Filing Overview
Registrant: Enochian Biosciences, Inc. and subsidiaries; the provided filing does not identify Lunai Bioworks Inc. as the registrant. This Form 10-Q was filed February 13, 2019 for the fiscal quarter and six months ended December 31, 2018, representing fiscal 2018 Q2. The financial statements are unaudited.
The company is a pre-clinical biotechnology business developing genetically modified cellular and immune-therapy technologies for HIV and cancer. It completed the acquisition of Enochian Biopharma on February 16, 2018 and began trading on Nasdaq under “ENOB” in December 2018.
Financial Highlights
| Metric | Three months ended Dec. 31, 2018 | Six months ended Dec. 31, 2018 |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $6.27 million | $10.03 million |
| Loss from operations | $6.27 million | $10.03 million |
| Net loss | $17.99 million | $20.29 million |
| Basic and diluted loss per share | $0.50 | $0.56 |
| Operating cash flow | Used $3.55 million for the six months |
There was no gross profit or operating margin because the company reported no revenue. Six-month expenses included $3.86 million of depreciation and amortization, primarily amortization of acquired intellectual property; $1.87 million of stock-based compensation; $1.28 million of research and development expense; and $2.93 million of general and administrative expense.
At December 31, 2018, cash was $13.24 million, compared with $15.60 million at June 30, 2018. Working capital was $11.76 million versus $14.89 million. Total assets were $173.96 million, including $148.26 million of net definite-life intangible assets and $11.64 million of goodwill.
Total liabilities were $25.24 million, including $1.64 million of current liabilities and a $23.60 million contingent consideration liability. The filing does not show material conventional debt at period-end. Cash used in investing activities was $0.64 million, primarily for property and equipment, while financing activities provided $1.70 million from option or warrant exercises. Ending cash declined by $2.36 million.
Material Changes Versus Prior Comparable Period
- Revenue remained zero for both the quarter and six-month period.
- Six-month operating expenses increased to $10.03 million from $1.91 million, primarily due to acquired intellectual-property amortization, increased infrastructure and administrative costs, stock-based compensation, and higher research and development spending.
- Six-month net loss increased to $20.29 million from $1.30 million. The quarter’s loss increased to $17.99 million from $1.08 million.
- Other expense included a $10.13 million six-month and $11.59 million quarterly change in the fair value of contingent consideration related to the Enochian Biopharma acquisition. This was substantially non-cash.
- Shares outstanding increased to 38.79 million at December 31, 2018 from 36.16 million at June 30, 2018. The company issued 1.31 million contingent shares and received $1.70 million from warrant exercises during the quarter.
- Cash declined 15% from June 30, 2018, and working capital declined 21%.
Outlook, Risks, Contingencies, and Unusual Items
Management stated that existing cash was expected to fund operations for the next twelve months, but additional financing may be required for equipment, research and development, an anticipated Investigational New Drug application for ENO-1001, continued development of ENO-4001 and ENO-4002, and potential strategic acquisitions. Future equity or debt financing may be unavailable or obtainable only on unfavorable terms.
- The company has no product revenue and expects securities issuances to fund operations until products or therapies receive regulatory approval. Management stated that the company may never become profitable.
- FDA approval, clinical success, manufacturing compliance, market acceptance, and product liability protection are uncertain. The filing states that approval of the company’s products cannot be assured.
- The $23.60 million contingent consideration liability is a Level 3 fair-value estimate and is subject to significant assumptions. An additional 5.18 million contingent shares remained issuable at December 31, 2018.
- Goodwill of $11.64 million and significant license and patent assets could be subject to material impairment charges if operating results or assumptions deteriorate.
- G-Tech, a related party controlled by members of Weird Science, could receive up to $130,000 per month under a 20-month consulting agreement. The company recorded $750,000 of related research and development expense for the six months.
- Management concluded that disclosure controls and procedures were not effective as of December 31, 2018 and identified material weaknesses related to complex accounting resources and segregation of duties. Consultants were engaged, but management expected deficiencies to continue until adequate internal accounting staff were hired.
- Subsequent events included the appointment of Mark Dybul to lead operations, termination of CEO Eric Leire, appointment of Luisa Puche as CFO, termination of the Crossfield CFO services agreement, and recognition of $377,000 of severance accrued at December 31, 2018.
Investor Verification Checklist
- Confirm the correct issuer: the supplied filing is for Enochian Biosciences, Inc., not Lunai Bioworks Inc.
- Reconcile the contingent consideration liability, its Level 3 valuation assumptions, and the remaining 5.18 million contingent shares.
- Assess cash burn, the stated twelve-month liquidity outlook, and the likelihood and dilution impact of future financing.
- Evaluate the development status, regulatory pathway, and funding requirements for ENO-1001, ENO-4001, ENO-4002, and the company’s HIV and cancer programs.
- Review the material weaknesses in disclosure controls and the effectiveness of remediation efforts.
- Review related-party consulting arrangements, particularly the G-Tech agreement and its potential maximum payments.
- Verify the treatment and future impairment risk of the $148.26 million license and patent assets and $11.64 million of goodwill.