Business Context and Reporting Period
This unaudited Form 10-Q covers the quarter and six months ended June 30, 2014. The filing identifies the registrant as DanDrit Biotech USA, Inc., formerly Putnam Hills Corp.; it does not identify the company as Lunai Bioworks Inc. The company develops dendritic-cell cancer vaccines, including its lead MCV colorectal cancer vaccine, through its Danish subsidiary, DanDrit Biotech A/S.
On February 12, 2014, the company completed a reverse acquisition and share exchange, acquiring approximately 100% of DanDrit Denmark. The transaction resulted in 8,040,000 common shares outstanding, including shares reserved for non-consenting Danish shareholders.
Financial Performance and Position
| Metric | Three Months Ended June 30, 2014 | Six Months Ended June 30, 2014 | Comparable Period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 and $31,558, respectively, in 2013 |
| Cost of goods sold | $64,266 | $82,005 | $36,928 and $52,288, respectively |
| Gross loss | $64,266 | $82,005 | $36,928 and $20,730, respectively |
| Operating expenses | $503,836 | $898,203 | $205,881 and $402,545, respectively |
| Operating loss | $568,102 | $980,208 | $242,809 and $423,275, respectively |
| Net loss | $469,452 | $882,509 | $343,944 and $743,016, respectively |
| Loss per share | $0.06 | $0.12 | $0.06 and $0.14, respectively |
Gross margins were not meaningful because the company reported no revenue while incurring production costs. General and administrative expense was $421,077 for the quarter and $747,505 for the six months, substantially above the prior-year periods. Consulting expense was $79,797 for the quarter and $140,942 for the six months.
Net cash used in operating activities was $641,976 for the six months ended June 30, 2014, compared with $1.304 million in the prior-year period. Investing activities used $69,640, primarily for increased cash held in escrow. Financing activities provided $858,765 through related-party notes.
At June 30, 2014, cash was $181,024 and cash held in escrow was $147,108. Total current assets were $422,710, compared with current liabilities of $3.349 million. Total assets were $718,283, total liabilities were $3.349 million, and stockholders’ deficit was $2.631 million.
Related-party notes payable totaled $1.717 million, all classified as current. The notes generally mature on February 1, 2015 or upon completion of a contemplated public offering, with certain extension rights. The company also reported approximately $220,498 of net definite-life patent assets and no net property and equipment.
Material Changes Versus the Prior Comparable Period
- Revenue fell to zero for the quarter and six-month period; the prior-year six-month period included $31,558 from a Singapore compassionate-use program.
- Six-month gross loss increased to $82,005 from $20,730 because of lower sales and higher production costs.
- Six-month operating expenses increased 123% to $898,203, driven primarily by legal, audit, consulting, and financing-related costs.
- Six-month net loss increased 19% to $882,509, although the loss per share improved to $0.12 from $0.14 because of the higher share count.
- Related-party debt increased from $728,001 at December 31, 2013 to $1.717 million at June 30, 2014.
- Shares outstanding increased from 6,000,000 at December 31, 2013 to 8,040,000 at June 30, 2014, largely reflecting the reverse acquisition and related equity issuances.
- The company raised $858,765 from related-party notes during the first six months, compared with $1.272 million in the prior-year period.
Guidance, Outlook, Risks, and Unusual Items
Management projects approximately $983,108 of revenue and $1,404,187 of expenses for the following twelve months. The plan is to raise additional capital and generate revenue through MCV, including sales under a Patient Name Use Program for non-registered medicines. FDA approval and broader commercialization are not assured.
The financial statements contain a substantial doubt regarding the company’s ability to continue as a going concern. The company has incurred recurring losses, has not established profitable operations, has negative working capital, and depends on additional debt or equity financing and related-party support. Management disclosed a related-party funding commitment of approximately DKK 2.0 million, or approximately $368,868, through February 2015, but stated that failure to obtain funding could materially impair operations.
Key risks include regulatory approval, clinical efficacy and safety, manufacturing requirements, product liability, limited commercialization of MCV, dependence on related-party financing, foreign-currency exposure, and the ability to raise capital on acceptable terms. The company has approximately $10.2 million of Danish tax-loss carryforwards and approximately $120,000 of U.S. federal tax-loss carryforwards, but recorded a full valuation allowance against deferred tax assets.
Unusual items include the February 2014 reverse acquisition, non-cash debt-to-equity conversions completed in connection with the transaction, increased legal and offering-related expenses, and the write-off of $41,498 of website development costs during the second quarter. Management reported no material pending legal proceedings, although it disclosed a disputed Danish law-firm claim of approximately $33,421.
Management concluded that disclosure controls and procedures were effective as of June 30, 2014, with no material changes in internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Confirm the registrant identity, because the supplied metadata names Lunai Bioworks Inc., while the filing names DanDrit Biotech USA, Inc.
- Verify the terms, maturity dates, interest rates, security, and related-party status of the $1.717 million of current notes payable.
- Assess the company’s ability to fund operations beyond February 2015 and whether the disclosed DKK 2.0 million funding commitment was actually received.
- Review the status of FDA approval, clinical development, manufacturing, and commercialization plans for MCV.
- Reconcile the reverse-acquisition share issuances, including the 185,053 shares reserved for non-consenting shareholders and other debt-conversion shares.
- Evaluate the sustainability of operations given zero current-period revenue, recurring losses, negative equity, and substantial doubt regarding going-concern status.
- Confirm the basis for management’s projected $983,108 of revenue and $1.404 million of expenses for the next twelve months.