Business Context and Reporting Period
The supplied filing is a Form 10-Q for Enochian Biosciences, Inc., not Lunai Bioworks Inc. It covers the three and nine months ended March 31, 2020, within the company’s fiscal year ending June 30, 2020. The filing was signed May 11, 2020. Enochian is a preclinical biotechnology company developing genetically modified cellular and immune-therapy products for HIV, hepatitis B, and cancer. The filing text does not clearly correspond to the requested “2019 Q3” period.
Financial Highlights
| Metric | Three Months Ended March 31, 2020 | Three Months Ended March 31, 2019 | Nine Months Ended March 31, 2020 | Nine Months Ended March 31, 2019 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $3.83 million | $2.69 million | $9.09 million | $8.88 million |
| Operating loss | $3.83 million | $2.69 million | $9.09 million | $8.88 million |
| Net loss | $1.51 million | $2.73 million | $7.32 million | $19.19 million |
| Basic and diluted loss per share | $0.03 | $0.07 | $0.16 | $0.52 |
| Cash used in operating activities | Not separately provided | Not separately provided | $8.21 million | $6.29 million |
There was no revenue, gross profit, or operating margin. The nine-month operating loss increased modestly by approximately 2%, while the quarterly operating loss increased approximately 43%. The reduction in net loss was driven primarily by non-cash changes in the fair value of contingent consideration, rather than operating profitability.
Liquidity, Capital Resources, and Debt
- Cash was $10.94 million at March 31, 2020, compared with $12.28 million at June 30, 2019.
- Working capital was $10.29 million, compared with $11.38 million at June 30, 2019.
- Total liabilities increased to $10.29 million from $6.78 million, primarily due to new debt and lease liabilities.
- Debt included $1.20 million of convertible notes due February 2023 and a $5.00 million unsecured note due November 2021, both bearing 6% interest. The $5.00 million note’s interest was prepaid through the issuance of 188,485 common shares.
- Nine-month financing inflows were $7.20 million, consisting of $1.20 million of convertible notes, $5.00 million of long-term debt, and $1.00 million from warrant exercises.
- Management stated that existing liquidity was sufficient to fund operations for the next twelve months, but indicated that additional capital may be needed for research, equipment, an investigational new drug application, HBV development, and potential acquisitions.
Material Changes Versus the Prior Comparable Period
- Quarterly research and development expense increased 216% to $2.31 million, primarily due to $1.80 million of payments related to the HBV License Agreement.
- Nine-month research and development expense increased 68% to $3.39 million.
- Quarterly general and administrative expense declined 24% to $1.49 million; nine-month general and administrative expense declined 18% to $5.62 million.
- Quarterly net loss declined 45%, and nine-month net loss declined 62%, largely because the prior-year periods included substantial unfavorable fair-value changes in contingent consideration.
- The contingent consideration liability declined from $5.67 million at June 30, 2019 to $2.01 million at March 31, 2020, reflecting shares issued and a $1.45 million fair-value adjustment.
- The company adopted ASC 842 lease accounting prospectively on July 1, 2019, recording a right-of-use asset of $1.77 million and lease liabilities totaling approximately $1.87 million at March 31, 2020.
- The company issued 193,485 unregistered shares during the quarter, including shares issued for consulting services and prepaid interest.
Outlook, Commentary, Risks, and Unusual Items
- The company remains preclinical, has no operating revenue, and stated that it may never become profitable.
- The company entered into an HBV license arrangement with G-Tech and Seraph Research Institute. The arrangement included a $1.20 million upfront payment, $1.80 million of reported payments during the quarter, ongoing monthly research funding of $144,500, milestone payments, and a 2% royalty on potential net sales. Certain counterparties are controlled by members of a company shareholder.
- Management identified planned regulatory and development milestones, including an FDA INTERACT meeting for ENOB-HV-01 scheduled for June 2, 2020 and planned scientific presentations for HIV and HBV programs.
- COVID-19 could delay research, preclinical studies, regulatory interactions, suppliers, laboratory access, and capital raising. The filing states that the financial impact could not be reasonably estimated.
- After quarter-end, the company received a $272,700 Paycheck Protection Program loan on April 20, 2020, but repaid it before May 7, 2020.
- Management reported that disclosure controls and procedures were not effective as of March 31, 2020 due to material weaknesses involving limited accounting resources, insufficient segregation of duties, and inadequate internal expertise in complex U.S. GAAP and SEC reporting matters.
- The company carries $154.82 million of indefinite-life license assets and $11.64 million of goodwill. Future impairment charges could be material if actual results or assumptions differ from management’s estimates.
- No material pending legal proceedings were reported, and management stated that routine claims were not expected to materially affect the company.
Important Facts for Investors to Verify
- Confirm the issuer and period: the supplied document identifies Enochian Biosciences, Inc. and March 31, 2020, rather than Lunai Bioworks Inc. and 2019 Q3.
- Assess the company’s ability to fund ongoing operations given zero revenue, recurring operating losses, and expected additional research and development spending.
- Review the terms, maturity, security status, conversion features, and dilution implications of the $6.20 million of new notes.
- Evaluate the HBV License Agreement’s related-party relationships, required funding, milestones, royalty obligations, and development prospects.
- Consider potential dilution from 1.44 million contingent acquisition shares, 1.44 million warrants, options, convertible notes, and other equity issuances.
- Review the disclosed material weaknesses in internal controls and the company’s remediation plans.
- Monitor COVID-19 effects on preclinical studies, regulatory timelines, laboratory operations, suppliers, and access to capital.
- Evaluate the recoverability of the substantial indefinite-life license assets and goodwill, which are subject to impairment testing.