Bone Biologics Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016. The unaudited statements are consolidated and compare results with Q1 2015. Bone Biologics is a development-stage biotechnology company developing NELL-1 for bone regeneration in spinal fusion; it had not generated revenue.
Financial results and liquidity
| Metric | Q1 2016 / March 31, 2016 | Comparable period / prior year-end |
|---|---|---|
| Revenue | $0 | $0 in Q1 2015 |
| Research and development expense | $4.68 million | $188,288 in Q1 2015 |
| General and administrative expense | $1.88 million | $735,132 in Q1 2015 |
| Operating expenses | $6.56 million | $923,420 in Q1 2015 |
| Net loss | $6.98 million; $0.20 per share | $1.64 million; $0.07 per share in Q1 2015 |
| Operating cash used | $2.53 million | $491,814 in Q1 2015 |
| Cash | $4.22 million | $1.12 million at December 31, 2015 |
| Total liabilities | $7.63 million | $7.23 million at December 31, 2015 |
| Notes payable, net | $5.33 million | $5.08 million at December 31, 2015 |
There was no gross profit or meaningful margin because the company had no revenue. Cash from financing activities was $5.63 million, comprising $2.50 million from common-stock issuance, $1.25 million from warrant exercises and approximately $1.88 million net proceeds from a new note. Cash increased by $3.11 million during the quarter. The filing reports no principal payments due in the next 12 months.
Changes and unusual items
- Net loss increased by 325% year over year. R&D expense rose by $4.49 million, primarily from $2.94 million of consultant option expense and increased NELL-1 development and patent costs. G&A rose by $1.15 million, including management compensation, legal and financing costs, and stock-based compensation.
- Interest expense declined to $411,209 from $716,799, which management attributed mainly to warrants expensed in Q1 2015.
- In February 2016, the company issued Hankey Capital a $2 million secured convertible note at a minimum 8.5% interest rate, issued a warrant, and pledged collateral shares and company assets, including license rights. The first two Hankey notes were also amended, including maturity extensions to December 31, 2019 and fixed conversion terms.
- Common shares outstanding increased to 38.08 million from 32.21 million at year-end. Warrants and options, along with convertible notes, represent substantial potential dilution; the filing lists 27.90 million underlying shares excluded from diluted loss per share as anti-dilutive.
- The company adopted accounting guidance on debt issuance cost presentation and early-adopted share-based payment guidance; it reported no material effect from the latter.
Outlook, risks and contingencies
- Management estimated operating expenditures of $7.2 million over the next 12 months. It intends to raise additional debt or equity, but gave no assurance financing will be available in sufficient amounts. The filing reiterates the going-concern uncertainty and notes the prior auditor’s going-concern notation.
- NELL-1/DBX is expected to be regulated by the FDA as a combination product with a device lead. Clinical testing, regulatory authorization, financing, third-party manufacturing, market acceptance, and intellectual-property protection are material risks. No specific development or revenue guidance was provided.
- The UCLA license carries a $10,000 annual maintenance fee, royalties and development, regulatory and commercial milestones. Failure to meet diligence milestones could permit UCLA to terminate or make the license non-exclusive. The licensed field excludes certain indications, including osteoporosis and cartilage, absent further rights.
- The company reported no pending legal proceedings and no material off-balance-sheet arrangements. Management concluded disclosure controls were not effective because of a material weakness in valuation of options and warrants; remediation steps included engaging a third party and increasing accounting review.
- Subsequent to quarter-end, AFH was engaged under a three-month consulting agreement with a $100,000 upfront retainer and monthly fees of $33,333.33. The company also had an option to distribute MTF’s Sygnal product; exercise would require issuing MTF 700,000 shares.
Important facts for investors to verify
- Whether additional financing is secured, and how cash burn compares with the $7.2 million estimated next-12-month expenditures.
- Clinical and FDA milestones for NELL-1, and whether the company meets UCLA license diligence requirements.
- The terms, collateral coverage, conversion mechanics and repayment risks of Hankey Capital’s secured convertible notes.
- The potential dilution from outstanding options, warrants, convertible notes and shares issuable under agreements, including related-party arrangements.
- Progress in remediating the material weakness and the reliability of equity-award valuation and expense estimates.