $4.352 million stockholders’ deficit. Assets included $401,118 of deferred financing fees. Current liabilities included $2.862 million of related-party notes payable, $324,188 of other notes payable, and $140,175 of related-party advances.
- Nine-month operating cash use was $845,290, investing cash provided was $37,377, and financing cash provided was $821,388. Cash increased by $13,475 from $1,538 at year-end 2013.
Material changes, outlook, and risks
- Losses increased substantially year over year, driven by Nell-1 development and patent costs, higher professional and public-company transaction expenses, and increased interest and noncash debt/warrant costs. The company recorded $301,833 of consultant warrant expense and $148,334 of stock-based compensation during the nine months.
- Management stated that the company had limited operating history, expected significant further development spending, and could not assure it could meet cash requirements for the next 12 months. It intended to raise debt and/or equity, but financing was not assured. The financial statements included a going-concern basis.
- The LOI described possible future financing efforts, including a private placement of up to $10 million, a subsequent PIPE of $8–10 million, and an IPO of up to $40 million. These were contemplated transactions, not assured funding commitments.
- After quarter-end, the company reported a $5 million convertible note issued to Hankey Capital on October 24, bearing interest at the greater of prime plus 4% or 8.5%, secured by shares and license agreements, and convertible subject to a pricing formula. It also issued Hankey a warrant for 3,955,697 shares at $1.58 and paid a $150,000 commitment fee. Separately, the MTF short-term loan was paid off and cancelled on October 27.
- Key risks include financing availability, regulatory authorization and successful clinical trials, reliance on licensed technology and third parties, and potential dilution. Management concluded disclosure controls were ineffective due to insufficient accounting resources and weaknesses in communicating non-routine transactions; remediation was underway.
Important facts for investors to verify
- Cash runway and the status, proceeds, and conditions of post-quarter financing, including the Hankey note, collateral, conversion terms, and warrant dilution.
- Debt balances, related-party arrangements, accrued interest, and the treatment of debt and shares in the reverse merger.
- Nell-1 regulatory and clinical development milestones, including the FDA’s combination-product classification and any trial plans or approvals.
- Progress in remediating the disclosed material weakness and whether subsequent filings provide effective controls and reliable reporting.
- Share-count and dilution reconciliation: 17,939,933 shares were reported outstanding at September 30, while 24,269,047 were outstanding as of November 19, 2014.