Business Context and Reporting Period
The filing is a Form 10-Q for the three months ended March 31, 2014, filed May 14, 2014. The filing identifies the registrant as DanDrit Biotech USA, Inc., formerly Putnam Hills Corp.; this differs from the requested company name, Lunai Bioworks Inc. The company develops dendritic-cell cancer vaccines, principally MelCancerVac (MCV) for colorectal cancer, and conducts research, manufacturing, and clinical-trial activities through its Danish subsidiary, DanDrit Biotech A/S.
On February 12, 2014, the company completed a reverse acquisition and acquired approximately 97% of DanDrit Biotech A/S. The 2014 financial statements include the subsidiary's operations from the acquisition date through March 31, 2014, so comparisons with the prior period are affected by the transaction.
Key Financial Metrics
| Metric | Three months ended March 31, 2014 | Three months ended March 31, 2013 |
|---|---|---|
| Revenue | $0 | $31,558 |
| Gross income (loss) | $(17,739) | $16,198 |
| Operating expenses | $394,367 | $196,664 |
| Loss from operations | $(412,106) | $(180,466) |
| Net loss | $(426,054) | $(399,072) |
| Loss per share | $(0.06) | $(0.08) |
| Operating cash flow | $(437,746) | $(1,123,899) |
| Investing cash flow | $(395,906) | $0 |
| Financing cash flow | $865,976 | $987,911 |
Gross margin was negative in 2014 because the company reported no revenue and $17,739 of cost of goods sold. The prior-period gross margin was approximately 51%. Operating expenses increased approximately 101%, primarily due to legal, consulting, and other costs associated with financing and the reverse acquisition. No income tax expense or benefit was recorded.
Balance Sheet, Debt, and Liquidity
- Cash was $54,472 at March 31, 2014, compared with $18,794 at December 31, 2013. Cash held in escrow was $423,969, resulting in reported cash and cash held in escrow of $478,441.
- Total assets were $911,466, including $40,460 of net property and equipment and $233,766 of net patent-related intangible assets.
- Total liabilities were $3.10 million, including $1.71 million of current notes payable to related parties, $568,175 of accounts payable, and $824,192 of accrued expenses. The filing reports no long-term liabilities.
- Stockholders' deficit was $2.19 million, compared with $1.68 million at December 31, 2013.
- Financing cash flow consisted primarily of $865,976 in proceeds from related-party notes. The company states that it depends on additional debt or equity financing to continue operations.
Material Changes and Unusual Items
- The reverse acquisition materially changed the company's capital structure and reporting basis. Shares outstanding increased from 5,814,945 at December 31, 2013 to approximately 7,854,947 at March 31, 2014.
- The company issued 5,814,945 shares to acquire approximately 97% of DanDrit Biotech A/S, canceled 4.4 million existing shares, and issued 1.44 million shares for consulting and legal services related to the transaction and proposed offering.
- Related-party debt increased from $728,001 at December 31, 2013 to $1.71 million at March 31, 2014. New Paseco ApS loans received in February and March 2014 totaled approximately $885,000 and bear interest at 5%.
- Investing cash outflows included $346,501 placed into escrow, $41,498 for fixed assets, and $7,907 for intangible assets.
- The prior-period results included a $100,327 foreign-currency loss and a $41,643 gain on a derivative liability; neither item was recorded in the 2014 quarter.
Outlook, Risks, and Contingencies
Management states that substantial doubt exists regarding the company's ability to continue as a going concern because of recurring losses, limited revenue, and the absence of profitable operations. Management plans to raise additional debt or equity and increase sales after obtaining regulatory approval for MCV, but provides no assurance that these plans will succeed.
- MCV is not approved for general sale and has historically been available only on a limited compassionate-use basis in Singapore. FDA approval, clinical success, manufacturing compliance, and commercial sales remain uncertain.
- The company entered a Patient Name Use Program with MyTomorrows that may permit sales of MCV to cancer patients, subject to applicable regulatory conditions; the company would pay royalties on sales under the arrangement.
- Related-party financing is a major source of liquidity. Certain loans are payable on February 1, 2015, with options to extend for one year at an increased 7% interest rate. The filing also discloses a related-party loan commitment of 2 million DKK after quarter-end.
- Property and equipment secures certain related-party notes, and intellectual property secures a historical credit facility.
- The company faces potential product-liability exposure, FDA and other regulatory risks, foreign-currency risk, and possible dilution from future equity financing or additional shares issuable under the Share Exchange Agreement.
- A Danish law firm asserted a claim of approximately $33,421 relating to services allegedly performed for a former shareholder. Management intends to defend the claim and states that routine proceedings are not expected to have a material effect.
Important Facts for Investors to Verify
- Confirm the correct issuer identity, because the filing names DanDrit Biotech USA, Inc., not Lunai Bioworks Inc.
- Verify the final share count and any additional shares issuable to non-consenting DanDrit Biotech A/S shareholders, including the potential additional 185,053 shares.
- Review the terms, maturity dates, collateral, and related-party nature of the $1.71 million of current notes payable.
- Determine whether escrowed cash is restricted and when it will be available for operating purposes.
- Assess the company's ability to obtain FDA approval, generate MCV revenue, and secure additional financing before available liquidity is exhausted.
- Reconcile inconsistencies in the filing regarding share counts, debt balances, and certain loan amounts presented in different sections.