Business Context and Reporting Period
The filing is an unaudited Form 10-Q for DanDrit Biotech USA, Inc. and subsidiary, although the request metadata identifies Lunai Bioworks Inc. The report covers the three months ended September 30, 2017, the first quarter of the company’s fiscal year ending June 30, 2018. The company develops cancer vaccines and related biological products, principally MelCancerVac (MCV), and is focused on research, clinical trials, and potential commercialization. Management states that MCV could not be marketed during the period.
Financial Highlights
| Metric | Q1 FY2018 | Q1 FY2017 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $625,768 | $852,291 |
| Operating loss | $625,768 | $852,291 |
| Other income, net | $395,355 | $18,603 |
| Net loss | $225,775 | $793,181 |
| Basic and diluted loss per share | $0.02 | $0.08 |
| Cash at period end | $2,944,659 | $31,675 |
| Cash used in operating activities | $506,921 | $326,496 |
The filing’s financial statements report total assets of $3.71 million and total liabilities of $951,448 at September 30, 2017. Working capital was $2.21 million, compared with $1.21 million at June 30, 2017. Related-party convertible notes payable were $407,562 net of discounts, and other related-party notes payable were $88,408; all were classified as current.
Operating expenses included general and administrative expense of $288,123, non-cash compensation of $112,837, research and development expense of approximately $153,652, depreciation and amortization of $3,946, and consulting expense of $67,210. The company reported no gross profit or operating margin because it generated no revenue.
Material Changes Versus the Prior Comparable Period
- Revenue remained at zero.
- Operating expenses declined 27%, primarily because non-cash compensation fell from $626,487 to $112,837.
- Research and development expense increased approximately 798%, from $17,104 to approximately $153,652, reflecting MCV development and clinical study activity.
- General and administrative expense increased from $204,951 to $288,123, and consulting expense increased from zero to $67,210.
- Net loss improved by $567,406, or approximately 72%, primarily because of lower non-cash compensation and higher currency-related gains.
- Other income increased substantially, principally because of a $387,409 gain on currency transactions versus a $23,084 gain in the prior-year quarter.
- Cash declined by approximately $997,053 during the quarter, from $3.94 million at June 30, 2017 to $2.94 million at September 30, 2017.
- Common shares outstanding increased to 13,727,538 from 12,433,290 at June 30, 2017, primarily reflecting equity issuances.
Cash Flow, Financing, and Liquidity
- Investing cash outflow was $226,200, reflecting additional funding under a promissory note to a biopharmaceutical company. The note bears interest at 5%, matures July 13, 2020, and had a balance of $422,340 at September 30, 2017, with up to $77,660 remaining available.
- Financing cash flows included $1.595 million of stock issuance proceeds and $1.560 million of payments on related-party notes, resulting in reported net financing cash flow of approximately negative $4,499 in the statement of cash flows.
- The company completed a July 12, 2017 private placement of 1,231,561 units for approximately $1.601 million. Each unit included one common share and warrants to purchase two shares at $1.30 per share.
- At September 30, 2017, the company had 7,963,122 warrant shares outstanding, generally exercisable at $1.30, and 900,000 stock options exercisable at $2.00 per share.
- Management states that the company has historically relied on shareholder funding, convertible notes, and equity sales to satisfy liquidity needs.
Outlook, Risks, Contingencies, and Unusual Items
- No quantitative revenue, earnings, or cash-flow guidance was provided. Management’s strategy is to continue MCV research and pursue a randomized multicenter Phase III colorectal cancer trial.
- The company has no commercial product revenue and states that it currently lacks the ability to market MCV. Future operations depend on clinical development, regulatory approvals, financing, and potential commercialization.
- The filing identifies significant regulatory, clinical-trial, product-liability, manufacturing, financing, foreign-currency, and intellectual-property risks. FDA approval is not assured.
- As of September 30, 2017, more than $2.4 million of cash was held in financial institutions in Denmark and the United States in excess of federally insured limits.
- Several related-party convertible notes had December 31, 2017 maturities. Subsequent to quarter-end, the notes were amended to a $1.60 conversion price, and holders of certain notes gave conversion notices covering 150,374 shares.
- Subsequent events included a planned five-year-plus lease for a Los Angeles headquarters, with monthly base rent ranging from approximately $8,719 to $10,107 before specified free-rent benefits.
- Management concluded that disclosure controls and procedures were not effective as of September 30, 2017 because of inadequate accounting resources, insufficient segregation of duties, and weaknesses involving complex U.S. GAAP and SEC reporting. Consultants were engaged, but management expected deficiencies to continue until additional capital allowed hiring qualified personnel.
- The filing reports no material pending legal proceedings and no material off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the issuer’s identity: the supplied metadata names Lunai Bioworks Inc., while the filing identifies DanDrit Biotech USA, Inc.
- Reconcile the cash-flow presentation: the cash-flow statement reports $506,921 of operating cash use, while the MD&A table reports $623,418.
- Assess the company’s ability to fund ongoing clinical development given zero revenue, recurring operating losses, and reliance on equity and related-party financing.
- Review dilution exposure from 7.96 million outstanding warrants, 900,000 options, subsequent note conversions, and additional equity financings.
- Evaluate the terms, collectability, and concentration risk of the $422,340 loan receivable to a biopharmaceutical company.
- Monitor the December 31, 2017 maturities and conversion terms of related-party convertible notes.
- Review the disclosed material weaknesses in internal control and any remediation reported in subsequent filings.