10-Q Summary
Filing identity and period: The supplied filing identifies the registrant as Enochian Biosciences, Inc. (Nasdaq: ENOB), not Lunai Bioworks Inc. It is an unaudited Form 10-Q for the quarter and nine months ended March 31, 2021, corresponding to the company’s fiscal third quarter. The company is a pre-clinical biotechnology business developing cellular, gene and immune therapies for HIV, hepatitis B, cancer and, subsequent to quarter-end, coronavirus-related indications.
Financial condition and results
| Metric | Three months ended March 31, 2021 | Three months ended March 31, 2020 | Nine months ended March 31, 2021 | Nine months ended March 31, 2020 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $3.1 million | $3.8 million | $9.2 million | $9.1 million |
| Loss from operations | $3.1 million | $3.8 million | $9.2 million | $9.1 million |
| Net loss | $4.0 million | $1.5 million | $9.4 million | $7.3 million |
| Basic and diluted loss per share | $0.09 | $0.03 | $0.20 | $0.16 |
| Net cash used in operating activities | Not separately provided | Not separately provided | $7.6 million | $8.2 million |
There was no revenue, cost of goods sold or gross profit. Research and development expense was $1.1 million in the quarter and $3.5 million for the nine months. General and administrative expense was $1.9 million in the quarter and $5.7 million for the nine months. The filing does not present a meaningful operating margin because revenue was zero.
- Cash was $4.5 million at March 31, 2021, compared with $8.7 million at June 30, 2020.
- Working capital was $3.5 million, compared with $7.6 million at June 30, 2020.
- Total assets were $173.7 million, including $154.8 million of indefinite-life license assets and $11.6 million of goodwill.
- Total liabilities were $11.4 million, including $1.2 million of convertible notes, $4.5 million of long-term notes payable, $3.0 million of contingent consideration and $1.6 million of lease liabilities.
- Financing activities provided $3.4 million, primarily from a $3.6 million private placement and $82,000 from warrant exercises.
- Outstanding common shares increased to 47.8 million from 46.5 million at June 30, 2020.
Material changes versus the prior comparable period
- Quarterly net loss increased by $2.5 million, or approximately 166%, primarily because the prior-year quarter included a $2.3 million gain from remeasurement of contingent consideration, while the current quarter included an $882,000 expense.
- Nine-month net loss increased by $2.0 million, or approximately 28%, to $9.4 million.
- Quarterly operating expenses declined 20% because prior-year research and development expense included a $1.2 million upfront HBV license payment. Nine-month operating expenses increased approximately 1%.
- General and administrative expense increased 31% in the quarter, primarily due to higher stock-based compensation, including $147,000 of shares issued for consulting services.
- Cash declined $4.2 million during the nine months, despite $3.4 million of financing proceeds, reflecting continued operating cash consumption.
- The company amended its $5.0 million unsecured note to extend maturity from November 30, 2021 to November 30, 2022. Additional interest was prepaid through the issuance of 74,054 shares valued at $298,178.
Guidance, outlook, risks and unusual items
Management stated that existing liquidity and committed funds were expected to fund operations for the next twelve months, but additional capital may be required for equipment, research and development, potential IND filings, HBV development and strategic opportunities. The company has no operating revenue and acknowledges that it may never become profitable. Additional equity or debt financing may be unavailable or available only on unfavorable terms.
- Management indicated that a pre-IND submission for ENOB-HV-01 could be possible by the fourth quarter of 2021. Preliminary results from an HIV non-human-primate study could be available by year-end 2021, and FDA comments on the HBV program were expected in September 2021.
- On April 18, 2021, after the reporting date, the company entered into a coronavirus and pan-influenza license agreement requiring a $10 million upfront payment within 60 days. G Tech may terminate the agreement if the payment is not made; the agreement also includes a 3% royalty on potential net sales.
- The company’s contingent consideration liability is a Level 3 fair-value measurement and is highly sensitive to stock price, volatility and other valuation assumptions. It included $2.95 million at March 31, 2021 and 1.35 million potentially issuable contingent shares.
- The company carries $166.5 million of indefinite-life intangible assets and goodwill. Management reported no impairment as of March 31, 2021, but adverse operating results or revised assumptions could result in a material impairment charge.
- COVID-19 effects on operations, liquidity and capital resources could not be reasonably estimated.
- Disclosure controls and procedures were reported as ineffective because of material weaknesses related to limited accounting resources, complex accounting matters and insufficient segregation of duties. Consultants were engaged, but management did not expect remediation until adequate internal staff could be hired.
- The filing reports no material pending legal proceedings and no material changes to the risk factors disclosed in the fiscal 2020 Form 10-K.
Most important facts to verify
- Confirm the issuer and ticker: the supplied filing is for Enochian Biosciences, Inc., not Lunai Bioworks Inc.
- Verify the reporting period: the filing covers the quarter ended March 31, 2021, despite the request labeling it “2020 Q3.”
- Assess funding needs relative to the $4.5 million cash balance, $7.6 million nine-month operating cash burn and the subsequent $10 million coronavirus-license payment obligation.
- Review the valuation support for the $154.8 million license asset, $11.6 million goodwill balance and $3.0 million contingent consideration liability.
- Monitor dilution from the 47.8 million shares outstanding, 1.35 million contingent shares, 1.35 million warrants and 1.26 million outstanding options.
- Evaluate remediation of the disclosed material weaknesses in internal control over financial reporting.