Business Context and Reporting Period
The filing identifies the registrant as Enochian Biosciences, Inc. and subsidiaries, although the request metadata names Lunai Bioworks Inc. The company is a preclinical biotechnology business focused on research, development, manufacturing and clinical trials for HIV and cancer therapies. This unaudited Form 10-Q covers the three months ended September 30, 2019, the first quarter of fiscal 2020, compared with the three months ended September 30, 2018.
Key Financial Metrics
| Metric | Three months ended September 30, 2019 | Prior comparable period |
|---|---|---|
| Revenue | $0 | $0 |
| Operating expenses | $2.442 million | $1.813 million |
| Loss from operations | $2.442 million | $1.813 million |
| Net loss | $4.083 million | $0.350 million |
| Basic and diluted loss per share | $0.09 loss | $0.01 loss |
| Net cash used in operating activities | $1.801 million | $1.797 million |
| Net cash used in investing activities | $0.069 million | $0.308 million |
| Net cash provided by financing activities | $1.000 million | $0 |
| Cash at period end | $11.138 million | $13.405 million |
Gross profit and gross margin were zero because the company had no revenue. Operating and net margins are not meaningful because there was no revenue. The company reported no income tax benefit.
At September 30, 2019, total assets were $180.620 million, including $154.824 million of indefinite-lived license-related intangible assets and $11.640 million of goodwill. Total liabilities were $8.438 million, including $5.399 million of contingent consideration and $1.994 million of operating lease liabilities. The filing does not report conventional interest-bearing debt.
Common shares outstanding increased to 46,273,924 from 45,273,924 at June 30, 2019. The increase reflected 500,000 shares issued upon warrant exercise and 500,000 contingent shares issued under the acquisition agreement.
Material Changes Versus the Prior Comparable Period
- Operating expenses increased $0.629 million, or 34.7%, primarily due to higher general and administrative expenses.
- General and administrative expenses increased 49.3% to $1.869 million, driven by higher franchise taxes, stock-based compensation, directors and officers insurance, legal fees, rent and payroll.
- Research and development expense increased modestly to $0.520 million from $0.494 million.
- Other income of $1.463 million in the prior period changed to other expense of $1.641 million. The principal driver was a $1.942 million non-cash fair-value charge for contingent consideration, compared with a $1.468 million reduction in the prior period.
- Net loss increased by $3.733 million, primarily because of the contingent-consideration fair-value change and higher general and administrative expense.
- Operating cash use was substantially unchanged, while investing cash use declined and financing cash flow increased by $1.000 million from warrant exercises.
- The company adopted ASC 842 on July 1, 2019, recognizing approximately $2.054 million of operating lease right-of-use assets and lease liabilities. Management stated that adoption did not materially affect operations or cash flows.
- The prior-period financial statements were revised to correct the classification of acquired in-process research and development assets as indefinite-lived rather than finite-lived intangible assets. The revision reduced prior-period amortization and reported the September 30, 2018 net loss as $0.350 million.
Guidance, Outlook, Risks and Unusual Items
Management expects operating losses to continue for at least the next several years and expects cash usage to increase as product development advances. Management believes existing cash will support currently planned operations for at least the twelve months following the report date, but states that additional funding may be required for equipment, research and development, potential IND preparation for ENOB-HV01, development of ENOB-HV11/12 and strategic acquisitions.
ENOB-HV01 was undergoing additional in vivo and in vitro studies intended to support an FDA INTERACT meeting request in early calendar 2020. In vivo studies for ENOB-HV11 and ENOB-HV12 were expected to begin in early calendar 2020. These programs remain preclinical, and the filing provides no assurance of regulatory approval, clinical success or commercialization.
- The company may need additional equity or debt financing, which may be unavailable or available only on unfavorable terms.
- Approximately 1,438,122 contingent shares remained potentially issuable in connection with the Enochian Biopharma acquisition, creating potential dilution and fair-value volatility.
- The company recorded $0.375 million of research and development expense under a related-party G-Tech consulting agreement during the quarter. G-Tech is controlled by certain members of Weird Science.
- Goodwill and other indefinite-lived intangible assets are subject to impairment testing. The filing reports no impairment as of June 30, 2019 but notes that adverse changes in estimates or actual results could produce a material impairment charge.
- Disclosure controls and procedures were deemed ineffective because of material weaknesses, including insufficient accounting resources and inadequate segregation of duties. The company engaged external consultants but stated that deficiencies were expected to continue until sufficient capital permits additional internal accounting hires.
- No material pending legal proceedings or significant reportable subsequent events were reported as of November 13, 2019.
Most Important Facts to Verify
- Confirm the correct issuer identity, because the supplied metadata names Lunai Bioworks Inc. while the filing identifies Enochian Biosciences, Inc., ticker ENOB.
- Verify the company’s cash runway against planned research, clinical and regulatory spending and the likelihood and terms of future financing.
- Assess the potential dilution from 1,438,122 contingent shares, outstanding options and other equity awards.
- Review the valuation assumptions supporting the $154.824 million license-related intangible asset and $11.640 million goodwill balance.
- Monitor remediation of the disclosed material weaknesses in disclosure controls and internal control over financial reporting.
- Verify progress toward the planned FDA INTERACT meeting request and subsequent development milestones for ENOB-HV01, ENOB-HV11 and ENOB-HV12.