Bone Biologics Corp. — FY 2014 Form 10-K
Reporting period: Year ended December 31, 2014; filed March 31, 2015. This is an annual report, not a standalone fourth-quarter report. Bone Biologics became a public-company reporting entity through a reverse merger completed September 19, 2014.
Business context
Bone Biologics is a development-stage biotechnology company focused on Nell-1, a recombinant protein being developed for bone regeneration. Its lead candidate, Nell-1/TCP, is intended for lumbar spinal fusion and is still in the pre-IDE phase. The FDA indicated that the product is a combination product regulated under device authorities, with a device lead; the company expects a Class III pathway requiring PMA approval. The company reported no product revenue and had not begun human clinical trials.
Key financial results and position
| Metric | FY / as of Dec. 31, 2014 | Prior comparable period |
|---|---|---|
| Revenue | $0 | $0 |
| Research and development expense | $623,522 | $188,236 |
| General and administrative expense | $1,509,306 | $483,749 |
| Transaction costs | $877,776 | $0 |
| Total operating expenses | $3,010,604 | $671,985 |
| Net interest and other expense | $1,412,209 | $409,419 |
| Net loss | $(4,424,413) | $(1,082,204) |
| Basic and diluted loss per share | $(0.30) | $(0.10) |
| Cash | $2,661,396 | $1,538 |
| Total assets | $3,821,391 | $87,305 |
| Total liabilities | $7,519,911 | $5,695,411 |
| Stockholders’ deficit | $(3,698,520) | $(5,608,106) |
Operating cash use was $2,755,618, versus $525,365 in 2013. Investing activities provided $25,476, and financing activities provided $5,390,000, resulting in a $2,659,858 increase in cash. No gross margin is meaningful because the company had no revenue. Operating expenditures for the next 12 months were estimated at $3.6 million; management said additional financing would be needed and provided no assurance it could be raised in time or in sufficient amounts.
Changes and financing
- Net loss increased about 309% year over year, driven by higher development, administrative, transaction, and interest costs. The $877,776 of transaction costs included a $590,000 payment to AFH Advisory related to the recapitalization.
- R&D expense rose $435,286, primarily for patent and Nell-1 development work. G&A rose $1,025,557, including higher professional fees and stock- and warrant-based compensation.
- In October 2014, the company issued Hankey Capital a $5 million secured convertible note due October 24, 2017, bearing interest at prime plus 4%, subject to an 8.5% minimum, and payable monthly. Hankey also received a warrant for 3,955,697 shares at $1.58 and 6,329,114 shares were issued as collateral. The note is additionally secured by assignments of the company’s license agreements.
- At year-end, the company reported $3,659,328 of related-party MTF convertible-note principal, classified as current in the balance-sheet summary, and $3,645,194 of other notes payable, net of discount. The filing describes conversion of the MTF note in connection with a future PIPE and IPO. The reported maturity and payment disclosures should be checked against the note documents.
- Common shares outstanding increased to 24,269,047 from 10,928,099. Year-end potential common shares included 7,023,464 warrants, 757,977 options, and 6,911,659 shares underlying convertible notes; these were excluded from diluted loss per share as anti-dilutive.
Outlook, risks, and unusual items
- Going concern: The auditor highlighted substantial doubt about the company’s ability to continue as a going concern. The company had approximately $12 million of accumulated losses, estimated $3.6 million in next-12-month operating expenditures, and stated it must raise additional debt or equity. The company said it could not assure that it could meet cash requirements for the next 12 months.
- Development and regulatory risk: Nell-1 remained pre-IDE. Preclinical work, IDE clearance, human trials, PMA approval, manufacturing readiness, reimbursement, and commercial acceptance remain uncertain. Management estimated $8.5 million for further preclinical work, $1 million to complete an IDE filing, $4 million to initiate human studies, and $50–60 million to reach product launch.
- License and milestone exposure: The UCLA license requires diligence milestones and gives the Regents rights to terminate or reduce exclusivity if deadlines are missed. Human trials are stated to be due to commence no later than December 31, 2015, but management said trials would not begin before the current license expires. The parties were discussing amendments, with no assurance of agreement. Management also believed Milestone Side Letter targets were likely to be missed on schedule.
- Concentration and dilution: The company depends on UCLA-licensed intellectual property and strategic relationships, including MTF. Hankey’s note includes substantial share collateral and warrants; further financing, conversion, warrant exercise, and equity compensation may materially dilute shareholders.
- Controls: Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end. A material weakness involved valuation of options and warrants; the company was continuing to build public-company controls after the reverse merger.
- Other items: The company reported no public trading market for its common stock. A prior Cytovance contract dispute remained unresolved; Bone alleged damages exceeding $150,000, while the filing said no legal action was pending. The 10-K’s Item 1A says “Not applicable,” although the filing describes significant business and financing risks elsewhere.
Most important facts for investors to verify
- Cash runway, actual spending against the $3.6 million estimate, and whether additional financing was obtained after year-end.
- Current status, maturity, conversion terms, and classification of the MTF note and Hankey secured convertible note, including collateral-share treatment.
- Status of the UCLA license, any amendments or waivers, and the clinical, pre-IDE, and milestone schedule.
- Current share count and fully diluted capitalization, including warrants, options, convertible debt, and shares pledged as collateral.
- Remediation of the reported control weaknesses and any material changes in financial reporting controls.