10-Q Summary: Enochian Biosciences, Inc.
Filing-period note: The supplied filing is for Enochian Biosciences, Inc. (formerly DanDrit Biotech USA, Inc.), not Lunai Bioworks Inc. It covers the three and nine months ended March 31, 2018, within the fiscal year ending June 30, 2018. The financial statements are unaudited.
Business context and reporting period
The company is an early-stage biopharmaceutical business developing therapies for HIV/AIDS and cancer, including ENO-1001, ENO-2001, ENO-4001, ENO-4002, ENO-5001 and ENO-3001. It reported no ability to commercially market its principal product, ENO-4001, and generated no revenue during either comparable period.
On February 16, 2018, the company completed its acquisition of Enochian Biopharma Inc. (EBI), obtaining an exclusive worldwide HIV-related license. The acquisition was recorded at preliminary consideration of $127.8 million, primarily representing a license agreement.
Key financial metrics
| Metric | Three months ended March 31, 2018 | Three months ended March 31, 2017 | Nine months ended March 31, 2018 | Nine months ended March 31, 2017 |
|---|---|---|---|---|
| Revenue | $0 | $0 | $0 | $0 |
| Operating expenses | $3.24 million | $0.35 million | $5.15 million | $1.75 million |
| Operating loss | $3.24 million | $0.35 million | $5.15 million | $1.75 million |
| Net loss | $2.96 million | $0.25 million | $4.26 million | $1.96 million |
| Basic and diluted loss per share | $0.12 | $0.03 | $0.25 | $0.21 |
| Cash used in operating activities | Not separately presented in the financial statements | Not separately presented in the financial statements | $2.73 million | $0.68 million |
At March 31, 2018, cash was $17.02 million, compared with $3.94 million at June 30, 2017. Working capital was $16.16 million, compared with $1.21 million at June 30, 2017. Total assets were $144.26 million, including $127.14 million of net definite-life intangible assets. Total liabilities were $0.91 million, compared with $2.99 million at June 30, 2017.
The company had no notes payable or convertible notes payable outstanding at March 31, 2018. It reported no material off-balance-sheet arrangements.
Material changes versus the prior comparable period
- Revenue remained zero, while operating expenses increased 823% in the quarter and 194% for the nine-month period.
- Quarterly net loss increased approximately 1,102%, primarily from acquisition-related general and administrative costs and amortization of acquired intellectual property.
- Nine-month net loss increased 118%, to $4.26 million, despite $0.87 million of other income, including currency gains and debt forgiveness.
- Research and development expense increased to $0.51 million for nine months from $0.05 million, reflecting development and study activities for ENO-1001 and ENO-4001.
- Depreciation and amortization increased to $0.77 million for nine months from $0.01 million, principally due to amortization of the EBI license.
- Cash increased by $13.08 million during the nine-month period, mainly from $16.71 million of financing proceeds, partially offset by operating and investing cash uses.
- Common shares outstanding increased to 36,163,924 from 12,433,290, primarily due to the EBI acquisition, private placements, warrant exercises and note conversions.
Guidance, outlook, risks and unusual items
Management stated that existing cash was believed sufficient to fund operations for the foreseeable future, but the company remains pre-revenue and dependent on equity financing and other capital sources. No quantitative revenue, earnings or cash-flow guidance was provided.
- The EBI transaction resulted in a $127.8 million preliminary license asset with a 20-year amortization period. Management’s purchase-price allocation remained subject to change.
- As of March 31, 2018, up to 6,488,122 additional shares were contingently issuable in connection with the EBI acquisition. Outstanding warrants and grant warrants also create substantial potential dilution.
- The company recorded $2.39 million of acquisition-related costs for the nine months and $0.46 million of expense associated with forgiveness of the EBI note receivable.
- FDA approval, clinical development, manufacturing, efficacy and safety of the company’s products remain uncertain. The filing states that regulatory approval cannot be assured.
- Disclosure controls and procedures were assessed as ineffective because of material weaknesses, including insufficient accounting resources, limited segregation of duties and inadequate internal expertise in complex U.S. GAAP and SEC reporting matters.
- The company has consulting commitments of up to $30,000 per month to Weird Science and paid $10,000 to a director for consulting services during the quarter. Related-party transactions and director compensation should be reviewed.
- The company held $16.77 million of cash in excess of federally insured limits at March 31, 2018.
- The results for the period are not necessarily indicative of full-year results.
Investor verification checklist
- Verify that the filing issuer is Enochian Biosciences, Inc., rather than Lunai Bioworks Inc.
- Review the EBI acquisition agreement, preliminary valuation of the $127.8 million license and assumptions supporting its 20-year useful life.
- Assess the company’s ability to fund clinical development given zero revenue, recurring losses and operating cash burn.
- Quantify dilution from the 6.49 million contingently issuable acquisition shares, 5.84 million warrants and 0.69 million grant warrants outstanding at March 31, 2018.
- Evaluate the status, timing and regulatory prospects of ENO-1001 and the ENO-4001/ENO-4002 cancer programs.
- Review the disclosed material weaknesses and whether subsequent filings report remediation or additional control deficiencies.
- Examine related-party consulting arrangements, acquisition costs, debt forgiveness and other unusual or nonrecurring items.