Business Context and Reporting Period
The filing is an unaudited Form 10-Q for Enochian Biosciences, Inc. and subsidiaries, not Lunai Bioworks Inc. It covers the three months ended September 30, 2018, the first quarter of the company’s fiscal year ending June 30, 2019. Enochian is an early-stage biopharmaceutical company developing gene, cell, HIV/AIDS, cancer and immuno-oncology therapies. The company completed its acquisition of Enochian Biopharma in February 2018.
Key Financial Metrics
| Metric | Q1 FY2019 | Q1 FY2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $3.77 million | $0.63 million |
| Loss from operations | $3.77 million | $0.63 million |
| Other income | $1.46 million | $0.40 million |
| Net loss | $2.30 million | $0.23 million |
| Basic and diluted loss per share | $0.06 | $0.02 |
| Cash used in operating activities | $1.80 million | $0.51 million |
| Cash used in investing activities | $0.31 million | $0.23 million |
| Cash at period end | $13.41 million | $2.94 million |
Gross profit and margins were not meaningful because the company reported no revenue. Cash declined from $15.60 million at June 30, 2018 to $13.41 million at September 30, 2018. Working capital was $12.76 million, compared with $14.89 million at June 30, 2018.
Total assets were $175.80 million, including $150.14 million of net definite-life intangible assets and $11.64 million of goodwill. Total liabilities were $22.21 million, including a $21.42 million contingent consideration liability. Current liabilities were $0.78 million. The filing does not report conventional funded debt outstanding at September 30, 2018.
Material Changes Versus the Prior Comparable Period
- Operating expenses increased 502% to $3.77 million, primarily because of higher general and administrative expenses and amortization of intellectual property acquired in the Enochian Biopharma acquisition.
- General and administrative expense increased 305% to $1.17 million, reflecting security, compensation, board and committee fees, office, laboratory, travel and deposit costs.
- Research and development expense increased approximately 221% to $493,555, mainly for ENO-1001 and ENO-5001 development and studies.
- Depreciation and amortization increased to $1.96 million from $3,946, primarily due to amortization of acquired intellectual property rights.
- Net loss increased to $2.30 million from $225,775. The increase occurred despite a $1.47 million gain from the reduction in the fair value of contingent consideration.
- Operating cash use increased to $1.80 million from approximately $0.51 million, while investing cash use included $308,186 of property and equipment purchases.
- Shares outstanding increased modestly to 36,173,924 at September 30, 2018 from 36,163,924 at June 30, 2018. The company also had 6,488,122 contingently issuable acquisition-related shares and substantial outstanding warrants and options.
Guidance, Outlook, Risks and Unusual Items
- Management stated that existing cash was sufficient to fund operations for the next twelve months, but anticipated potential additional capital needs for equipment, research and development, an Investigational New Drug application for ENO-1001, continued development of ENO-4001 and ENO-4002, and potential strategic acquisitions.
- The company has no commercial product revenue and stated that sales revenue is not expected to support current operations until therapies or products receive regulatory approval. Management acknowledged that the company may never become profitable.
- G-Tech Bio, LLC, an entity controlled by members of significant shareholder Weird Science, was engaged for up to 20 months at fees not exceeding $130,000 per month. The company recorded $375,000 of related research and development expense during the quarter.
- The $1.47 million reduction in the contingent consideration liability was recorded as other income and reduced the liability to $21.42 million. This was a material non-operating and valuation-related item.
- The company reported material weaknesses and concluded that disclosure controls and procedures were not effective, citing insufficient accounting resources and inadequate segregation of duties. Consultants were engaged to review financial information, but management expected the deficiencies to continue until additional resources could be hired.
- Key risks include regulatory approval and clinical trial uncertainty, product liability, possible impairment of substantial intangible assets and goodwill, foreign currency exposure, continuing losses and dependence on future equity or debt financing.
- The company reported no material pending legal proceedings and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm that the filing entity is Enochian Biosciences, Inc., rather than Lunai Bioworks Inc., and reconcile the requested company and period metadata.
- Assess the sustainability of the $13.41 million cash balance against quarterly operating cash burn, planned clinical development and potential capital needs.
- Review the valuation and settlement terms of the $21.42 million contingent consideration liability and the assumptions supporting the $1.47 million fair-value gain.
- Evaluate the recoverability of approximately $161.78 million in net definite-life intangible assets and $11.64 million of goodwill.
- Review dilution exposure from 6.49 million contingently issuable acquisition shares, 5.84 million outstanding common-stock warrant shares and outstanding options.
- Investigate the disclosed material weaknesses in internal controls and whether subsequent filings report remediation.
- Review related-party consulting arrangements, particularly the G-Tech agreement and payments to entities or individuals connected with significant shareholders and directors.