Business Context and Reporting Period
The filing is Enochian BioSciences Inc.’s Form 10-K for the fiscal year ended June 30, 2021. The request metadata identifies Lunai Bioworks Inc. and “2020 Q4,” but the supplied filing identifies Enochian BioSciences Inc. and reports fiscal 2021 results.
Enochian is a preclinical biotechnology company developing gene-, cell- and immune-therapy platforms targeting HIV, hepatitis B, coronavirus and influenza infections, and cancer. The company has no approved products and has never generated revenue.
Financial Metrics
| Metric | FY2021 | FY2020 | Change |
|---|---|---|---|
| Revenue | $0 | $0 | No change |
| Operating expenses | $23.4 million | $11.9 million | Up 96% |
| Research and development | $15.5 million | $4.7 million | Up 231% |
| General and administrative | $7.7 million | $7.1 million | Up 9% |
| Loss from operations | $(23.4) million | $(11.9) million | Loss increased 96% |
| Net loss | $(26.7) million | $(11.4) million | Loss increased 134% |
| Basic and diluted loss per share | $(0.57) | $(0.25) | Loss per share increased |
| Operating cash flow | $(20.6) million | $(10.5) million | Cash use increased $10.2 million |
| Cash and cash equivalents | $20.7 million | $8.7 million | Up $12.0 million |
| Working capital | $19.0 million | $7.6 million | Up $11.4 million |
| Total debt and notes payable | Approximately $5.8 million principal, excluding leases and contingent consideration | Approximately $6.2 million principal, excluding leases and contingent consideration | Debt balances changed modestly |
Margins are not meaningful because the company has no revenue. The net loss included a $3.0 million unfavorable change in the fair value of contingent consideration, $379,608 of interest expense and a $125,276 income tax benefit.
Total assets were $189.6 million, including $154.8 million of indefinite-lived in-process research and development assets and $11.6 million of goodwill. Management reported no impairment of these assets at June 30, 2021.
Material Changes Versus the Prior Comparable Period
- Research and development expense increased by $10.8 million, primarily because of the $10 million upfront payment under the coronavirus and influenza license agreement and approximately $657,000 of collaboration costs.
- Net loss increased by $15.3 million, or 134%, to $26.7 million.
- Operating cash use nearly doubled to $20.6 million.
- Financing cash inflows increased to $32.6 million from $7.2 million, primarily from equity issuances.
- The company completed a registered direct offering of 3,866,668 shares for approximately $29 million of gross proceeds and $26.8 million of net proceeds.
- Common shares outstanding increased to 52.2 million from 46.5 million, resulting in equity dilution.
- The contingent consideration liability increased to $6.0 million from $3.2 million, primarily due to a $3.0 million fair-value adjustment.
- The $5 million unsecured note’s maturity was extended from November 30, 2021 to November 30, 2022. The company issued 74,054 shares valued at approximately $298,000 for prepaid interest related to the extension.
Guidance, Outlook, Risks and Unusual Items
Management stated that available liquidity and committed funds were expected to fund operations for the next twelve months as of the filing date. However, additional financing is expected to support preclinical development, regulatory submissions, licensing obligations, staffing, equipment and potential strategic acquisitions. Future financing may be unavailable or may dilute existing stockholders.
- Management expected potential Pre-IND submissions for ENOB-CV-01, ENOB-HB-01, ENOB-HV-01 and ENOB-HV-21, with timing dependent on regulatory and preclinical progress.
- Most programs remained in discovery or preclinical development. No product candidate had entered the commercial stage, and no assurance was provided that any candidate would achieve clinical efficacy, regulatory approval or market acceptance.
- COVID-19 had not materially affected operations through the reporting date, but it delayed certain experiments and increased animal-study costs. Further disruptions could affect research, manufacturing, regulatory activities and access to capital.
- The company relies heavily on third parties, including G-Tech, Seraph Research Institute, research institutions, contract manufacturers and other service providers. It also depends substantially on key scientific personnel, including Dr. Serhat Gümrükcü.
- Licensing arrangements require research funding, milestone payments and, in some cases, royalties. The coronavirus and influenza license carried a 3% royalty on future net sales; the HBV license carried a 2% royalty.
- Internal control over financial reporting and disclosure controls were reported as not effective because the company lacked sufficient personnel to adequately segregate accounting duties. The company’s auditor did not provide an attestation report because the company qualified for the smaller reporting company accommodation.
- The auditor identified impairment assessments for the $154.8 million in-process research and development asset and $11.6 million of goodwill as critical audit matters because their valuation depended on significant assumptions regarding market size, penetration, commercialization timing and discount rates.
- No material legal proceedings were reported, and the company reported no off-balance-sheet arrangements.
Important Facts for Investors to Verify
- Confirm the issuer and reporting period: the supplied filing is for Enochian BioSciences Inc. and fiscal year ended June 30, 2021, not Lunai Bioworks Inc. or 2020 Q4.
- Review the company’s ability to fund operations given recurring losses, negative operating cash flow and its stated need for additional capital.
- Assess dilution from equity offerings, contingent shares, warrants, options and future financing needs.
- Evaluate the assumptions supporting the $154.8 million in-process research and development asset and $11.6 million goodwill balance.
- Track Pre-IND submissions, FDA feedback, clinical-trial authorization and evidence supporting the company’s preclinical claims.
- Review related-party licensing and research arrangements with G-Tech and SRI, including upfront payments, ongoing funding, milestones and royalties.
- Monitor the $1.2 million convertible notes due in February 2023, the approximately $5 million unsecured note due in November 2022 and lease obligations.
- Consider the reported material weaknesses in disclosure controls and internal control over financial reporting.