Filing Overview
The supplied filing is Enochian Biosciences, Inc.’s unaudited Form 10-Q for the quarter and nine months ended March 31, 2019, not a filing for Lunai Bioworks Inc. or a period labeled 2018 Q3. Enochian is a preclinical biotechnology company developing genetically modified cellular and immunotherapy technologies for HIV and cancer. The company reported no commercial revenue.
Financial Results and Position
| Metric | Three months ended March 31, 2019 | Nine months ended March 31, 2019 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $4.7 million | $14.7 million |
| Operating loss | $4.7 million | $14.7 million |
| Net loss | $4.7 million | $25.0 million |
| Basic and diluted loss per share | $0.13 loss | $0.67 loss |
| Operating cash flow | Not separately provided | $6.3 million used |
- Gross margin and profitability margins are not meaningful because revenue was zero.
- Cash was $10.3 million at March 31, 2019, down from $15.6 million at June 30, 2018. Reported working capital was $9.0 million, down from $14.9 million.
- Total assets were $169.3 million, including $146.3 million of net definite-life intangible assets and $11.6 million of goodwill.
- Total liabilities were $25.3 million, including $23.8 million of contingent consideration liability and $1.5 million of current liabilities. The filing does not show material conventional bank or convertible debt outstanding.
- Cash used in investing activities was $0.7 million, primarily for property and equipment. Financing activities provided $1.7 million from the exercise of options by a related party.
Material Changes Versus Prior Comparable Period
- Quarterly operating expenses increased 44% from $3.2 million to $4.7 million; year-to-date expenses increased 186% from $5.1 million to $14.7 million.
- Research and development expense increased 430% for the quarter and 294% year to date, reflecting development of HIV and cancer platforms, scientific consulting, regulatory services, and experimental materials.
- Depreciation and amortization increased to $2.0 million for the quarter and $5.8 million year to date, primarily from amortization of intellectual property acquired with Enochian Biopharma.
- Year-to-date net loss increased to $25.0 million from $4.3 million. The increase included a $10.3 million non-cash change in the fair value of contingent consideration.
- Shares outstanding increased to 38.8 million at March 31, 2019 from 36.2 million at June 30, 2018; weighted-average shares for the nine-month period increased to 37.1 million from 17.3 million.
- On December 10, 2018, the company began trading on Nasdaq under the symbol ENOB. In January 2019, Mark Dybul assumed operating leadership as Executive Vice Chair, Eric Leire was terminated as CEO, and Luisa Puche became CFO.
Outlook, Risks, and Unusual Items
- Management stated that existing liquidity was expected to fund operations for the next twelve months, but additional capital may be needed for equipment, research and development, an investigational new drug application for ENOB-HV-01, continued development programs, and potential acquisitions.
- Future financing may involve equity or debt securities and may not be available on acceptable terms or at all. The company expects sales revenue will not support operations until therapies or products receive marketing approval, and it may never become profitable.
- The company remains preclinical; FDA approval, clinical success, manufacturing compliance, market acceptance, and product liability protection are uncertain.
- G-Tech Bio, a related party controlled by members of Weird Science, received research and development charges of $1.1 million for the nine months under a consulting agreement with monthly fees capped at $130,000.
- At March 31, 2019, 5.2 million contingent shares remained issuable under the Enochian Biopharma acquisition agreement. Outstanding warrants and options could create additional dilution.
- Management identified material weaknesses in disclosure controls and internal control over financial reporting, citing insufficient accounting resources and inadequate segregation of duties. Consultants were engaged, but management did not expect the deficiencies to be fully resolved until additional capital permitted hiring appropriate staff.
- No material pending legal proceedings were reported, and management disclosed no significant reportable subsequent events through May 10, 2019.
Investor Verification Items
- Confirm the intended issuer and reporting period: the source document identifies Enochian Biosciences, Inc., not Lunai Bioworks Inc.
- Reconcile the MD&A cash-flow table, which states $6.8 million of operating cash use, with the financial statements showing $6.3 million.
- Assess liquidity relative to the company’s continuing operating cash burn and expected funding needs.
- Review the valuation assumptions supporting the $23.8 million contingent consideration liability and the $146.3 million net intangible asset balance.
- Quantify potential dilution from 5.2 million contingent shares, 4.5 million warrants, and 1.1 million options and grant warrants.
- Evaluate the related-party consulting arrangements and the remediation plan for material weaknesses in internal controls.