See accompanying notes to the unaudited condensed
consolidated financial statement.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 1 — THE BUSINESS AND SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Business – Enochian
Biosciences Inc., (“Enochian,” or “Registrant”, and together with its subsidiaries, the “Company”,
“we” or “us”) engages in the research and development of pharmaceutical and biological products for the
treatment of Cancer, HIV, and HBV and other infectious diseases with the intent to manufacture said products.
Going Concern - These
financial statements have been prepared on a going concern basis, which assumes that the Company will continue to realize its assets
and discharge its liabilities in the normal course of business. The Company has not generated any revenue, has incurred substantial
recurring losses from continuing operations and has an accumulated deficit of $220,831,001 as of March 31, 2023. The continuation
of the Company as a going concern is dependent upon (i) its ability to successfully obtain FDA approval of its product candidates,
(ii) its ability to obtain any necessary debt and/or equity financing, and (iii) its ability to generate profits from the Company’s
future operations. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern for
a period of one year from the issuance of these financial statements. These financial statements do not include any adjustments
to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should
the Company be unable to continue as a going concern.
Basis of Presentation
– The Company prepares consolidated financial statements in accordance with accounting principles generally accepted
in the United States of America (“U.S. GAAP”) and follows the rules and regulations of the U.S. Securities and Exchange
Commission (“SEC”). The accompanying financial statements are unaudited. In the opinion of management, all adjustments
(which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and
cash flows at March 31, 2023, and 2022 and for the periods then ended have been made. Certain information and footnote disclosures
normally included in financial statements prepared in accordance with U.S. GAAP have been condensed or omitted. The accompanying
unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto
included in the Company’s June 30, 2022, audited financial statements. The results of operations for the periods ended March
31, 2023, and 2022 are not necessarily indicative of the operating results for the full year.
Consolidation –
For the three and nine months ended March 31, 2023, and 2022, the condensed consolidated financial statements include the accounts
and operations of the Registrant and its subsidiaries. All material inter-company transactions and accounts have been eliminated
in the consolidation.
Accounting Estimates
– The preparation of financial statements in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosures of contingent assets
and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period.
Actual results could differ from those estimated. Significant estimates include the fair value and potential impairment of intangible
assets, and fair value of equity instruments issued.
Functional Currency &
Foreign Currency Translation – The functional currency of Enochian Denmark is the Danish Kroner (“DKK”).
The Company’s reporting currency is the U.S. Dollar for the purpose of these financial statements. The Company’s balance
sheet accounts are translated into U.S. dollars at the period-end exchange rates and all revenue and expenses are translated into
U.S. dollars at the average exchange rates prevailing during the periods ended March 31, 2023, and 2022. Translation gains and
losses are deferred and accumulated as a component of other comprehensive income in stockholders’ equity. Transaction gains
and losses that arise from exchange rate fluctuations from transactions denominated in a currency other than the functional currency
are included in the statement of operations as incurred.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Cash and Cash Equivalents
– The Company considers all highly liquid debt instruments purchased with a maturity of three months or less to be cash
equivalents. The Company had balances held in financial institutions in Denmark and in the United States in excess of federally
insured amounts at March 31, 2023, and June 30, 2022, of $2,594,707 and $8,805,495, respectively.
Property and Equipment
– Property and equipment are stated at cost. Expenditures for major renewals and betterments that extend the useful lives
of property and equipment are capitalized and depreciated upon being placed in service. Expenditures for maintenance and repairs
are charged to expense as incurred. Depreciation is computed for financial statement purposes on a straight-line basis over the
estimated useful lives of the assets, which range from four to ten years (see Note 4.)
Intangible Assets –
The Company has both definite and indefinite life intangible assets.
Definite life intangible
assets include patents. The Company accounts for definite life intangible assets in accordance with Financial Accounting Standards
Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 350, “Goodwill and Other Intangible
Assets”. Intangible assets are recorded at cost. Patent costs consist of costs incurred to acquire the underlying patent.
If it is determined that a patent will not be issued, the related remaining capitalized patent costs are charged to expense. Intangible
assets are amortized on a straight-line basis over their estimated useful life. The estimated useful life of patents is twenty
years from the date of application.
Indefinite life intangible
assets include license agreements and goodwill. The Company accounts for indefinite life intangible assets in accordance with ASC
350, “Goodwill and Other Intangible Assets”. License agreement costs represent the fair value of the license agreement
on the date acquired and are tested annually for impairment, as well as whenever events or changes in circumstances indicate the
carrying value may not be recoverable.
Goodwill –
Goodwill is not amortized but is evaluated for impairment annually as of June 30th of each fiscal year or whenever events
or changes in circumstances indicate the carrying value may not be recoverable.
Impairment of Goodwill
and Indefinite Lived Intangible Assets – We test for goodwill impairment at the reporting unit level, which is one level
below the operating segment level. Our detailed impairment testing involves comparing the fair value of each reporting unit to
its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential
sale of the reporting unit and is based on discounted cash flows or relative market-based approaches. If the carrying value of
the reporting unit exceeds its fair value, we record an impairment loss for such excess. The annual fair value analysis performed
on goodwill supported that goodwill was not impaired as of June 30, 2022, and no impairment is deemed necessary as of March 31,
2023 (see Note 5.)
For indefinite-lived intangible
assets, such as licenses acquired as an IPR&D asset, on an annual basis we determine the fair value of the asset and record
an impairment loss, if any, for the excess of the carrying value of the asset over its fair value. For the year ended June 30,
2022, the carrying value of the licenses acquired as an IPR&D asset exceeded its fair value. Therefore, the Company recorded
an impairment loss of $93,253,000 during the year ended June 30, 2022. No additional impairment is deemed necessary as of March
31, 2023 (see Note 5.)
The carrying value of IPR&D
and goodwill at March 31, 2023, was $61,571,000 and $11,640,000, respectively.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Impairment of Long-Lived
Assets – Long-lived assets, such as property and equipment, definite and indefinite life intangible assets are reviewed
for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Circumstances which could trigger a review include, but are not limited to: significant decreases in the market price of the asset;
significant adverse changes in the business climate or legal factors; current period cash flow or operating losses combined with
a history of losses or a forecast of continuing losses associated with the use of the asset; and current expectations that the
asset will more likely than not be sold or disposed of significantly before the end of its estimated useful life.
Recoverability of assets
to be held and used is measured by a comparison of the carrying amount of an asset to estimated undiscounted future cash flows
expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated undiscounted future cash flows,
an impairment charge is recognized for the amount by which the carrying amount of the asset exceeds the fair value of the asset.
Assets to be disposed of would be separately presented in the balance sheet and reported at the lower of the carrying amount or
fair value less costs to sell and would no longer be depreciated. The depreciable basis of assets that are impaired and continue
in use are their respective fair values.
Leases – In
accordance with ASC Topic 842, “Leases”, the Company determined the initial classification and measurement of its right-of-use
assets and lease liabilities at the lease commencement date and thereafter. The lease terms include any renewal options and termination
options that the Company is reasonably assured to exercise, if applicable. The present value of lease payments is determined by
using the implicit interest rate in the lease, if that rate is readily determinable; otherwise, the Company develops an incremental
borrowing rate based on the information available at the commencement date in determining the present value of the future payments.
Rent expense for operating
leases is recognized on a straight-line basis, unless the operating lease right of use assets have been impaired, over the reasonably
assured lease term based on the total lease payments and is included in operating expenses in the condensed consolidated statements
of operations. For operating leases that reflect impairment, the Company will recognize the amortization of the operating lease
right-of-use assets on a straight-line basis over the remaining lease term with rent expense still included in general and administrative
expenses in the unaudited condensed consolidated statements of operations.
The Company has elected
the practical expedient to not separate lease and non-lease components. The Company’s non-lease components are primarily
related to property maintenance, insurance, and taxes, which vary based on future outcomes, and thus are recognized in general
and administrative expenses when incurred (see Note 6.)
Research and Development
Expenses – The Company expenses research and development costs incurred in formulating, improving, validating, and creating
alternative or modified processes related to and expanding the use of the potential Oncology, HIV and HBV therapies and technologies
for use in the prevention, treatment, amelioration of and/or therapy for Oncology, HIV and HBV. Research and development expenses
for the three and nine months ended March 31, 2023, amounted to $239,137 and $3,170,471, respectively. Research and development
expenses for the three and nine months ended March 31, 2022, amounted to $1,212,380, and $6,605,038, respectively.
Income Taxes –
The Company accounts for income taxes in accordance with FASB ASC Topic 740, “Accounting for Income Taxes”, which requires
an asset and liability approach for accounting for income taxes.
Loss Per Share –
The Company calculates earnings/ (loss) per share in accordance with FASB ASC Topic 260, “Earnings Per Share”. Basic
earnings per common share (EPS) are based on the weighted average number of shares of Common Stock outstanding during each period.
Diluted earnings per common share are based on shares outstanding (computed as under basic EPS) and potentially dilutive shares
of Common Stock. Potential shares of Common Stock included in the diluted earnings per share calculation include in-the-money stock
options that have been granted but have not been exercised. Because of the net loss for the three and nine months ended March 31,
2023, and 2022, the dilutive shares for both periods were excluded from the Diluted EPS calculation as the effect of these potential
shares of Common Stock is anti-dilutive. The Company had 5,410,460 and 7,201,108 potential shares of Common Stock excluded from
the Diluted EPS calculation as of March 31, 2023, and March 31, 2022, respectively.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 — THE BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES (Continued)
Fair Value of Financial
Instruments – The Company accounts for fair value measurements for financial assets and financial liabilities in accordance
with FASB ASC Topic 820, “Fair Value Measurements”. The authoritative guidance, among other things, defines fair value,
establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category
measured at fair value on either a recurring or nonrecurring basis. Fair value is defined as the exit price, representing the amount
that would either be received to sell an asset or be paid to transfer a liability in an orderly transaction between market participants.
As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would
use in pricing an asset or liability (see Note 3.)
Stock Options and
Restricted Share Units – The Company has granted stock options, restricted share units (“RSUs”) and warrants.
The Company accounts for stock-based awards in accordance with the provisions of FASB ASC Topic 718, “Compensation - Stock
Compensation”.
Stock-Based Compensation
– The Company records stock-based compensation in accordance with ASC Topic 718, “Compensation - Stock Compensation”.
All transactions in which goods or services are the consideration received for the issuance of equity instruments are accounted
for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever
is more reliably measurable. Equity instruments issued to consultants and the cost of the services received as consideration are
measured and recognized based on the fair value of the equity instruments issued and are recognized over the required service
period, which is generally the vesting period. Stock based compensation costs for the vesting of options, stock awards, and RSUs
granted for the three and nine months ended March 31, 2023, were $1,076,203 and $2,922,166, respectively. Stock-based compensation
costs for the vesting of the options and RSUs granted for the three and nine months ended March 31, 2022, were $577,676 and $5,348,943,
respectively. (See Note 8.)
Recently Adopted Accounting
Pronouncements – Recent accounting pronouncements issued by the FASB do not or are not believed by management to have
a material impact on the Company’s present or future financial statements.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 – GOING CONCERN
The Company’s condensed
consolidated financial statements are prepared using the generally accepted accounting principles applicable to a going concern,
which contemplates the realization of assets and liquidation of liabilities in the normal course of business. However, the Company
has incurred substantial recurring losses from continuing operations, has used cash in the Company’s continuing operations,
and is dependent on additional financing to fund operations. The Company incurred a net loss of approximately $4,328,296 and $16,485,804
for the three and nine months ended March 31, 2023, respectively. As of March 31, 2023, the Company had cash and cash equivalents
of $2,948,042 and an accumulated deficit of $220,831,001. These conditions raise substantial doubt about the Company’s ability
to continue as a going concern for one year after the date the financial statements are issued. The condensed consolidated financial
statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts and classification
of liabilities that might be necessary should the Company be unable to continue in existence. Management intends to raise additional
funds for (a) research and development, (b) increases in personnel, and (c) the purchase of equipment, specifically to advance
the Company’s potential products through the regulatory process. The Company may raise such funds from time to time through
public or private sales of equity or debt securities. Such financing may not be available on acceptable terms, or at all, and the
failure to raise capital when needed could materially adversely affect the Company’s growth plans and its financial condition
and results of operations.
NOTE 3 — FAIR VALUE MEASUREMENTS
The Company accounts for
fair value measurements for financial assets and financial liabilities in accordance with FASB ASC Topic 820, “Fair Value
Measurements”. The authoritative guidance among other things, defines fair value, establishes a consistent framework for
measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring
or nonrecurring basis. Fair value is defined as the exit price, representing the amount that would either be received to sell an
asset or be paid to transfer a liability in an orderly transaction between market participants. As such, fair value is a market-based
measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.
As a basis for considering such assumptions, the guidance establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value as follows:
| |
● |
Level 1. Observable inputs such as
quoted prices in active markets for identical assets or liabilities; |
| |
● |
Level 2. Inputs, other than quoted
prices in active markets, that are observable either directly or indirectly; and |
| |
● |
Level 3. Unobservable inputs in which
there is little or no market data, which require the reporting entity to develop its own assumptions.
|
There were no Level 1, 2
or 3 assets, nor any Level 1, 2 or 3 liabilities measured at fair value on a recurring basis as of March 31, 2023.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 — PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
| Summary of property and equipment |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Useful
Life |
|
March
31, 2023 |
|
June
30, 2022 |
| Lab
Equipment and Instruments |
|
|
4-7 |
|
|
$ |
570,157 |
|
|
$ |
546,524 |
|
| Leasehold
Improvements |
|
|
10 |
|
|
|
224,629 |
|
|
|
224,629 |
|
| Furniture,
Fixtures and Equipment |
|
|
4-7 |
|
|
|
172,861 |
|
|
|
172,861 |
|
| Total |
|
|
|
|
|
|
967,647 |
|
|
|
944,014 |
|
| Less
Accumulated Depreciation |
|
|
|
|
|
|
(438,393 |
) |
|
|
(357,478 |
) |
| Net
Property and Equipment |
|
|
|
|
|
$ |
529,254 |
|
|
$ |
586,536 |
|
Depreciation expense amounted
to $26,662, and $80,915 for the three and nine months ended March 31, 2023, respectively, and $27,990 and $83,787 for the three
and nine months ended March 31, 2022, respectively.
NOTE 5 —INTANGIBLE ASSETS
At March 31, 2023, and June
30, 2022, definite-life intangible assets, net of accumulated amortization, consisted of patents on the Company’s products
and processes of $41,095 and $44,268, respectively. The patents are recorded at cost and amortized over twenty years from the date
of application. Amortization expense for the three and nine months ended March 31, 2023, was $1,580 and $4,572, respectively. Amortization
expense for the three and nine months ended March 31, 2022, was $3,730 and $11,471, respectively.
At March 31, 2023, and 2022,
indefinite life intangible assets consisted of a license agreement classified as In-Process Research and Development (“IPR&D”)
intangible assets, which are not amortizable until the intangible asset provides economic benefit, and goodwill.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
At March 31, 2023, and June
30, 2022, definite and indefinite-life intangible assets consisted of the following:
| Schedule of life intangible assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Useful
Life |
|
June
30,
2022 |
|
Period
Change |
|
Effect
of Currency Translation |
|
March
31,
2023 |
| Definite
Life Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Patents |
|
20
Years |
|
$ |
279,257 |
|
|
$ |
— |
|
|
$ |
10,324 |
|
|
$ |
289,581 |
|
| Less
Accumulated Amortization |
|
|
|
|
(234,989 |
) |
|
|
(4,572 |
) |
|
|
(8,925 |
) |
|
|
(248,486 |
) |
| Net
Definite-Life Intangible Assets |
|
|
|
$ |
44,268 |
|
|
$ |
(4,572 |
) |
|
$ |
1,399 |
|
|
$ |
41,095 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Indefinite
Life Intangible Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| License
Agreement |
|
|
|
$ |
61,571,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
61,571,000 |
|
| Goodwill |
|
|
|
|
11,640,000 |
|
|
|
— |
|
|
|
— |
|
|
|
11,640,000 |
|
| Total
Indefinite Life Intangible Assets |
|
|
|
$ |
73,211,000 |
|
|
|
— |
|
|
|
— |
|
|
$ |
73,211,000 |
|
Expected future amortization expense is as follows:
| Schedule of expected future amortization expense | |
|
| Year
ending June 30, | |
|
| | 2023 | | |
$ | 7,894 | |
| | 2024 | | |
| 11,067 | |
| | 2025 | | |
| 11,067 | |
| | 2026 | | |
| 11,067 | |
| | Total | | |
$ | 41,095 | |
During February 2018, the
Company acquired a License Agreement (as licensee) to an HIV therapy which consists of a perpetual, fully paid-up, royalty-free,
sub-licensable, and sole and exclusive worldwide license to research, develop, use, sell, have sold, make, have made, offer for
sale, import and otherwise commercialize certain intellectual property in cellular therapies for the prevention, treatment, amelioration
of and/or therapy exclusively for HIV in humans, and research and development exclusively relating to HIV in humans (the “HIV License Agreement”). Because the
HIV License Agreement is considered an IPR&D intangible asset it is classified as an indefinite life asset that is tested annually
for impairment.
Impairment – Following
the fourth quarter of each year, management performs its annual test of impairment of intangible assets by performing a quantitative
assessment and determines if it is more likely than not that the fair value of the asset is greater than or equal to the carrying
value of the asset. The results of the quantitative assessment indicated that the carrying value of the licenses acquired as an
IPR&D asset exceeded its fair value, due to the sublicensing of ENOB HV-01, which required a different valuation approach and
changes in other factors impacting the fair value of the asset. Therefore, an impairment adjustment of $93,253,000 was recorded
in the year ended June 30, 2022. No additional impairment is deemed necessary as of March 31, 2023.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
NOTE 6 — LEASES
Operating
Leases — On November 13, 2017, the Company entered into a Lease Agreement for a term of five years and two months from
November 1, 2017, with Plaza Medical Office Building, LLC, a California limited liability company, as landlord, (the “Landlord”),
pursuant to which the Company agreed to lease from the Landlord approximately 2,325 rentable square feet. The base rent increased
by 3% each year, and ranged from approximately $8,719 per month for the first year to $10,107 per month for the two months of the
sixth year. The lease was terminated early without penalties or additional costs as of September 30, 2022, that released an accrual
of $70,800 related to leasehold improvements that was not utilized.
On June 19, 2018, the Company
entered into a Lease Agreement for a term of ten years from September 1, 2018, with Century City Medical Plaza Land Co., Inc.,
pursuant to which the Company agreed to lease approximately 2,453 rentable square feet. On February 20, 2019, the Company entered
into an Addendum to the original Lease Agreement with an effective date of December 1, 2019, where it expanded the lease area to
include another 1,101 square feet for a total rentable 3,554 square feet. The base rent increases by 3% each year, and ranges from
$17,770 per month for the first year to $23,186 per month for the tenth year. The equalized monthly lease expense for the term
of the lease is $20,050. The Company subleased the space as of June 25, 2022 through April 30, 2023 (see subsection below “Sublease
Agreement” for details.)
The Company identified and
assessed the following significant assumptions in recognizing the right-of-use asset and corresponding liabilities:
Expected lease term
— The expected lease term includes both contractual lease periods and, when applicable, cancelable option periods when it
is reasonably certain that the Company would exercise such options. The Company’s lease has a remaining lease term of 53
months. As of March 31, 2023, the weighted-average remaining term is 4.42 years.
Incremental borrowing
rate — The Company’s lease agreements do not provide an implicit rate. As the Company does not have any external
borrowings for comparable terms of its leases, the Company estimated the incremental borrowing rate based on the U.S. Treasury
Yield Curve rate that corresponds to the length of each lease. This rate is an estimate of what the Company would have to pay if
borrowing on a collateralized basis over a similar term in an amount equal to the lease payments in a similar economic environment.
As of March 31, 2023, the weighted-average discount rate is 4.03%.
Lease and non-lease
components — In certain cases the Company is required to pay for certain additional charges for operating costs,
including insurance, maintenance, taxes, and other costs incurred, which are billed based on both usage and as a percentage of
the Company’s share of total square footage. The Company determined that these costs are non-lease components, and they are
not included in the calculation of the lease liabilities because they are variable. Payments for these variable, non-lease components
are considered variable lease costs and are recognized in the period in which the costs are incurred.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Below are the lease commitments
for the next 5 years:
| |
Lease commitments |
|
|
|
|
|
| Year
Ending June 30th |
|
Lease Expense |
| |
2023 |
|
|
$ |
60,001 |
|
| |
2024 |
|
|
|
246,004 |
|
| |
2025 |
|
|
|
253,384 |
|
| |
2026 |
|
|
|
260,985 |
|
| |
2027 |
|
|
|
313,836 |
|
| |
Less
imputed interest |
|
|
|
(98,775 |
) |
| |
Total |
|
|
$ |
1,035,435 |
|
Sublease Agreement
On June 20, 2022, the Company
entered into a sublease Agreement with One Health Labs (the “Subtenant”), whereby the Subtenant agreed to lease 3,554
square feet of space currently rented by the Company in Century City Medical Plaza as of June 25, 2022, for a period of 3.5 years
with an option to renew for the remaining term of the lease that ends as of June 19, 2028. The base rent was $17,770 per month
plus $750 towards utility fees that were part of the original lease agreement and would increase by 3% each year over the term
of the sub-lease. The Company received a total of $57,022 on July 1, 2022 after execution of the sublease to cover the first month
rent, utility fee and deposit. The first sublease payment began on August 1, 2022.
In accordance with ASC Topic
842, the Company treated the sublease as a separate lease, as the Company was not relieved of the primary obligation under the
original lease. The Company continued to account for the Century City Medical Plaza lease as a lessee and in the same manner as
prior to the commencement date of the sublease. The Company accounted for the sublease as a lessor of the lease. The sublease was
classified as an operating lease, as it does not meet the criteria of a sales-type or direct financing lease.
On April 18, 2023, the Company
entered into a sublease termination Agreement with One Health Labs (the “Subtenant”), whereby the Subtenant and the
Company agreed to terminate the sublease effective as of April 30, 2023. The Subtenant agreed to pay the Company $139,460 along
with the security deposit of $35,540 for a total termination fee of $175,000, to permit early termination of the sublease.
The Company recognized operating
income from the sublease on a straight-line basis in its statements of operations over the sublease term.
During the three and nine
months ended March 31, 2023 and 2022, the net operating lease expenses were as follows:
| Schedule of net operating lease expenses | |
| | | |
| | | |
| | | |
| | |
| | |
For
the Three Months Ended | |
For
the Nine Months Ended |
| | |
March
31, | |
March
31, |
| |
2023 | |
2022 | |
2023 | |
2022 |
| | |
| |
| |
| |
|
| Operating
Lease Expense | |
$ | 99,099 | | |
$ | 85,027 | | |
$ | 239,759 | | |
$ | 253,223 | |
| Sub lease
Income | |
| (53,310 | ) | |
| — | | |
| (159,930 | ) | |
| — | |
| | |
| | | |
| | | |
| | | |
| | |
| Total
Net Lease Expense | |
$ | 45,789 | | |
$ | 85,027 | | |
$ | 79,829 | | |
$ | 253,223 | |
Lease expense charged to
general and administrative expenses for the three and nine months ended March 31, 2023, amounted to $45,789 and $79,829, respectively.
Lease expense charged to general and administrative expenses for the three and nine months ended March 31, 2022, amounted
to $85,027 and $253,223, respectively.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 — NOTES PAYABLE
Convertible Notes Payable
— On February 6, 2020, the Company issued two Convertible Notes (the “Convertible Notes”) to Paseco ApS (the
“Holder”), a Danish limited company and an existing stockholder of the Company each with a face value amount of $600,000,
convertible into shares of Common Stock, $0.0001 par value per share. The outstanding principal amount of the Convertible Notes
was due and payable on February 6, 2023. Interest on the Convertible Notes commenced accruing on the date of issuance at six percent
(6%) per annum, computed on the basis of twelve 30-day months, and is compounded monthly on the final day of each calendar month
based upon the principal and all accrued and unpaid interest outstanding as of such compound date. The interest was payable in
cash on a semi-annual basis.
The conversion price was
equal to $12.00 per share of Common Stock. The Holder did not exercise the conversion feature that expired on February 6, 2021.
The Company evaluated the Convertible Notes in accordance with ASC 470-20 and identified that they each contain an embedded conversion
feature that shall not be bifurcated from the host document (i.e., the Convertible Notes) as they are not deemed to be readily
convertible into cash. All proceeds received from the issuance have been recognized as a liability on the balance sheet.
Effective December 30, 2022
(the “Effective Date”), the Company amended and restated the Convertible Notes (the “Amended and Restated Secured
Notes”). Pursuant to the Amended and Restated Secured Notes, the due date was extended to February
28, 2024, unless the Company consummates a public offering or private placement prior to the maturity date (a
“Qualified Offering”) and the Holder elects to convert the outstanding principal balance into Common Stock at the price
being paid by the investors in such Qualified Offering. The interest was increased to twelve percent (12%)
per annum, which was prepaid by the Company in full on the date of amendment through the issuance of 198,439
shares of the Company’s Common Stock which is comprised of 29,419
shares for accrued interest up to the Effective Date and 169,020
shares related to the prepayment of interest through the extension date of the Amended and Restated Secured Notes using the closing
market price on the Effective date, of $1.03.
The obligations of the Company under the Amended and Restated Secured Notes were secured by a security agreement (the
“Security Agreement”). The Company evaluated the Secured Notes and conversion feature to determine the appropriate
accounting treatment based on the terms of the agreement. In accordance with ASC 480-Distinguising Liabilities from Equity, the
Company determined that the Secured Notes embody an obligation that may require the Company to settle with the issuance of a
variable number of shares, where the monetary value of the obligation is based predominantly on a fixed monetary amount $1,200,000
known at inception. Accordingly, the Company recorded the Secured Notes as share settled debt. The total value of the shares issued
was $204,392
which included $174,090
of prepaid interest and $30,302
for accrued interest as of December 30, 2022.
As of March 31, 2023 and
2022, the Company recorded accrued interest in the amount of zero 0 and $12,030, which is included in accrued expenses,
respectively. For the three and nine months ended March 31, 2023 the interest expense related to the Convertible Notes amounted to
$37,155 and $73,608, respectively. For the three and nine months ended March 31, 2022 the interest expense related to the
Convertible Notes amounted to $18,151 and $54,604 respectively. The Convertible Notes balance as of March 31, 2023 and 2022, was
$1,200,000.
Note Payable —
On March 30, 2020 (the “Issuance Date”), the Company issued a Promissory Note in the principal amount of $5,000,000
(the “Promissory Note”) to the Holder. The principal amount of the Promissory Note was originally payable on November
30, 2021 (the “Maturity Date”). The Promissory Note bore interest at a fixed rate of 6% per annum, computed based on
the number of days between the Issuance Date and the Maturity Date, which was prepaid by the Company in full on the Issuance Date
through the issuance of 188,485 shares of the Company’s Common Stock based on the closing market price on that date for a
total value of $501,370. The Company evaluated the Promissory Note and PIK interest in accordance with ASC 470-Debt and ASC 835-Interest,
respectively. Pursuant to ASC 470-20, proceeds received from the issuance are to be recognized at their relative fair value, thus
the liability is shown net of the corresponding discount of $493,192, which is the relative fair value of the shares issued for
the PIK interest on the closing date using the effective interest method. The discount of $493,192 will be accreted over the life
of the Promissory Note.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
On February 11, 2021, the
Company entered into an amendment to the Promissory Note that extended the Maturity Date to November 30, 2022. All other terms
of the Promissory Note remained the same. The change in Maturity Date required an additional year of interest at the fixed rate
of 6% per annum, which was prepaid by the Company in full on the date of the amendment through the issuance of 74,054 shares of
the Company’s Common Stock based on the closing market price on that date for a total value of $298,178.
On May 17, 2022, the Company
entered into a second amendment to the Promissory Note that extended the Maturity Date to November 30, 2023 and increased the interest
rate from 6% to 12% per annum. All other terms of the Promissory Note remained the same. The change in Maturity Date required an
additional year of interest at the fixed rate of 12% per annum. Pursuant to the amendment, the Company prepaid interest for the
period November 30, 2022 until May 30, 2023 on the date of the amendment through the issuance of 47,115 shares of the Company’s
Common Stock based on the closing market price on that date for a total value of $299,178. All other accrued interest payable from
May 30, 2023 to the Maturity Date shall be payable by the Company on May 30, 2023, at the option of the Holder either (i) in cash
or (ii) in non-assessable shares of the Company’s Common Stock, valued at the closing sale price of the Common Stock on the
Nasdaq Capital Market on May 30, 2023.
Effective December 30, 2022,
the Company entered into a third amendment to the Promissory Note. Pursuant to the third amendment, the Company’s obligations
under the Promissory Note were secured by the Security Agreement. To secure the Company’s obligations under each of the Amended
and Restated Secured Notes and the Promissory Note, the Company entered into a Security Agreement with the Holder, pursuant to
which the Company granted a lien on all assets of the Company (the “Collateral”) for the benefit of the Holder. Upon
an Event of Default (as defined in the Amended and Restated Secured Notes and Promissory Note, respectively) the Holder may, among
other things, collect or take possession of the Collateral, proceed with the foreclosure of the security interest in the Collateral
or sell, lease, or dispose of the Collateral.
For the three and nine months
ended March 31, 2023, discount amortization of $74,621 and $223,863 was charged to interest expense. For the three and nine months
ended March 31, 2022, discount amortization of $74,274 and $222,822 was charged to interest expense. The Promissory Note balance,
net of discount at March 31, 2023 is $4,801,011.
Finance Agreement —
On November 30, 2022, the Company entered into a premium finance agreement (the “Agreement”) related to insurance,
which resulted in a prepaid expense with a principal amount of $1,139,875 at 6.69% interest per annum. The repayment of the Agreement
will be made in nine equal monthly installments of $96,220. For the three and nine months ended March 31, 2023, the Company made
repayments of $374,367 and $840,992, respectively. For the three and nine months ended March 31, 2022, the Company made repayments
of $222,167 and $449,765, respectively, which relates to the prior year’s insurance policy.
For the three and nine months
ended March 31, 2023, the Company recorded interest expense related to the Agreement in the amount of $10,513 and $13,295, respectively.
This amount is reflected in other income and expenses.
Total interest expense recorded
for the three and nine months ended March 31, 2023, was $122,289 and $310,766, respectively. Total interest expense recorded for
the three and nine months ended March 31, 2022, was $95,206 and $278,327, respectively.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — STOCKHOLDERS’ EQUITY
Preferred Stock —The
Company has 10,000,000 authorized shares of Preferred Stock, par value $0.0001 per share. At March 31, 2023, and June 30, 2022,
there were zero 0 shares issued and outstanding.
Common Stock —The
Company has 100,000,000 authorized shares of Common Stock, par value $0.0001 per share. At March 31, 2023, and June 30, 2022, there
were 57,983,591 and 53,007,082 shares issued and outstanding, respectively.
Voting — Holders
of Common Stock are entitled to one vote for each share held of record on each matter submitted to a vote of stockholders, including
the election of directors, and do not have any right to cumulate votes in the election of directors.
Dividends — Holders
of Common Stock are entitled to receive ratably such dividends as the Board from time to time may declare out of funds legally
available.
Liquidation Rights —
In the event of any liquidation, dissolution or winding up of the affairs of the Company, after payment of all debts and liabilities,
the holders of Common Stock will be entitled to share ratably in the distribution of any of the remaining assets.
In the three and nine months
ended March 31, 2023 there were 2,278,070 and 4,976,509 shares of Common Stock issued, respectively.
Purchase Agreement with Lincoln Park Capital
On July 8, 2020, we entered
into a purchase agreement (the “Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“Lincoln Park”),
pursuant to which the Company was able to sell and issue to Lincoln Park, and Lincoln Park was obligated to purchase, up to $20,000,000
of shares of Common Stock from time to time through August 1, 2023.
In consideration for entering
into the Purchase Agreement, we issued 139,567 shares of Common Stock to Lincoln Park as a commitment fee on July 21, 2020.
During the nine months ended
March 31, 2023, we did not
sell any shares of Common Stock to Lincoln Park under the Purchase Agreement. During the three and nine months ended March 31, 2022,
we issued 60,000 and 337,340 shares
of Common Stock to Lincoln Park under the Purchase Agreement for a purchase price of $451,700 and
$3,500,039,
respectively. As of October 17, 2022, we no longer had access to this Purchase Agreement as we are no longer able to use the
registration statement on Form S-3 that registered the shares issuable to Lincoln Park under the Purchase Agreement.
March
2023 Private Placement
In
March 2023, the Company issued 2,178,070
shares of Common Stock and warrants to purchase 1,089,036
shares of common stock (“Purchase Warrants”) resulting in proceeds of $2,483,000 in a private placement offering
(“Private Placement”). The Company effected the issuances of the shares of Common Stock from March 13, 2023 to March 29,
2023. The Purchase Warrants were immediately exercisable and had an exercise term of five years 5 with an exercise price of $1.14
per share. The combined purchase price for one share of common stock and one Purchase Warrant was $1.14 per share. The private
placement was made directly by the Company to persons who are not U.S. persons in reliance upon Regulation S of the Securities Act
of 1933. No underwriter or placement agent was engaged by the Company for this private placement.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — STOCKHOLDERS’ EQUITY
(Continued)
2017 Warrants
On July 14, 2022, certain
of our warrant holders exercised warrants to purchase 1,250,000 shares of Common Stock for total proceeds to the Company of $1,625,000,
with corresponding earn-out distribution of the same number of shares in connection with the acquisition of Enochian BioPharma,
Inc. This non-cash earn-out distribution impacted stockholders’ equity in the amount of $2,762,500 based on the share price
on July 14, 2022 of $2.21. The Company recorded a loss on extinguishment of contingent consideration liability of $419,182 during
the quarter ended December 31, 2022 which reflects the difference between the fair value of the shares and the contingent consideration
liability at the time of extinguishment. As of December 31, 2022, all outstanding 2017 Warrants were exercised and there is no
further contingent consideration liability balance remaining as of the end of this period.
Acquisition of Enochian
Biopharma Inc. / Contingently issuable shares — On February 16, 2018, the acquisition of Enochian Biopharma was completed.
As part of the acquisition, the stockholders of Enochian Biopharma received (i) 18,081,962 shares of Common Stock, and (ii) the right
to receive contingent shares of Common Stock (“Contingent Shares”) pro rata upon the exercise or conversion of warrants, which
were outstanding at closing. As of December 31, 2022, no further Contingent Shares are issuable.
Acquisition of Enochian
Denmark — At March 31, 2023, and June 30, 2022, the Company maintained a reserve of 17,414 shares of Common Stock
of the Registrant held in escrow according to Danish law (the “Escrow Shares”), all of which are reflected as issued
and outstanding in the accompanying financial statements. The Escrow Shares are reserved to acquire the shares of Enochian Denmark
held by non-consenting shareholders of Enochian Denmark on both March 31, 2023, and June 30, 2022, in accordance with Section 70
of the Danish Companies Act and the Articles of Association of DanDrit Denmark. There have been 167,639 shares of Common Stock
issued to non-consenting shareholders of Enochian Denmark as of March 31, 2023. During the three and nine months ended March 31,
2023, the Company issued zero 0 shares of Common Stock to such non-consenting shareholders of Enochian Denmark.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — STOCKHOLDERS’ EQUITY (Continued)
Stock-based Compensation
The Company recognizes compensation
costs for stock option awards to employees and directors based on their grant-date fair value. The value of each stock option is
estimated on the date of grant using the Black-Scholes option-pricing model. The weighted-average assumptions used to estimate
the fair values of the stock options granted using the Black-Scholes option-pricing model are as follows in the three months ended
March 31, 2023:
| Summary of weighted-average assumptions used to estimate the fair values of the stock options granted |
|
|
|
|
| |
|
Enochian
Biosciences Inc. |
| Expected
term (in years) |
|
|
5.3 – 6.5 |
|
| Volatility |
|
|
84.66%-91.47 |
% |
| Risk
free interest rate |
|
|
2.70%-4.24 |
% |
| Dividend
yield |
|
|
0 |
% |
The Company recognized stock-based compensation
expense of $1,076,203 and $2,922,166 for the three and nine months ended March 31, 2023, respectively. The Company recognized stock-based
compensation expense related to the options of $577,676 and $5,348,943 for the three and nine months ended March 31, 2022, respectively.
At March 31, 2023, the Company had approximately $2,127,498 of unrecognized compensation cost related to non-vested options.
Plan Options
On February 6, 2014, the
Board adopted the Company’s 2014 Equity Incentive Plan (the “2014 Plan”), and the Company had reserved 1,206,000
shares of Common Stock for issuance in accordance with the terms of the 2014 Plan.
On October 30, 2019,
the Board approved and on October 31, 2019, the Company’s stockholders adopted Enochian’s 2019 Equity Incentive Plan
(the “2019 Plan”), which replaced the 2014 Plan. The 2019 Plan authorized options to be awarded to not exceed the sum
of (1) 6,000,000 new shares, and (2) the number of shares available for the grant of awards as of the effective date under the
2014 Plan plus any options related to awards that expire, are terminated, surrendered, or forfeited for any reason without issuance
of shares under the 2014 Plan after the effective date of the 2019 Plan.
Pursuant to the 2019 Plan,
the Company granted options to purchase 15,000
and 193,000
shares of Common Stock to employees with a three-year vesting period during the three and nine months ended March 31, 2023,
respectively. For the three and nine months ended March 31, 2022, the Company granted options to purchase 11,900
and 3,142,100
shares of Common Stock to employees with a three-year vesting period, respectively. One million shares were subject to performance
based vesting criteria, and as of March 31, 2023, no expense has been recognized based on the assessment that these shares are not
probable of vesting. As performance criteria for Years 2 and 3 are not probable, the Company has deemed forfeited the remaining
two-thirds of the performance-based options as of March 31, 2022. One-third of these options were forfeited as of June 30, 2022.
During the three and nine
months ended March 31, 2023, the Company granted options to purchase zero 0 and 184,800 shares of Common stock to employees with
a six-month vesting period, respectively. For the three and nine months ended March 31, 2022, the Company did not grant options
to purchase shares of Common Stock to employees with a six-month vesting period.
During the three and nine
months ended March 31, 2023, the Company granted options to purchase zero 0 and 73,200 shares of Common stock to employees with a
one-year vesting period, respectively. For the three and nine months ended March 31, 2022, the Company granted options to purchase
zero 0 and 65,000 shares of Common Stock to employees with a one-year vesting period, respectively.
During the three and nine
months ended March 31, 2023, the Company granted options to purchase 64,655 and 275,572 shares of Common Stock, to the Board of
Directors and Scientific Advisory Board Members with a one-year vesting period, respectively. For the three and nine months ended
March 31, 2022, the Company granted options to purchase 23,314 and 86,776 shares of Common Stock to members of the Board of Directors
and Scientific Advisory Board with a one-year vesting period, respectively.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — STOCKHOLDERS’ EQUITY
(Continued)
During the three and nine
months ended March 31, 2023, the Company granted options to purchase 75,000
shares of Common Stock for consulting services with a one-year vesting period. For the three and nine months ended March 31, 2022,
the Company granted options to purchase zero 0
and 21,979
shares of Common Stock with immediate vesting, issued options to purchase zero 0
and 24,500 shares
of Common Stock with a one-year vesting period, and issued options to purchase zero 0 and 60,000 shares of Common Stock
with a three-year vesting period for consulting services, respectively.
All of the above options
are exercisable at the market price of the Company’s Common Stock on the date of the grant.
At March 31, 2023 the Company
had 2,722,302 options available to be issued under the 2019 Plan.
A summary of the status
of the Plan Options outstanding at March 31, 2023, is presented below:
| Summary of stock options outstanding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options
Outstanding |
|
Options
Exercisable |
| |
|
Exercise
Price Ranges |
|
Number
Outstanding |
|
Weighted
Average Remaining Contractual Life (years) |
|
Weighted
Average Exercise Price |
|
Number
Exercisable |
|
Weighted
Average Remaining Contractual Life (years) |
|
Weighted
Average Exercise Price |
| |
|
|
$ |
1.00–4.50 |
|
|
|
1,014,928 |
|
|
|
8.89 |
|
|
$ |
2.24 |
|
|
|
388,404 |
|
|
|
7.77 |
|
|
$ |
2.86 |
|
| |
|
|
$ |
4.51–6.50 |
|
|
|
2,503,102 |
|
|
|
7.87 |
|
|
$ |
4.89 |
|
|
|
1,167,268 |
|
|
|
7.36 |
|
|
$ |
5.26 |
|
| |
|
|
$ |
6.51–12.00 |
|
|
|
803,393 |
|
|
|
7.45 |
|
|
$ |
8.02 |
|
|
|
609,016 |
|
|
|
7.01 |
|
|
$ |
7.93 |
|
| Total |
|
|
|
|
|
|
|
4,321,424 |
|
|
|
8.03 |
|
|
$ |
4.85 |
|
|
|
2,164,689 |
|
|
|
7.33 |
|
|
$ |
5.58 |
|
A summary of the status
of the Plan Options at March 31, 2023, and changes since July 1, 2022, are presented below:
| Summary of stock option activity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Shares |
|
Weighted Average Exercise
Price |
|
Average Remaining Life |
|
Weighted Average Intrinsic
Value |
| |
|
|
|
|
|
|
|
|
| Outstanding at beginning of period |
|
|
|
4,307,820 |
|
|
$ |
5.37 |
|
|
|
8.55 |
|
|
$ |
— |
|
| Granted |
|
|
|
801,572 |
|
|
$ |
1.92 |
|
|
|
|
|
|
|
|
|
| Exercised |
|
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
| Forfeited |
|
|
|
(787,968 |
) |
|
$ |
4.68 |
|
|
|
|
|
|
|
|
|
| Expired/Canceled |
|
|
|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
| Outstanding at end of period |
|
|
|
4,321,424 |
|
|
$ |
4.85 |
|
|
|
8.03 |
|
|
$ |
— |
|
| Exercisable at end of period |
|
|
|
2,164,689 |
|
|
$ |
5.58 |
|
|
|
7.33 |
|
|
$ |
— |
|
At March 31, 2023, the
Company had 2,164,689
exercisable Plan Options outstanding. The total intrinsic value of options exercisable at March 31, 2023, was zero0. Intrinsic
value is measured using the fair market value at the date of exercise (for shares exercised) and at March 31, 2023 (for outstanding
options), less the applicable exercise price.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 — STOCKHOLDERS’ EQUITY
(Continued)
Common Stock Purchase Warrants
A summary of the warrants
outstanding at March 31, 2023 and changes since July 1, 2022, are presented below:
| Summary of common stock purchase warrants outstanding | |
| | | |
| | | |
| | |
| | |
Shares | |
Weighted
Average Exercise
Price | |
Weighted
Average Remaining
Life |
| | |
| |
| |
|
| Outstanding
at beginning of period | |
| 1,250,000 | | |
$ | 1.30 | | |
| 1.02 | |
| Granted | |
| 1,089,036 | | |
$ | 1.14 | | |
| 4.98 | |
| Exercised | |
| (1,250,000 | ) | |
$ | 1.30 | | |
| — | |
| Cancelled/Expired | |
| — | | |
$ | — | | |
| — | |
| Outstanding
and exercisable at end of period | |
| 1,089,036 | | |
$ | 1.14 | | |
| 4.98 | |
Restricted Stock Units (RSUs)
The Company recognized
stock-based compensation expense related to RSUs of zero 0 for both the three and nine months ended March 31, 2023. The Company
recognized stock-based compensation expense related to the RSUs of $228 and $258,559 for the three and nine months ended March 31,
2022, respectively.
Restricted Stock Awards (RSA)
The Company recognized stock-based
compensation expense related to RSAs of $108,000 for the three and nine months ended March 31, 2023, respectively for a grant of
100,000 shares of restricted stock made to a consultant as consideration for consulting services. The Company recognized stock-based
compensation expense related to RSAs of zero 0 for both the three and nine months ended March 31, 2022.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 — COMMITMENTS AND CONTINGENCIES
Commitments
On July 9, 2018, the Company
entered into a consulting agreement with G-Tech Bio, LLC, a California limited liability company (“G-Tech”) to assist
the Company with the development of the gene therapy and cell therapy modalities for the prevention, treatment, and amelioration
of HIV in humans, and with the development of a genetically enhanced Dendritic Cell for use as a wide spectrum platform for various
diseases (including but not limited to cancers and infectious diseases) (the “G-Tech Agreement”). G-Tech was entitled
to consulting fees for 20 months, with a monthly consulting fee of not greater than $130,000 per month. Upon the completion of
the 20 months, the monthly consulting fee of $25,000 continued for scientific consulting and knowledge transfer on existing HIV
experiments until the services were no longer being rendered or the G-Tech Agreement is terminated. As of May 25, 2022, the consultant
was no longer able to render services, therefore no expense was incurred for the three and nine months ended March 31, 2023. For
the three and nine months ended March 31, 2022, $75,000 and $225,000 was charged to research and development expenses in our Condensed
Consolidated Statements of Operations related to this consulting agreement.
On January 31, 2020, the
Company entered into a Statement of Work and License Agreement (the “HBV License Agreement”) by and among the Company,
G-Tech, and G Health Research Foundation, a not for profit entity organized under the laws of California doing business as Seraph
Research Institute (“SRI”) (collectively the “HBV Licensors”), whereby the Company acquired a perpetual,
sublicensable, exclusive license (the “HBV License”) for a treatment under development (the “Treatment”)
aimed to treat Hepatitis B Virus (HBV) infections.
The HBV License Agreement
states that in consideration for the HBV License, the Company shall provide cash funding for research costs and equipment and certain
other in-kind funding related to the Treatment over a 24 month period, and provides for an up-front payment of $1.2 million within
7 days of January 31, 2020, along with additional payments upon the occurrence of certain benchmarks in the development of the
technology set forth in the HBV License Agreement, in each case subject to the terms of the HBV License Agreement. Additionally,
the HBV License Agreement provides for cooperation related to the development of intellectual property related to the Treatment
and for a 2% royalty to G-Tech on any net sales that may occur under the HBV License. On February 6, 2020, the Company paid the
$1.2 million up-front payment. The HBV License Agreement contains customary representations, warranties, and covenants of the parties
with respect to the development of the Treatment and the HBV License.
The cash funding for research
costs pursuant to the HBV License Agreement consisted of monthly payments amounting to $144,500 that covered scientific staffing
resources to complete the project as well as periodic payments for materials and equipment needed to complete the project. There
were no payments made after January 31, 2022. During the three and nine months ended March 31, 2023 the Company paid a total of zero 0,
and during the three and nine months ended March 31, 2022, the Company paid $144,500
and $1,011,500,
respectively, for scientific staffing resources, research and development and Investigational New Drug (IND) enabling studies.
During the three and nine months ended March 31, 2023, the Company paid zero 0
for any type of milestone. During the three and nine months ended March 31, 2022 the Company paid zero 0
and $1,500,000,
respectively, for the milestone completion of a Pre-IND process following receipt of written comments in accordance with the HBV
License Agreement. The Company has filed a claim against the HBV Licensors, which includes certain payments it made related to this
license (see Contingencies sub-section below).
On April 18, 2021, the Company entered into a Statement of Work and License
Agreement (the “Development License Agreement”), by and among the Company, G-Tech and SRI (collectively, the “Development
Licensors”), whereby the Company acquired a perpetual sublicensable, exclusive license (the “Development License”) to
research, develop, and commercialize certain formulations which are aimed at preventing and treating pan-coronavirus or the potential
combination of the pan-coronavirus and pan-influenza, including the SARS-coronavirus that causes COVID-19 and pan-influenza (the “Prevention
and Treatment”).
The Development License
Agreement was entered into pursuant to the existing Framework Agreement between the parties dated November 15, 2019. The Development
License Agreement states that in consideration for the Development License, the Company shall provide cash funding for research
costs and equipment and certain other in-kind funding related to the Prevention and Treatment over a 24-month period. Additionally,
the Development License Agreement provides for an up-front payment of $10,000,000
and a $760,000
payment for expenditures to date prior to the effective date related to research towards the Prevention and Treatment within 60 days
of April 18, 2021. The amounts were paid on June 18, 2021 and June 25, 2021, respectively. The Development License Agreement provides for additional payments upon the
occurrence of certain benchmarks in the development of the technology set forth in the Development License Agreement, in each case subject
to the terms of the Development License Agreement.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
The Development License
Agreement provides for cooperation related to the development of intellectual property related to the Prevention and Treatment and
for a 3% royalty to G Tech on any net sales that may occur under the Development License Agreement. For both the three and nine
months ended March 31, 2023, the Company paid zero 0
related to this Development License Agreement. During the three and nine months ended March 31, 2022 the Company paid zero 0
and $150,000
related to the Prevention and Treatment research. The Company is no longer pursuing any product candidates that relate to this
license. The Company has filed a claim against the Development Licensors to recover all monies it paid related to this license (see
Contingencies sub-section below).
On August 25, 2021, the
Company entered into an ALC Patent License and Research Funding Agreement in the HIV Field (the “ALC License Agreement”)
with Serhat Gümrükcü and SRI (collectively, the “ALC Licensors”) whereby the ALC Licensors granted the
Company an exclusive, worldwide, perpetual, fully paid-up, royalty-free license, with the right to sublicense, proprietary
technology subject to a U.S. patent application, to make, use, offer to sell, sell or import products for use solely for the
prevention, treatment, amelioration of or therapy exclusively for HIV in humans, and research and development exclusively relating
to HIV in humans; provided the ALC Licensors retained the right to conduct HIV research in the field. Pursuant to the ALC License
Agreement, the Company granted a non-exclusive license back to the ALC Licensors, under any patents or other intellectual property
owned or controlled by the Company, to the extent arising from the ALC License, to make, use, offer to sell, sell or import products
for use in the diagnosis, prevention, treatment, amelioration or therapy of any (i) HIV Comorbidities and (ii) any other diseases or
conditions outside the HIV Field. The Company made an initial payment to SRI of $600,000
and agreed to fund future HIV research conducted by the ALC Licensors, as mutually agreed to by the parties. On September 10, 2021,
pursuant to the ALC License Agreement, the Company paid the initial payment of $600,000.
G-Tech and SRI are controlled
by Serhat Gümrükcü and Anderson Wittekind, shareholders of the Company.
Shares held for
non-consenting shareholders – The 17,414
remaining shares of Common Stock related to the Acquisition of Enochian Denmark have been reflected as issued and outstanding in the
accompanying financial statements. There were zero 0 shares of Common Stock issued to such non-consenting shareholders
during the three and nine months ended March 31, 2023 (see Note 8.)
Service Agreements
– The Company had a consulting agreement for services of a Senior Medical Advisor for up to $210,000 per year on a
part-time basis. This consulting agreement was terminated as of October 31, 2022. The Company maintains employment agreements with
other staff in the ordinary course of business.
Contingencies
Securities Class Action
Litigation. On July 26, 2022 and July 28, 2022, securities class action complaints (the former, the “Chow Action”
and the latter, the “Manici Action”) were filed by purported stockholders of ours in the United States District Court
for the Central District of California against us and certain of our current and former officers and directors. The complaints
allege, among other things, that the defendants violated Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, as amended,
and Rule 10b-5 thereunder, by making false and misleading statements and omissions of material fact in connection with the Company’s
relationship with Serhat Gümrükcü and its commercial prospects. The complaints seek unspecified damages, interest,
fees, and costs. On November 22, 2022, the Manici Action was voluntarily dismissed without prejudice, but the Chow action remains
pending. The defendants did not respond to the complaint in the Manici action and have not yet responded to the complaint in the
Chow action. The Company intends to contest this matter but expresses no opinion as to the likelihood of a favorable outcome.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Federal Derivative
Litigation. On September 22, 2022, Samuel E. Koenig filed a shareholder derivative action in the United States District Court
for the Central District of California. On January 19, 2023, John Solak filed a substantially similar shareholder derivative action
in the United States District Court for the District of Delaware. Both derivative actions recite similar underlying facts as those
alleged in the Securities Class Action Litigation. The actions, filed on behalf of the Company, name Serhat Gümrükcü
and certain of the Company’s current and former directors as defendants. The actions also name the Company as a nominal defendant.
The actions allege violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934 and also set out claims for breach
of fiduciary duty, contribution and indemnification, aiding and abetting, and gross mismanagement. Plaintiffs do not quantify any
alleged injury, but seek damages, disgorgement, restitution, and other costs and expenses. On January 24, 2023, the United States
District Court for the Central District of California stayed the Koenig matter pending resolution of the defendants’ anticipated
motion to dismiss in the Securities Class Action Litigation. On April 6, 2023, the United States District Court for the District
of Delaware stayed the Solak matter pending resolution of the defendants’ anticipated motion to dismiss in the Securities
Class Action Litigation. The defendants have not yet responded to either complaint. The Company intends to contest these matters
but expresses no opinion as to the likelihood of favorable outcomes.
State Derivative Litigation.
On October 20, 2022, Susan Midler filed a shareholder derivative action in the Superior Court of California, Los Angeles County,
reciting similar underlying facts as those alleged in the Securities Class Action Litigation. The action, filed on behalf of the
Company, names Serhat Gümrükcü and certain of the Company’s current and former directors as defendants. The
action also names the Company as a nominal defendant. The action sets out claims for breaches of fiduciary duty, contribution and
indemnification, aiding and abetting, and gross mismanagement. Plaintiff does not quantify any alleged injury, but seeks damages,
disgorgement, restitution, and other costs and expenses. On January 20, 2023, the Court stayed the Midler matter pending resolution
of the defendants’ anticipated motion to dismiss in the Securities Class Action Litigation. The Court also set a status conference
for November 6, 2023. The defendants have not yet responded to the complaint. The Company intends to contest this matter but expresses
no opinion as to the likelihood of a favorable outcome.
On October 21, 2022, the Company filed a Complaint in the Superior Court of
the State of California for the County of Los Angeles against Serhat Gümrükcü, William Anderson Wittekind (“Wittekind”),
G-Tech Bio LLC (“G Tech”), SG & AW Holdings LLC (“SG & AW”), and SRI. The Complaint alleges that the defendants
engaged in a “concerted, deliberate scheme to alter, falsify, and misrepresent to the Company the results of multiple studies supporting
its [Hepatitis B] and SARS-CoV-2/influenza pipelines.” Specifically, “Defendants manipulated negative results to reflect positive
outcomes from various studies, and even fabricated studies out of whole cloth.” As a result of the defendants’ conduct, the
Company claims that it “paid approximately $25 million to Defendants and third-parties that it would not otherwise have paid.”
On April 21, 2023, defendants Wittekind, G Tech, SG & AW, and SRI filed a demurrer with respect to some, but not all, of the Company’s
claims, as well as a motion to strike.
On December 28, 2022, the
Company received a demand letter on behalf of Weird Science LLC (“Weird Science”), William Anderson Wittekind, the
William Anderson Wittekind 2020 Annuity Trust, the William Anderson Wittekind 2021 Annuity Trust, the Dybul 2020 Angel Annuity
Trust, and the Ty Mabry 2021 Annuity Trust alleging that the Company breached the February 16, 2018 Investor Rights Agreement between
the Company, Weird Science, and RS Group ApS. Specifically, the demand letter alleges that the Company “breached its obligations
under the Investor Rights Agreement to provide the requisite thirty days’ notice” to Holders of Registrable Securities
in connection with SEC Form S-3 filings on July 13, 2020 and February 11, 2022 and demands over $64 million in damages. The Company
denies these allegations and intends to vigorously defend against this claim.
On March 1, 2021, former
Enochian BioSciences Chief Financial Officer, Robert Wolfe and his company, Crossfield, Inc., filed a Complaint in the U.S. District
Court for the District of Vermont against the Company, Enochian BioSciences Denmark ApS, and certain directors and officers. In
the Complaint, Mr. Wolfe and Crossfield, Inc. asserted claims for abuse of process and malicious prosecution, alleging, inter alia,
that the Company lacked probable cause to file and prosecute an earlier action, and sought millions of dollars of compensatory
damages, as well as punitive damages. The allegations in the Complaint relate to an earlier action filed by the Company and Enochian
BioSciences Denmark ApS in the Vermont Superior Court, Orange Civil Division. On March 3, 2022, the court partially granted the
Company’s motion to dismiss, dismissing the abuse of process claim against all defendants and all claims against Mark Dybul
and Henrik Grønfeldt-Sørensen. On November 29, 2022, the Company filed a motion for summary judgment with respect
to the sole remaining claim of malicious prosecution. The Company denies the allegations set forth in the Complaint and will continue
to vigorously defend against the remaining claim.
ENOCHIAN BIOSCIENCES INC. AND SUBSIDIARIES
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 — RELATED PARTY TRANSACTIONS
On March 17, 2023, RS Bio ApS, a Danish
entity, participated in the Private Placement and purchased 877,193 of common stock and warrants to purchase 438,597 shares of
Common Stock resulting in proceeds to the Company of $1,000,000. Mr. Rene Sindlev, the Chairman of the Company’s Board of
Directors, holds the sole voting and disposition power of the shares owned by RS Bio ApS. The Board of Directors (excluding Mr.
Sindlev) approved the participation of certain officers and directors of the Company in the Private Placement on identical terms
as the other investors of the Private Placement (see Note 8).
There were no payments made
to G-Tech by the Company for the three and nine months ended March 31, 2023. For the three and nine months ended March 31, 2022,
the Company paid G-Tech $354,500 and 3,891,500, respectively, which included payments for consulting agreements related to HIV,
and contractual costs related to the HBV License, the Development License, the ALC License (see Note 9), and security expenses.
NOTE 11 — SUBSEQUENT EVENTS
On
April 11, 2023, the Company received final proceeds of $228,000 in connection with the March 2023 Private Placement, whereby the
Company issued 200,000 shares of Common Stock and warrants to purchase 100,000 shares of Common Stock. The Company received
a total of $2,711,000 in connection with the March 2023 Private Placement, whereby the Company issued a total of 2,378,070 shares
of Common Stock and warrants to purchase 1,189,036 shares of Common Stock (see Note 8).