Business Context and Reporting Period
This unaudited Form 10-Q was filed by DanDrit Biotech USA, Inc. and subsidiary, although the request metadata identifies Lunai Bioworks Inc. The report covers the three and six months ended December 31, 2017, within the fiscal year ending June 30, and was filed February 9, 2018.
The Company develops pharmaceutical and biological products for cancer treatment, principally the MelCancerVac (MCV) dendritic-cell vaccine. MCV was not commercially marketable during the period, and the Company reported no operating revenue. Its strategy focused on research and clinical development, including a planned Phase III colorectal-cancer study.
Financial Highlights
| Metric | Three Months Ended December 31, 2017 | Six Months Ended December 31, 2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $1.281 million | $1.907 million |
| Loss from operations | $1.281 million | $1.907 million |
| Net loss | $1.076 million | $1.303 million |
| Basic and diluted loss per share | $0.078 | $0.103 |
| Net cash used in operating activities | Source text provides approximately $371,157 | $994,575 |
Six-month operating expenses included $956,947 of general and administrative expense, $373,621 of research and development expense, $456,098 of consulting expense, $112,837 of non-cash compensation, and $7,900 of amortization. The filing does not present a meaningful gross margin because revenue and cost of goods sold were both zero.
At December 31, 2017, cash was $2.306 million, cash held in escrow was $4.812 million, total current assets were $7.238 million, total assets were $7.827 million, and working capital was $1.263 million. Total current liabilities were $5.974 million, including $4.812 million of advances to purchase common shares, $698,816 of trade payables, $235,000 of related-party payables, and $120,300 of convertible notes payable to a related party.
For the six months, investing cash outflows were $5.063 million, principally the escrow deposit and a $250,799 increase in note receivables. Financing cash inflows were $4.812 million, including $3.211 million of advances to purchase common shares and $1.601 million from stock issuance. Ending cash declined by $1.636 million to $2.306 million.
Material Changes Versus Prior Comparable Period
- Revenue remained $0 for both the quarter and six-month period.
- Quarterly operating expenses increased 133% to $1.281 million, driven primarily by higher general and administrative and consulting costs.
- Six-month operating expenses increased 36% to $1.907 million. Research and development increased to $373,621 from $30,891, while general and administrative expense increased 73% to $956,947.
- Quarterly net loss increased 17% to $1.076 million, despite a $202,762 net other-income contribution, including a $209,023 currency transaction gain.
- Six-month net loss improved from $1.712 million to $1.303 million, primarily because non-cash compensation declined from $626,487 to $112,837. Currency results shifted from a $353,617 loss to a $596,432 gain.
- Cash used in six-month operating activities increased 53% to $994,575.
- Shares outstanding increased to 13,910,894 from 12,433,290 at June 30, 2017. The Company completed private placements in May and July 2017 and issued shares upon conversion of related-party notes.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
- No quantitative financial guidance was provided. Management stated that MCV currently cannot be marketed and that future results are subject to substantial uncertainty.
- On January 12, 2018, the Company entered into a merger agreement with Enochian Biopharma. Enochian shareholders would receive an aggregate number of Company shares equal to 50% of the post-merger outstanding shares, plus potential earn-out shares related to outstanding options and warrants. The Enochian note receivable is to be assumed, cancelled, or forgiven upon completion of the merger.
- The Company had loaned $446,939 under the Enochian note as of December 31, 2017, with $53,061 remaining available. The note bears 5% interest and matures in 2020.
- The Company entered into a five-year, two-month Los Angeles lease beginning November 1, 2017, with monthly base rent ranging from approximately $8,719 to $10,107 and an approximately $70,800 tenant-improvement allowance.
- A consulting agreement with RS Group ApS, owned and controlled by two directors, required payment of $367,222 for services from October 1, 2017 through March 31, 2018; the full amount was payable at December 31, 2017.
- Convertible related-party notes totaling $293,370 were converted into 183,356 common shares in November 2017. Two additional $60,150 notes were subsequently converted into 75,188 shares in January 2018.
- The Company had 900,000 exercisable grant warrants at a $2.00 exercise price and 7,963,122 exercisable common-stock warrants at a weighted-average $1.30 exercise price, creating substantial potential dilution.
- The Company disclosed that its disclosure controls and procedures were not effective because of material weaknesses, including insufficient accounting resources and inadequate segregation of duties. Consultants were engaged to review financial information, but management expected deficiencies to continue until additional capital supported appropriate staffing.
- The Company reported no material pending legal proceedings and no material off-balance-sheet arrangements. It faces substantial biotechnology risks, including regulatory approval, clinical-trial efficacy and safety, manufacturing, product liability, financing, foreign-currency exposure, and continued operating losses.
Investor Verification Checklist
- Confirm the registrant identity, because the supplied metadata names Lunai Bioworks Inc. while the filing identifies DanDrit Biotech USA, Inc.
- Verify the status, closing conditions, dilution effects, and accounting treatment of the Enochian merger.
- Determine whether the $4.812 million escrow balance and related advance to purchase shares were released, converted, or otherwise settled.
- Assess available unrestricted cash versus near-term obligations, including related-party debt, trade payables, director-controlled consulting fees, and operating cash burn.
- Review the material weaknesses in disclosure controls and any remediation progress.
- Evaluate clinical-trial progress, regulatory status, funding requirements, and the absence of revenue from MCV.
- Quantify dilution from outstanding warrants, options, and subsequent note conversions.