UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

xQUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

OR

For the quarterly period ended December 31, 2017
OR
¨TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from              to

Commission file number: 000-54495

 

Commission file number: 000-54495

REZOLUTE, INC

INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware27-3440894
(State of other jurisdiction of incorporation or organization)(I.R.S. Employer Identification No.)
  
1450 Infinite Drive, Louisville, Colorado201 Redwood Shores Parkway, Suite 315, Redwood City, California8002794065
(Address of Principal Executive Offices)(Zip Code)

 

(303) 222-2128

(650) 206-4507

(Registrant’s Telephone Number, including Area Code)

 

AntriaBio, Inc.

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 Securities registered pursuant to Section 12(b) of the Act:

Title of each classTrading Symbol(s)Name of each exchange on which registered
None NoneNone 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.xYes¨No

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files)files.).

xYes¨No

 

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, orand an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer  ¨Accelerated filer  ¨
  
Non-accelerated filer  ¨xSmaller reporting company  x
(Do not check if a smaller reporting company) 
 Emerging Growth Company  ¨

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 17(a)(2)(B) of the Securities Act.¨

 

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

¨YesxNo

 

Number ofThe registrant had 293,320,891 shares of issuer’sits $0.001 par value common stock outstanding as of February 14, 2018: 54,073,309

November 11, 2019.

 

 

 

 

 

TABLE OF CONTENTS

 Page
PART I – FINANCIAL INFORMATION2
  
ITEM 1.PART I - FINANCIAL STATEMENTSINFORMATION2
  
Consolidated Balance Sheets – December 31, 2017 and June 30, 2017ITEM 1.  FINANCIAL STATEMENTS2
  
Unaudited Condensed Consolidated Balance Sheets – September 30, 2019 and June 30, 20191
Unaudited Condensed Consolidated Statements of Operations – Three and six months ended December 31, 2017September 30, 2019 and 2016201832
  
Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit) – From JuneThree months Ended September 30, 2017 to December 31, 20172019 and 201843
  
Unaudited Condensed Consolidated Statements of Cash Flows – SixThree months ended December 31, 2017September 30, 2019 and 2016201854
  
Notes to Unaudited Condensed Consolidated Financial Statements65
  
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS1518
ITEM 3.  QUANTITATIVE AND QUALITATIVE AND QUANTITATIVE DISCUSSIONDISCLOSURES ABOUT MARKET RISK1727
ITEM 4.  CONTROLS AND PROCEDURES1827
  
PART II – OTHER INFORMATION1828
  
ITEM 1.  LEGAL PROCEEDINGS1828
ITEM 1A.  RISK FACTORS1828
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1828
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES1828
ITEM 4.  MINE SAFETY DISCLOSUREDISCLOSURES1828
ITEM 5.  OTHER INFORMATION1928
ITEM 6.  EXHIBITS1928
SIGNATURES29

 

 i

i

 

 

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q (“Report”) contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements included or incorporated by reference in this report,Report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including, but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements represent our reasonable judgment of the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project” and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:

 

•projected operating or financial results, including anticipated cash flows used in operations;

•expectations regarding capital expenditures, research and development expense and other payments;

•our beliefs and assumptions relating to our liquidity position, including our ability to obtain additional financing;

•our ability to obtain regulatory approvals for our pharmaceutical drugs and diagnostics; and

•our future dependence on third party manufacturers or strategic partners to manufacture any of our pharmaceutical drugs and diagnostics that receive regulatory approval, and our ability to identify strategic partners and enter into license, co-development, collaboration or similar arrangements.

Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors including, among others:but not limited to, the risks described in“Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2019 (the “2019 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on September 10, 2019.

 

•the loss of key management personnel or sponsored research partners on whom we depend;

•the progress and results of clinical trials for our product candidates;

•our ability to navigate the regulatory approval process in the U.S. and other countries, and our success in obtaining required regulatory approvals for our product candidates;

•commercial developments for products that compete with our product candidates;

•the actual and perceived effectiveness of our product candidates, and how those product candidates compare to competitive products;

•the strength of our intellectual property protection, and our success in avoiding infringing the intellectual property rights of others;

•adverse developments in our research and development activities;

•potential liability if our product candidates cause illness, injury or death, or adverse publicity from any such events;

•our ability to operate our business efficiently, manage capital expenditures and costs (including general and administrative expenses) and obtain financing when required;

•our expectations with respect to our acquisition activity.

In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this Quarterly Report, on Form 10-Q, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this Quarterly Report of Form 10-Q are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Quarterly Report, on Form 10-Q, except as otherwise required by applicable law.

 

 1

ii

 

 

PART I –- FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Rezolute, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

  September 30, June 30, 
  2019 2019 
Assets     
      
Current assets:     
Cash and cash equivalents $22,104 $11,573 
Restricted cash 3,111 - 
Receivables from related parties 247 - 
Prepaid expenses and other 454 571 
Total current assets 25,916 12,144 
      
Right-of-use assets 552 - 
Property and equipment, net 41 44 
Intangible assets, net 28 29 
Lease security deposits 35 35 
Total assets $26,572 $12,252 
      
Liabilities and Stockholders' Equity     
Current liabilities:     
Accounts payable $1,320 $563 
Accrued liabilities:     
Compensation and benefits 201 790 
Other 159 526 
Current portion of license fees payable to Xoma 3,609 6,500 
Current portion of operating lease liabilities 234 - 
Total current liabilities 5,523 8,379 
      
Operating lease liabilities, net of current portion 346 - 
Other non-current liabilities 85 121 
License fees payable to Xoma, net of current portion - 2,000 
Total liabilities 5,954 10,500 
      
Commitments and contingencies (Notes 4, 5 and 7)     
      
Stockholders' equity:     
Preferred Stock, $0.001 par value; 20,000 shares authorized, no shares issued - - 
Common Stock, $0.001 par value, 500,000 shares authorized; 293,321 and 210,390 shares issued and outstanding as of September 30, 2019 and June 30, 2019, respectively 293 210 
Additional paid-in capital 152,308 128,445 
Accumulated deficit (131,983)(126,903)
Total stockholders' equity 20,618 1,752 
Total liabilities and stockholders' equity $26,572 $12,252 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


Rezolute, Inc.

 

  December 31, 2017  June 30, 2017 
  (Unaudited) 
Assets        
         
Current assets        
Cash $868,071  $4,486,538 
Other current assets  295,728  442,015 
Total current assets  1,163,799   4,928,553 
         
Non-current assets        
Fixed assets, net  4,797,823   5,325,401 
Intangible assets, net  40,676   44,322 
Deferred lease asset  74,831   86,293 
Deposits  244,341   244,341 
Total non-current assets  5,157,671   5,700,357 
         
Total Assets $6,321,470  $10,628,910 
         
Liabilities and Stockholders’ Equity        
         
Current liabilities:        
Accounts payable and accrued expenses $2,121,854  $1,652,677 
Convertible notes payable  10,000   10,000 
Deferred lease liability, current portion  116,234   105,295 
Interest payable  2,762   2,762 
Warrant derivative liability  90   588 
Total current liabilities  2,250,940   1,771,322 
         
Non-current liabilities:        
Deferred lease liability, less current portion  243,686   304,575 
Deposit liability  25,046   25,046 
Total non-current liabilities  268,732   329,621 
         
Total Liabilities  2,519,672   2,100,943 
         
Commitments and Contingencies  (Note 10)        
         
Stockholders’ equity:        
Preferred stock, $0.001 par value; 20,000,000 shares authorized; none issued and outstanding  -   - 
Common stock, $0.001 par value, 200,000,000 shares authorized; 54,073,309 and 49,228,640  shares issued and outstanding, December 31, 2017 and June 30, 2017  54,075   49,230 
Additional paid-in capital  80,472,885   72,800,699 
Accumulated deficit  (76,725,162)  (64,321,962)
Total stockholders’ equity  3,801,798   8,527,967 
         
Total Liabilities and Stockholders’ Equity $6,321,470  $10,628,910 

See accompanying notes to consolidated financial statements

 2

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

  Three Months Ended 
  September 30, 
  2019 2018 
Operating expenses:     
Research and development:     
Compensation and benefits, net of related party reimbursements $1,418 $557 
Clinical trial costs 991 3 
Consulting and outside services 486 47 
Material manufacturing costs 187 73 
Facilities and other 152 250 
      
Total research and development 3,234 930 
      
General and administrative:     
Compensation and benefits 1,336 1,250 
Professional fees 360 166 
Facilities and other 249 239 
      
Total general and administrative 1,945 1,655 
      
Gain on sale of equipment - (23)
      
Net operating expenses 5,179 2,562 
      
Operating loss (5,179)(2,562)
      
Non-operating income (expense):     
Interest expense - (911)
Interest and other income 99 108 
      
Total non-operating income (expense) 99 (803)
      
Net loss $(5,080)$(3,365)
      
Net loss per common share - basic and diluted $(0.02)$(0.05)
      
Weighted average number of common shares outstanding - basic and diluted 270,452 62,166 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


Rezolute, Inc.

 

  Three Months  Six Months 
  Ended December 31,  Ended December 31, 
  2017  2016  2017  2016 
  (Unaudited)  (Unaudited) 
Operating expenses                
Research and development                
Compensation and benefits $1,482,946  $1,909,518  $2,983,810  $3,213,358 
Consultants and outside costs  233,798   194,783   364,159   466,258 
Material manufacturing costs  227,602   567,430   653,691   1,079,137 
Clinical trial costs  581,988   -   1,561,754   - 
License costs  407,605   -   1,178,505   - 
Facilities and other costs  479,149   403,648   981,807   802,555 
   3,413,088   3,075,379   7,723,726   5,561,308 
                 
General and administrative                
Compensation and benefits  1,672,494   1,285,052   3,467,921   2,151,953 
Professional fees  213,399   139,865   436,993   286,016 
Investor relations  133,705   87,428   193,576   155,535 
General and administrative  318,272   301,520   645,872   558,115 
   2,337,870   1,813,865   4,744,362   3,151,619 
                 
Total operating expenses  5,750,958   4,889,244   12,468,088   8,712,927 
                 
Loss from operations  (5,750,958)  (4,889,244)  (12,468,088)  (8,712,927)
                 
Other income (expense)                
Interest income  524   -   861   - 
Rent income  31,838   -   63,676   - 
Interest expense  (147)  -   (147)  (1,595)
Derivative gains  156   1,313   498   10,725 
Total other income  32,371   1,313   64,888   9,130 
                 
Net loss $(5,718,587) $(4,887,931) $(12,403,200) $(8,703,797)
                 
Net loss per common share - basic and diluted $(0.11) $(0.12) $(0.23) $(0.23)
                 
Weighted average number of common shares outstanding - basic and diluted  53,762,358   40,788,241   53,327,558   38,091,406 

See accompanying notes to consolidated financial statements

 3

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

From June 30, 2016 to December 31, 2017 (Unaudited)

(in thousands, except per share amounts)

 

        Additional     Total 
  Common Stock, $0.001 Par Value  Paid-in  Accumulated  Stockholders’ 
  Shares  Amount  Capital  Deficit  Equity 
                
Balance at June 30, 2017  49,228,640  $49,230  $72,800,699  $(64,321,962) $8,527,967 
                     
Stock-based compensation net of forfeitures of $317,674 (Unaudited)  -   -   2,701,728   -   2,701,728 
                     
Fair value of warrants issued for consulting services (Unaudited)  -   -   535,303   -   535,303 
                     
Issuance of common stock, net of issuance costs of $60,000 (Unaudited)  4,500,000   4,500   4,435,500   -   4,440,000 
                     
Commitment fee for issuance of common stock (Unaudited)  344,669   345   (345)  -   - 
                     
Net loss for the six months ended December 31, 2017 (Unaudited)  -   -   -   (12,403,200)  (12,403,200)
                     
Balance at December 31, 2017 (Unaudited)  54,073,309  $54,075  $80,472,885  $(76,725,162) $3,801,798 

      Additional     
  Common Stock Paid-in Accumulated   
  Shares Amount Capital Deficit Total 
Three Months Ended September 30, 2019:           
Balances, June 30, 2019 210,390 $210 $128,445 $(126,903)$1,752 
Stock-based compensation - - 1,394 - 1,394 
Fair value of warrants issued to consultants for services - - 2 - 2 
Issuance of common stock for cash:           
Related parties at $0.29 per share 68,966 69 19,931 - 20,000 
Other investors at $0.29 per share 13,965 14 4,036 - 4,050 
Advisory fees and other offering costs - - (1,500)- (1,500)
Net loss - - - (5,080)(5,080)
            
Balances, September 30, 2019 293,321 $293 $152,308 $(131,983)$20,618 
            
            
Three Months Ended September 30, 2018:           
Balances, June 30, 2018 62,166 $62 $90,161 $(94,184)$(3,961)
Stock-based compensation - - 878 - 878 
Fair value of warrants issued to consultants for services - - 5 - 5 
Net loss - - - (3,365)(3,365)
            
Balances, September 30, 2018 62,166 $62 $91,044 $(97,549)$(6,443)

 

SeeThe accompanying notes toare an integral part of these unaudited condensed consolidated financial statementsstatements.

 

 4

Rezolute, Inc.

 

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(Unaudited)(in thousands)

 

  Six Months 
  Ended December 30, 
  2017  2016 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net Loss $(12,403,200) $(8,703,797)
Amortization of intangible asset  3,646   3,646 
Depreciation expense  533,394   546,429 
Stock-based compensation expense  2,701,728   2,125,966 
Derivative gains  (498)  (10,725)
Warrant expense for consulting services  535,303   - 
Changes in operating assets and liabilities:        
Decrease in other assets  146,287   29,153 
Decrease in deferred lease asset  11,462   - 
Increase in accounts payable and accrued expenses  469,177   12,097 
Decrease in interest payable  -   (2,800)
Decrease in deferred lease liability  (49,950)  (58,924)
Net Cash Used In Operating Activities  (8,052,651)  (6,058,955)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Purchase of fixed assets  (5,816)  (272,587)
Return of security deposit  -   187,500 
Net Cash Used In Investing Activities  (5,816)  (85,087)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Payments on lease payable  -   (23,128)
Proceeds from issuance of equity financing  4,500,000   6,361,499 
Payment of placement agent compensation and issuance costs  (60,000)  (683,194)
Net Cash Provided by Financing Activities  4,440,000   5,655,177 
         
Net decrease in cash  (3,618,467)  (488,865)
         
Cash - Beginning of Period  4,486,538   4,062,013 
         
Cash - End of Period $868,071  $3,573,148 
         
SUPPLEMENTARY CASH FLOW INFORMATION:        
Cash Paid During the Period for:        
Taxes $-  $- 
Interest $-  $- 
         
Non-Cash Transactions:        
Fixed assets acquired through accounts payable and accrued expenses $-  $18,016 
Warrant value recorded as issuance costs $-  $516,550 
Conversion of note payable into common stock $-  $50,000 
Conversion of interest payable into common stock $-  $9,517 
  Three Months Ended 
  September 30, 
  2019 2018 
Cash Flows From Operating Activities:     
Net loss $(5,080)$(3,365)
Stock-based compensation expense 1,394 878 
Depreciation and amortization expense 5 27 
Fair value of warrants issued for services 2 5 
Accretion of debt discount and issuance costs - 703 
Gain on sale of equipment - (23)
Derivative gains - (19)
Changes in operating assets and liabilities:     
Decrease (increase) in prepaid expenses and other assets 170 (3)
Increase in receivables from related parties (247)- 
Increase in accounts payable 736 156 
Increase (decrease) in accrued liabilities (1,018)209 
Decrease in license fees payable to Xoma (4,891)- 
Net cash used in operating activities (8,929)(1,432)
      
Cash Flows Provided by Investing Activities:     
Proceeds from sale of equipment - 187 
      
Cash Flows From Financing Activities:     
Proceeds from issuance of Common Stock:     
Related parties 20,000 - 
Other investors 4,050 - 
Payments for commissions and other offering costs (1,479)- 
Net cash provided by financing activities 22,571 - 
      
Net increase (decrease) in cash, cash equivalents and restricted cash 13,642 (1,245)
Cash, cash equivalents and restricted cash, beginning of period 11,573 1,646 
Cash, cash equivalents and restricted cash, end of period $25,215 $401 
      
Cash, Cash Equivalents and Restricted Cash:     
Cash and cash equivalents, end of period $22,104 $401 
Restricted cash, end of period 3,111 - 
Cash, cash equivalents and restricted cash, end of period $25,215 $401 
      
Supplementary Cash Flow Information:     
Cash paid for interest $- $- 
Cash paid for income taxes - - 
Cash paid under operating lease obligations 68 85 
      
Non-Cash Investing and Financing Activities:     
Right-of-use assets acquired in exchange for operating lease liabilities upon adoption of new accounting standard $605 $- 
Payable for equity offering costs 21 - 

 

SeeThe accompanying notes toare an integral part of these unaudited condensed consolidated financial statementsstatements.

 

 5

 

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements
December 31, 2017
(Unaudited)

 

Note 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNFICANT ACCOUNTING POLICIES

Nature of Operations

 

These financial statements represent the consolidated financial statements of Rezolute, Inc. (“Rezolute”(the “Company”), and its wholly owned operating subsidiary AntriaBio Delaware, Inc. (“Antria Delaware”). Rezolute and Antria Delaware are collectively referred to herein as the “Company”. The Company is a clinical stage biopharmaceutical Company.company incorporated in Delaware in 2010.

 

Note 2 Summary of Significant Accounting Policies

Basis of Presentation

 

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and the rules and regulations of the United States Securities and Exchange CommissionSEC for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.

 

The condensed consolidated balance sheet as of June 30, 2019, has been derived from the Company’s audited consolidated financial statements. The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on2019 Form 10-K, filed on September 22, 2017, which contains the Company’s audited financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the year ended June 30, 2017.2019.

 

Certain information orand footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of AmericaGAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange CommissionSEC for interim financial reporting. Accordingly, they do not include all the information and footnotesfootnote disclosures necessary for a comprehensive presentation of financial position, results of operations, orand cash flows. It is management’smanagement's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the periodthree months ended December 31, 2017September 30, 2019 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the full fiscal year.year ending June 30, 2020.

 

Comprehensive income (loss)

Comprehensive income (loss) is defined as net income (loss) plus other comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under GAAP are reported as separate components of stockholders’ equity (deficit) instead of net income (loss). For the three months ended September 30, 2019 and 2018, the only component of comprehensive loss was the Company’s net loss.

Segment Information

The Company’s Chief Executive Officer also serves as the Company’s chief operating decision maker (the “CODM”) for purposes of allocating resources and assessing performance based on financial information of the Company. Since its inception, the Company has determined that its activities as a clinical stage biopharmaceutical company are classified as a single reportable operating segment.

Reclassifications

Certain amounts in the previously issued comparative interim financial statements for the three months ended September 30, 2018 have been reclassified to conform to the current interim financial statement presentation. These reclassifications had no effect on the previously reported net loss, working capital, cash flows and stockholders’ equity (deficit).

Consolidation

The Company has three wholly owned subsidiaries consisting of AntriaBio Delaware, Inc., Rezolute (Bio) Ireland Limited, and Rezolute Bio UK, Ltd. The accompanying consolidated financial statements include the accounts of the Company and its three wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

5

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principlesGAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. SuchThe Company bases its estimates and assumptions impact, among others,on current facts, historical experience, and various other factors that it believes are reasonable under the following: estimated useful livescircumstances, to determine the carrying values of assets and impairment of depreciable assets, theliabilities that are not readily apparent from other sources. The Company’s significant accounting estimates include, but are not necessarily limited to, fair value of share-based payments and warrants, fair valuemanagement’s assessment of derivative instruments,going concern, clinical trial accrued liabilities, estimates of the probability and potential magnitude of contingent liabilities, and the valuation allowance for deferred tax assets due to continuing and expected future operating losses. Actual results could differ from those estimates.

 

Risks and Uncertainties

 

The Company’sCompany's operations may be subject to significant riskrisks and uncertainties including financial, operational, regulatory and other risks associated with a clinical stage company, including the potential risk of business failure. Seefailure as discussed further in Note 3 regarding going concern matters.

 6

Fixed Assets2.

 

Fixed assets are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives.

Research and Development Costs

 

Research and development costs are expensed as incurred. Intangible assets for in-licensing costs incurred and include salaries, benefits and other staff-related costs; consultants and outside costs; material manufacturing costs, clinical trial costs; and facilities and other costs. These costs relateunder license agreements with third parties are charged to expense, unless the licensing rights have separate economic value in alternative future research and development costs without an allocation of general and administrative expenses.projects or otherwise.

 

Fair ValueClinical Trial Accruals

Clinical trial costs are a component of Financial Instrumentsresearch and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.

 

Fair value is definedNonrefundable advance payments for goods and services that will be used or rendered in future research and development activities, are deferred and recognized as the exchange price that would be received for an asset or paid to transfer a liability (an exit price)expense in the principalperiod that the related goods are delivered, or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair valueservices are as follows:performed.

 

·Level 1: Quoted prices for identical assets and liabilities in active markets;
·Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets; and
·Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.

Stock Options with Market, Performance and Service Conditions

 

The carrying amountsCompany grants certain stock options with vesting that is dependent on achieving market, performance and service criteria. For purposes of financial instruments including cash, accounts payable and accrued expenses, and convertible note payable approximated fair valuerecognizing compensation cost, the Company determines the requisite service period as of December 31, 2017 and June 30, 2017 due to the relatively short maturitylongest of the respective instruments.explicit, implicit and derived vesting periods for each of the market, performance and service conditions, respectively. The derived vesting period for market conditions will be based on a valuation performed using a Monte Carlo model. Compensation cost will be recognized beginning on such date that achievement of the performance criterion is considered probable and continuing through the end of the requisite service period.

If the stock options do not ultimately vest as a result of failure to achieve the service criterion, any previously recognized compensation cost will be reversed for options that never vest. However, if the service and performance criteria are achieved, compensation cost will not be reversed even if the market condition is never achieved.

Leases

 

The warrant derivative liability recorded as of December 31, 2017Company determines if an arrangement includes a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, accrued and June 30, 2017 is recorded at an estimated fair valueother current liabilities and other non-current liabilities on the Company's Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses the incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. The operating lease ROU asset also excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. Lease expense for minimum lease payments is recognized on a Black-Scholes pricing model.straight-line basis over the lease term. The warrant derivative liability is a level 3 fair value measurementCompany has elected not to apply the recognition requirements for short-term leases. For lease agreements with lease and non-lease components, the entire change in the balance recorded through earnings. See significant assumptions in Note 8.Company generally accounts for them separately.

6

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Recent Accounting Pronouncements

Recently Adopted Standards. The following table sets forth a reconciliation of changes inaccounting standards were adopted during the fair value of financial instruments classified as level 3 in the fair value hierarchy:

Balance as of June 30, 2017 $(588)
Total unrealized gains (losses):    
Included in earnings  498 
Balance as of December 31, 2017 $(90)

Recent Accounting Pronouncementsthree months ended September 30, 2019:

 

In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall:Recognition and Measurement of Financial Assets and Financial Liabilities, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial instruments. ASU 2016-01 will be effective for us starting on July 1, 2018, and early adoption is not permitted. We are currently evaluating the impact that the standard will have on our consolidated financial statements.

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). This updateASU requires organizationsthe Company to recognize leaseright-of-use assets and operating lease liabilities on the balance sheet and also disclose key information about leasing arrangements. On July 1, 2019, the Company adopted this new standard using the modified retrospective approach in accordance with Leases - Targeted Improvements (ASU No. 2018-11). The Company elected the package of practical expedients permitted under the transition guidance within ASU No. 2018-11, which among other things, allowed the Company to carry forward the historical lease classification of those leases in place as of July 1, 2019. The impact of adoption resulted in the recognition of right-of-use assets and operating lease liabilities for the discounted present value of the future lease payments on leases that were in effect on July 1, 2019, as follows (in thousands):

Right-of-use assets recorded under new standard $605 
Operating lease liabilities recorded under new standard:    
Current $227 
Long-term  406 
Total  633 
Eliminate previously existing deferred rent liability  (28)
     
Net increase in liabilities due to adoption of new standard $605 

Please refer to Note 3 for further information about the right-of-use assets and operating lease liabilities recognized under this standard. Due to the Company’s election to adopt this standard effective July 1, 2019, rent expense was recognized under the accounting standard that was previously in effect for all periods prior to July 1, 2019.

In June 2018, the FASB issued ASU 2018-07, "Compensation — Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting," which expands the scope of ASC 718 to include share-based payment transactions for acquiring goods and services from non-employees. The new standard does not apply to warrants issued to a lender or investor in a financing transaction. The Company adopted ASU 2018-07 effective July 1, 2019. Prior to the adoption of ASU 2018-07, the Company accounted for stock options and warrants granted to non-employees based on the fair value of the goods and services, or the equity instrument, whichever could be measured more reliably. If fair value of the equity instrument was more reliably determined, fair value of the equity instrument was required to be re-measured until the performance commitment date was achieved, which resulted in the recognition of subsequent gains and losses. Under the new standard, the fair value of the goods and services acquired from non-employees is solely determined using the fair value of the equity instruments issued and measurement of fair value is fixed on the grant date. The Company also made an accounting policy election to recognize the impact of forfeitures of non-employee awards in the period that the forfeiture occurs. The impact of adopting this standard was immaterial to the Company’s unaudited condensed consolidated financial statements.

Standard Required to be Adopted in Future Years. The following accounting standard is not yet effective; management has not completed its evaluation to determine the impact that adoption of this standard will have on the Company’s consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments.  This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses.  Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses.  In November 2018, ASU is2016-13 was amended by ASU 2018-19, Codification Improvements to Topic 326, Financial Instruments – Credit Losses. ASU 2018-19 changes the effective for annual reporting periodsdate of the credit loss standards (ASU 2016-13) to fiscal years beginning on or after December 15, 2018, and2021, including interim periods within those annual periods. Earlier application is permittedfiscal years. Further, the ASU clarifies that operating lease receivables are not within the scope of ASC 326-20 and should instead be accounted for all entities as ofunder the beginning of an interimnew leasing standard, ASC 842. 

Other accounting standards that have been issued or annual period. We will be requiredproposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not currently expected to adopt ASU 2016-02 starting on July 1, 2019. We are currently evaluating thehave a material impact the adoption of this ASU will have on our consolidated financial statements.statements upon adoption.

 

 7 

 

 

In March 2016, the FASB issued ASU 2016-09.Compensation – Stock Compensation (Topic 718): ImprovementsRezolute, Inc.

Notes to Employee Share-Based Payment Accounting.The update will affect all entities that issue share-based payment awards to their employees and is effective for annual periods beginning after December 15, 2016 for public entities. The areas for simplification in ASU 2016-09 involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. We adopted the ASU starting on July 1, 2017 and there is a minimal impact on our consolidated financial statements.Unaudited Condensed Consolidated Financial Statements

 

In May 2017, the FASB issued ASU 2017-9.Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.The update includes guidance on what changes to share-based payment awards would require modification accounting and is effective for annual periods after December 15, 2017. We expect to adopt the ASU 2017-9 on July 1, 2018. We do not expect the adoption of the new provisions to have a material impact on our financial condition or results of operations.Note 2—Liquidity

 

Note 3 Going Concern

As reflected in the accompanying financial statements, the Company has a net loss of $12,403,200 and net cash used in operations of $8,052,651 for the six months ended December 31, 2017, working deficit of $1,087,141 and stockholders’ equity of $3,801,798 and an accumulated deficit of $76,725,162 at December 31, 2017.  In addition, theThe Company is in the clinical stage and has not yet generated any revenues. These factors raise substantial doubt aboutFor the fiscal year ended June 30, 2019, the Company incurred a net loss of $30.4 million and net cash used in operating activities amounted to $15.3 million. For the three months ended September 30, 2019, the Company incurred a net loss of $5.1 million and net cash used in operating activities amounted to $8.9 million. As of September 30, 2019, the Company had an accumulated deficit of $132.0 million. As of September 30, 2019, the Company had cash, cash equivalents and restricted cash of $25.2 million and total liabilities of $6.0 million. 

As discussed in Note 5, in July and August 2019 the Company received aggregate net proceeds of approximately $22.6 million from the issuance of approximately 82.9 million shares of Common Stock to investors in a private placement. Management believes the Company’s abilityexisting cash, cash equivalents and restricted cash balance of $25.2 million is adequate to carry out currently planned activities at least through November 2020. The Company’s contractual obligations and other planned spending through November 2020 includes (i) licensing obligations to Xoma Corporation of $3.6 million as discussed in Note 4, (ii) research and development spending on RZ358, RZ402, and AB101 for a total of approximately $10.5 million, and (iii) an aggregate of approximately $8.9 million for spending on compensation, benefits, rent, and public company costs for auditing and professional fees. The Company expects to continue pursuing equity and/or debt financings to provide funding for planned activities for the fiscal year ending June 30, 2021 and beyond. To the extent that additional funding is obtained during the remainder of the current fiscal year, the Company plans to accelerate timing to complete clinical trials and other research and development activities which would result in increased spending. However, the Company has the flexibility to delay clinical programs to ensure that adequate capital resources are available.

There are no assurances that the Company will be able to obtain additional financing through other sources, such as equity offerings and bank financings in the future. Even if these other financing sources are available, they may be on terms that are not acceptable to management and the Company’s stockholders.

Note 3—RIGHT-OF-USE ASSETS

As discussed in Note 1, the Company adopted ASU 2016-02,Leases (Topic 842) effective July 1, 2019. As of July 1, 2019, the Company had two leases in effect, consisting of (i) a going concern.lease for its headquarters location in Redwood City, California that was entered into on January 25, 2019, that provides for monthly rent of approximately $21,000 through the expiration date in March 2022, and (ii) a lease for office space in Bend, Oregon entered into on February 7, 2019, that provides for monthly rent of approximately $2,700 through the expiration date in February 2021. The impact of adoption of ASU 2016-02 resulted in the recognition of right-of-use ("ROU") assets for $0.6 million and operating lease liabilities for the discounted present value of the future lease payments on these leases of approximately $0.6 million. For the three months ended September 30, 2019, the Company had operating lease expense of approximately $68,000 under ASC 842. For the three months ended September 30, 2018, the Company had operating lease expense of approximately $152,000 under the previous lease accounting standard.

 

The Company expectsdetermined the operating lease liability of approximately $633,000 based upon a discount rate of 10.0% and assuming that its current cash resources as well as expected lack of operating cash flowsthe Company will not be sufficientexercise its option to sustain operationsextend the lease for an additional three years. The discount rate represents the Company’s estimated incremental borrowing rate for collateralized debt with a period greater than one year. The ability ofpayment structure and term similar to the Company to continue its operations is dependent on Management’s plans, which include continuing to raise capital through equity or debt based financings. There can be no assurances that such capital will be available to us on acceptable terms, or at all.underlying operating lease terms.

 

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.

 8 

 

 

Note 4 Fixed AssetsRezolute, Inc.

 

The following is a summary of fixed assets and accumulated depreciation:

  Useful       
  Life  December 31, 2017  June 30, 2017 
Furniture and fixtures  5 - 7 years  $118,450  $118,450 
Lab equipment  3 - 15 years   3,951,855   3,946,040 
Leasehold Improvements  5 - 7 years   3,247,038   3,247,038 
       7,317,343   7,311,528 
Less: accumulated depreciation and amortization      (2,519,520)  (1,986,127)
      $4,797,823  $5,325,401 

Depreciation expense was $266,781 and $278,074 for the three months ended December 31, 2017 and 2016, respectively and was $533,394 and $546,429 for the six months ended December 31, 2017 and 2016, respectivelyNotes to Unaudited Condensed Consolidated Financial Statements

 

Note 5 Related Party TransactionsBalance Sheet Presentation

During the three and six months ended December 31, 2017, the Company incurred investor relations expense of $33,322 and $33,322 and general and administrative expenses of $67,439 and $67,439, see Note 8 for discussion related to warrants issued as compensation for such services. During the three and six months ended December 31, 2016, the Company incurred investor relations expense of $31,050 and $67,275 and general and administrative expenses of $13,928 and $13,928 for services performed by related parties of the Company and were included in the statement of operations. As of December 31, 2017, and June 30, 2017, there were none and $25,200, respectively, related party expenses recorded in accounts payable and accrued expense – related party.

Note 6 Convertible Notes Payable

 

As of December 31, 2017,September 30, 2019 and June 30, 2017,on the convertible note outstanding balance was $10,000adoption date of July 1, 2019, the carrying value of ROU assets and $10,000, respectively. operating lease liabilities are as follows (in thousands):

  September 30,  July 1, 
  2019  2019 
Right-of-Use Assets $552  $605 
         
Operating Lease Liabilities:        
Current $234  $227 
Long-term  346   406 
         
Total $580  $633 

As of December 31, 2017,September 30, 2019, the outstanding convertible note has maturedweighted average remaining lease term under operating leases was 2.3 years and payment is due. The convertible note which has not been repaid or converted continues to accrue interest at athe weighted average discount rate for operating lease liabilities was 10.0%.

Future Lease Payments

Future payments under operating lease agreements as of 8%.September 30, 2019 are as follows (in thousands):

Fiscal year ending June 30,   
Remainder of fiscal year 2020 $207 
2021  272 
2022  170 
Total lease payments  649 
Less imputed interest  (69)
     
Present value of operating lease liabilities $580 

Note 4—License Agreements

Xoma License Agreement

 

On January 30, 2018, the Company issued a secured convertible promissory note for $500,000 as well as a warrant to purchase 250,000 shares of common stock to a related party. The Note bears interest at 12% per annum and matures at the earlier of January 31, 2019 or when the Company raises $10 million in an equity financing. The note will be secured by a perfected security interest in the tangible assets of the Company.

Note 7 Shareholders’ Equity

During the year ended June 30,December 6, 2017, the Company closed private placement transactions in which the Company issued 5,783,184 units to accredited investors. Each investor was issued either Class A Units or Class B units of the Company. Each Class A Unit received one share of common stock and one-half of one common share purchase warrant. If the investor had previously invested in the Company they were eligible for a Class B Unit which received one share of common stock and one common share purchase warrant. Each common share purchase warrant is exercisable at $1.65 per share and will expire 60 months following the issuance. As of June 30, 2017, the Company received net proceeds of approximately $5.2 million after the placement agent compensation and issuance costs paid of $683,194 and $516,550 of warrant expense recorded as issuance costs.

The Company also entered into a private placement transaction inlicense agreement (“License Agreement”) with XOMA Corporation (“Xoma”), through its wholly-owned subsidiary, XOMA (US) LLC, pursuant to which Xoma granted an exclusive global license to the Company issued common stock to accredited investors at an offering price of $1.00 per share. As ofdevelop and commercialize Xoma 358 (formerly X358, now RZ358) for all indications. On January 7, 2019, the License Agreement was amended whereby the Company was required to make five cash payments to Xoma totaling $8.5 million on or before specified staggered future dates (the “Future Cash Payments”).  The Future Cash Payments are due for $1.5 million by September 30, 2019, $1.0 million by December 31, 2019, $2.0 million by September 30, 2020, $2.0 million by June 30, 2017,2020, and $2.0 million by September 30, 2020. As a result of this amendment to the License Agreement, the Company received net proceedsrecognized a liability in January 2019 for the entire $8.5 million of approximately $8.1 million after the placement agent compensation of $186,671 of warrant expense recorded as issuance costs, as there was no placement agent compensation.Future Cash Payments.

 

During the six months ended December 31, 2017, the Company closed an additional private placement transaction in which the Company issued common stock to accredited investors at an offering price of $1.00 per share. The Company received net proceeds of $4.44 million after the placement agent compensation of $60,000.

 9 

 

Lincoln Park Transaction – OnRezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The amended License Agreement provides that if future qualified financings occur before the Future Cash Payments are fully paid, the Company is required to pay Xoma 15% of the net proceeds from such financings (“Early Payments”) to be credited against the remaining unpaid Future Cash Payments in the reverse order of their future payment date.  Obligations to make the Future Cash Payments following a qualified financing and the obligations to make Early Payments shall end when the Future Cash Payments are fully paid for the total of $8.5 million.  As discussed in Note 5, the Company completed equity financings for net proceeds of approximately $22.6 million in July and August 2019, which resulted in the obligation to make Early Payments of approximately $3.4 million. Presented below is a summary of the amounts payable under the amended License Agreement along with cash payments made for the three months ended September 30, 2019 (in thousands):

  Payable  Cash Activity  Payable 
  June 30,  Early  Scheduled  September 30, 
Future Payment Date 2019  Payments  Payments  2019 
September 30, 2019 $1,500  $-  $(1,500) $- 
December 31, 2019  1,000   -   -   1,000 
March 31, 2020  2,000   -   -   2,000 
June 30, 2020  2,000   (1,391)  -   609 
September 30, 2020  2,000   (2,000)  -   - 
                 
Total  8,500  $(3,391) $(1,500)  3,609 
Less long-term portion of payable  (2,000)          - 
                 
Current portion of payable $6,500          $3,609 

The amendment to the License Agreement also revised the amount the Company is required to expend on development of RZ358 and related licensed products and revised provisions with respect to the Company’s diligence efforts in conducting clinical studies. Additionally, upon the future commercialization of RZ358, the Company would be required to pay royalties to Xoma based on the net sales of the related products.

As of September 30, 2019, Xoma owns approximately 8.1 million shares of the Company’s Common Stock. The License Agreement provides Xoma with the right and option to require the Company to use its best efforts to facilitate orderly sales of the shares to a third party or purchase the shares (the “Put Option”). Under the amended License Agreement, the Put Option becomes effective if the Company fails to list its shares of Common Stock on the Nasdaq Stock Market or a similar national exchange prior to December 22, 2017, we entered into31, 2019. Xoma may exercise the Lincoln Park Purchase Agreement pursuantPut option for up to which Lincoln Park has agreed to purchase from usa total of 2.5 million shares of Common Stock for the fiscal year ending December 31, 2020, and up to an aggregate of $10.0additional 2.5 million shares thereafter. If the Put Option becomes exercisable, the Company may be required to pay a price per share equal to the average of the Company’s common stock (subject to certain limitations) from time to time over the 36-month termclosing bid and asked prices of the agreement. We alsoCommon Stock on the date the Put Option is exercised.

ActiveSite License Agreement

On August 4, 2017, the Company entered into a registration rights agreementDevelopment and License Agreement with Lincoln ParkActiveSite Pharmaceuticals, Inc.  (“ActiveSite”) pursuant to which the Company filed withacquired the Securitiesrights to ActiveSite’s Plasma Kallikrein Inhibitor program (“PKI Program”).  The Company desires to use the PKI Program to develop, file, manufacture, market and Exchange Commission (the “SEC”)sell products for diabetic macular edema and other human therapeutic indications. The ActiveSite License Agreement requires various milestone payments ranging from $1.0 million to $10.0 million when milestone events occur, up to $36.0 million of aggregate milestone payments. The first milestone payment for $1.0 million is due after completion of the registration statementpreclinical work and submission of an IND application to register for resale under the Securities ActFDA. The Company is also required to pay royalties equal to 2.0% of 1933, as amended, orany sales of products that use the Securities Act, the sharesPKI Program, up to a maximum of common stock that$10.0 million in total royalty payments. Through September 30, 2019, no milestone payments and royalties have been or may be issued to Lincoln Park under the Purchase Agreement.incurred.

 

As a result, on December 22, 2017, 344,669 newly issuedNote 5—STOCKHOLDERS’ EQUITY

Equity Offerings

In January 2019, the Company closed an equity offering with two new investors (the “New Investors”) that resulted in cash proceeds of $25.0 million and the issuance of an aggregate of approximately 113.6 million shares of the Company’s common stock, equal to three percentCommon Stock in April 2019.

The Company granted each of the $10 million availability, were issued to Lincoln Park as consideration for Lincoln Park’s commitment to purchase sharesNew Investors a call option whereby upon the earlier of the Company’s common stock under the agreement.

Under the terms(i) December 31, 2020 and subject to the conditions of the Lincoln Park Purchase Agreement,(ii) such date that the Company hasrequests the right, but not the obligation,New Investors to sell to Lincoln Park, and Lincoln Park is obligatedprovide additional financing, each New Investor was entitled to purchase up to $10.0 million worth of sharesCommon Stock at a purchase price equal to the greater of (i) $0.29 per share or (ii) 75% of the volume weighted average closing price (“VWAP”) of the Company’s common stock. Such future sales of common stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s option, over the 36-month term of the agreement.

As contemplated by the Lincoln Park Purchase Agreement, and so long as the closing price of the Company’s common stock exceeds $0.40 per share, then the Company may direct Lincoln Park, at its sole discretion to purchase up to 65,000 shares of its common stock on any business day, provided that five business day has passed since the most recent purchase. The price per share for such purchases will be equal to the lower of: (i) the lowest sale price on the applicable purchase date and (ii) the arithmetic average of the three (3) lowest closing sale prices for the Company’s common stockCommon Stock during the twelve (12)thirty consecutive businesstrading days ending on the business day immediately preceding such purchase date (in each case,prior to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock split or other similar transaction that occurs on or after the date of the purchase agreement). The maximum amount of shares subject to any single regular purchase increases as the Company’s share price increases, subject to a maximum of $500,000.notice.

 

In addition to regular purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional purchases if the closing sale price of the common stock exceeds certain threshold prices as set forth in the purchase agreement. In all instances, the Company may not sell shares of its common stock to Lincoln Park under the purchase agreement if it would result in Lincoln Park beneficially owning more than 9.99% of its common stock. There are no trading volume requirements or restrictions under the purchase agreement nor any upper limits on the price per share that Lincoln Park must pay for shares of common stock.

The Lincoln Park Purchase Agreement and the registration rights agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the purchase agreement at any time, at no cost or penalty. During any “event of default” under the purchase agreement, all of which are outside of Lincoln Park’s control, Lincoln Park does not have the right to terminate the purchase agreement; however, the Company may not initiate any regular or other purchase of shares by Lincoln Park, until such event of default is cured. In addition, in the event of bankruptcy proceedings by or against the Company, the purchase agreement will automatically terminate.

Actual sales of shares of common stock to Lincoln Park under the purchase agreement will depend on a variety of factors to be determined by the Company from time to time, including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate sources of funding for the Company and its operations. Lincoln Park has no right to require any sales by the Company, but is obligated to make purchases from the Company as it directs in accordance with the purchase agreement. Lincoln Park has covenanted not to cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares.

 10 

 

 

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

In June 2019, the Company entered into a financial advisory agreement to undertake a private placement of (i) the shares of Common Stock issuable under the call option issued to the New Investors for a total of $20.0 million, plus (ii) between approximately $20 million and $30 million of equity or equity equivalent securities to be issued to other investors. On July 23, 2019, the Company entered into a purchase agreement whereby the New Investors exercised their call option to purchase an aggregate of approximately 69.0 million shares of Common Stock for gross cash proceeds of $20.0 million. Since VWAP for the previous thirty consecutive trading days was $0.20 per share, the New Investors exercised the call option at a purchase price of $0.29 per share. In addition, during July and August 2019 other investors purchased an aggregate of approximately 14.0 million shares of Common Stock at a purchase price of $0.29 per share for gross cash proceeds of $4.1 million. Pursuant to the financial advisory agreement, the Company agreed to pay a fee of 6.0% of the gross proceeds received from these private placements. The total advisory fees and other offering costs related to these issuances in July and August 2019 amounted to approximately $1.5 million, resulting in net proceeds of $22.6 million for the three months ended September 30, 2019. As discussed in Note 4, the completion of these financings resulted in the obligation to make Early Payments of approximately $3.4 million under the License Agreement with Xoma.

Restricted Cash

In connection with the private placement discussed above, one of the investors purchased approximately 13.1 million shares of Common Stock for gross proceeds of $3.8 million. The Company has not declaredagreed to spend the proceeds for research and development of RZ358 or paidfor the Company’s planned uplisting of its Common Stock to a national stock exchange. For the three months ended September 30, 2019, the Company made qualified expenditures of $0.7 million leaving a restricted cash balance of $3.1 million.

Reverse Stock Split

In August 2019, the Company’s Board of Directors approved a reverse stock split (the “Reverse Stock Split”) that was subject to stockholder approval at a special meeting that was concluded on October 28, 2019. As discussed in Note 13, stockholders approved the proposal whereby the Board of Directors have the ability at any dividendstime on or returnedbefore October 23, 2020 to execute the Reverse Stock Split and set the exchange ratio between 20 and 100 shares of the Company’s outstanding Common Stock, $0.001 par value per share, into one issued and outstanding share of Common Stock, without any capitalchange in the par value per share or the number of shares of common stock authorized. If the Reverse Stock Split is subsequently implemented, the number of shares subject to common stockholders as of December 31, 2017.outstanding stock options and warrants will also be adjusted with a corresponding increase in the related exercise prices.

 

Note 8 Stock-Based Compensation6—STOCK-BASED COMPENSATION AND WARRANTS

 

Options –Stock Option Plans

The Company currently has three active stock option plans consisting of the 2015 Non-Qualified Stock Option Plan (the “2015 Plan”), the 2016 Non-Qualified Stock Option Plan, as amended (the “2016 Plan”), and the 2019 Non Qualified Stock Option Plan (the “2019 Plan”). On March 26, 2014,July 31, 2019, the 2019 Plan was adopted by the Board of Directors and provides authority to grant non-qualified stock options for up to 15.0 million shares of the Company’s Common Stock. The Company adoptedalso has stock options outstanding to purchase up to approximately 2.2 million shares of Common Stock under the AntriaBio, Inc. 2014 Stock and Incentive Plan which allows(the “2014 Plan”) that terminated on March 21, 2019. Stock options outstanding under the Company2014 Plan expire pursuant to issue up to 3,750,000their contractual provisions on various dates in 2021. Presented below is a summary of common stock in the form of stock options, incentive options or common stock. The Company had granted 3,295,000 of these shares to current employees and directors of the Company as of June 30, 2017 and no additional grants as of December 31, 2017. The options have an exercise price from $1.29 to $3.44 per share. The options vest monthly over four years, with some options subject to a one year cliff before options begin to vest monthly.

On February 23, 2015, the Company adopted the AntriaBio, Inc. 2015 Non Qualified Stock Option Plan which allows the Company to issue up to 6,850,000 of common stock in the form of stock options. The Company had granted 4,487,000 of these shares to current employees and directors of the Company as of June 30, 2017 and no additional grants as of December 31, 2017. The options have an exercise price of from $1.00 to $2.06 per share. The options vest monthly over 4 years with some options subject to a one year cliff before options begin to vest monthly.

On October 31, 2016, the Board adopted the AntriaBio, Inc. 2016 Non Qualified Stock Option Plan which allows the Company to issue up to 35,000,000 shares of common stock in the form of stock options. The 2016 Non Qualified Stock Option Plan was amended on August 21, 2017 to reduce the number of shares to be issued to 15,000,000 shares of common stock in the form of stock options. The Board had issued options to purchase 28,995,000 of these shares to current employeesauthorized, outstanding, and directors as of June 30, 2017, of which 4,360,000 were cancelled before their terms were established and 11,090,000 were additionally cancelled by the Board during the year ended June 30, 2017. The Company had 1,550,000available for future grants under each of the cancelledCompany’s stock options that had begun vesting prior to the cancellation and with the cancellation the Company recorded $1,199,847 of unrecognized stock compensation expense. The Company had granted 255,000 of these shares to current employees and directors of the Company as of December 31, 2017. The options have an exercise price from $1.00 to $1.20 per share. The options expire no later than ten years from the date of the grant. The options vest on a monthly basis over 48 months, except for 75,000 of the options which do not begin to vest until specific events have occurred and then begin to vest over 48 months and 60,000 of the options that all vest at the end of the consulting contract. Some options are subject to a one year cliff and all options have an exercise price based on the fair value of the common stock on the date of grant.option plans (in thousands):

 

The Company has computed the fair value of all options granted that have begun vesting using the Black-Scholes option pricing model. The options that require specific events before they begin to vest are not valued until the specific event has occurred. In order to calculate the fair value of the options, certain assumptions are made regarding components of the model, including the estimated fair value of the underlying common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant adjustments to valuation. The Company estimated a volatility factor utilizing comparable published volatility of several peer companies. Due to the small number of option holders, the Company does not calculate a forfeiture rate but simply accounts for forfeitures as they occur. The Company estimates the expected term based on the average of the vesting term and the contractual term of the options. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.

  Termination Number of Shares 
Description Date Authorized  Outstanding  Available 
2014 Plan March 2019  2,185   2,185   - 
2015 Plan February 2020  6,850   2,610   4,240 
2016 Plan October 2021  28,000   26,630   1,370 
2019 Plan July 2029  15,000   15,000   - 
Total    52,035   46,425   5,610 

 

The Company has computed the fair value of all options granted during the six months ended December 31, 2017 using the following assumptions:

 11 

 

 

Expected volatility84%
Risk free interest rate2.0 - 2.21% 
Expected term (years)7
Dividend yield0%

Rezolute, Inc.

 

Stock option activity is as follows:Notes to Unaudited Condensed Consolidated Financial Statements

     Weighted  Weighted Average 
  Number of  Average  Remaining 
  Options  Exercise Price  Contractual Life 
Outstanding, June 30, 2017  21,290,751  $1.65   7.7 
Granted  255,000  $1.08     
Forfeited  (457,000) $1.65     
Outstanding, December 31, 2017  21,088,751  $1.65   7.7 
             
Exercisable at December 31, 2017  9,250,001  $2.09   6.4 

Stock-based compensation expense related toJuly 2019 Grants

On July 31, 2019, the fair valueBoard of Directors granted stock options was included infor an aggregate of approximately 34.0 million shares of Common Stock to certain officers and employees at an exercise price of $0.29 per share. The closing price of the statementCompany’s shares of operations as research and development – compensation and benefits expense of $281,814 and $444,801 and as general and administrative – compensation and benefits expense of $912,215 and $792,137 for the three months ended December 31, 2017 and 2016, respectively. Stock-based compensation expense related to the fair value of stock options was included in the statement of operations as research and development – compensation and benefits expense of $580,769 and $749,770 and as general and administrative – compensation and benefits expense of $2,120,959 and $1,376,196 for the six months ended December 31, 2017 and 2016, respectively. The unrecognized stock-based compensation expense at December 31, 2017 is $8,637,760. The Company determined the fair value as ofCommon Stock on the date of grant usingwas approximately $0.21 per share. The option grants were designated for approximately 19.0 million shares under the Black-Scholes option pricing method2016 Plan and expenses15.0 million shares under the 2019 Plan. As of July 31, 2019, the number of shares subject to stock options, the related fair value ratably over the vesting period.

Warrants – The Company issued warrants to agents in conjunction with the closing of various financings and issued warrants in private placementscompensation that was immediately recognized for vested options are as follows:

     Weighted  Weighted Average 
  Number of  Average  Remaining 
  Warrants  Exercise Price  Contractual Life 
Outstanding, June 30, 2017  32,796,448  $1.71   3.7 
Warrants issued for consulting services  650,000  $1.03     
Warrants expired  (285,407) $2.43     
Outstanding, December 31, 2017  33,161,041  $1.69   3.2 

For the Six Months Ended December 31, 2017: The Company issued warrants to purchase 100,000 shares of common stock at a price of $1.00 per share in connection with a consulting agreement. The Company also issued warrants to purchase 50,000 shares of common stock at a price of $1.00 per share in connection with investor services. The Company issued warrants to purchase 500,000 shares of common stock at a price of $1.04 per share in connection with a consulting agreement.follows (in thousands):

 

The warrants exercisable for 16,667 shares of common stock at December 31, 2017 are accounted for under liability accounting. The fair value as of December 31, 2017 and June 30, 2017 were $90 and $588, respectively which is reflected as a liability with the fair value adjustment recorded as derivative gains or losses on the consolidated statements of operations.

  Time-Based Vesting  Hybrid    
  Number of Shares  Vesting    
  Vested  Unvested  Shares  Total 
Executive officers  3,588(1)  11,562(1)(3)  7,550(2)(3)  22,700 
Other employees  921(1)  6,629(1)  3,700(2)  11,250 
                 
Total  4,509   18,191   11,250(6)   33,950 
                 
Total fair value $817(4) $3,297(5)     

 

(1)Stock options are subject to time-based vesting in two tranches, whereby (i) 25% of such options are immediately exercisable for employees who have been employed by the Company for more than one year, and for employees that have been employed by the Company less than one year, 25% of such options will vest on the one year anniversary of the employee’s start date, and (ii) the remaining 75% of the stock options will vest ratably over a period of 36 months beginning on the vesting date for the initial 25% tranche.

(2)Stock options that commence vesting upon the achievement of market, performance and service conditions (‘Hybrid” terms). These options will vest ratably over a period of 36 months beginning when all of the following have occurred: (i) the option recipient has been employed by the Company for at least one year, (ii) the Company’s shares of Common Stock have been listed for trading on a national stock exchange, and (iii) such date no later than July 31, 2023, when the Company’s closing stock price exceeds $0.58 per share for 20 trading days in any consecutive 30 day period.

(3)In August 2019, an executive officer terminated employment which resulted in forfeiture of stock options shown in the table above with time-based vesting for 0.8 million shares and performance vesting for 0.4 million shares.

(4)Represents the aggregate grant date fair value for stock options that were immediately vested on the grant date, which is included in stock-based compensation expense for the three months ended September 30, 2019.

(5)Represents the aggregate grant date fair value for stock options that were not immediately vested on the grant date and will be charged to expense from the grant date through the respective vesting dates through July 2023.

(6)A Monte Carlo valuation model will be used to determine the grant date fair value of these stock options that commence vesting upon the achievement of market, performance and service conditions. The Company has not recognized any expense related to these stock options for the three months ended September 30, 2019, since it is not yet probable that the performance criterion will be achieved. The Company will begin recognizing compensation expense at such time that the performance criterion is achieved and continuing through the end of the requisite service period which will also be determined upon completion of the Monte Carlo valuation.

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The warrants exercisable for the 250,000 shares of common stock are accounted for under the equity method of accounting and are fair valued monthly at the date that the warrants vest. As of June 30, 2017, warrantsRezolute, Inc.

Notes to purchase 15,624 shares of common stock had vested and $12,564 had been recorded into equity and investor relations expense. As of December 31, 2017, warrants to purchase an additional 31,248 shares of common stock had vested and $27,333 had been recorded into equity and investor relations expense.Unaudited Condensed Consolidated Financial Statements

Stock Options Outstanding

 

The warrants exercisable for 100,000 shares were accounted for under equity treatment and were fair valued asfollowing table sets forth a summary of the date of issuance. The fair value of the warrants was valued at $66,643 and recorded as additional paid-in-capital and as general and administrative expenses. The warrants exercisable for 50,000 shares were accounted forcombined stock option activity under equity treatment and were fair valued as of the date of issuance. The fair value of the warrants was valued at $33,322 and recorded as additional paid-in-capital and as investor relations expense. The warrants exercisable for 500,000 shares were accounted for under equity treatment and were fair valued as of the date of issuance. The fair value of the warrants was valued at $407,605 and recorded as additional paid-in-capital and license costs.

These warrants were valued using the Black-Scholes option pricing model on the date of issuance. In order to calculate the fair value of the warrants, certain assumptions were made regarding components of the model, including the closing price of the underlying common stock, risk-free interest rate, volatility, expected dividend yield, and warrant term. Changes to the assumptions could cause significant adjustments to valuation. Rezolute estimated a volatility factor utilizing comparable published volatilities of several peer companies. The risk-free interest rate is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.

The Black-Scholes valuation methodology was used because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant assumptions for the warrant values calculatedCompany’s stock option plans for the three months ended December 31, 2017 were as follows:September 30, 2019 (shares in thousands):

  Shares  Price(1)  Term(2) 
Outstanding, beginning of period  13,865  $1.60   6.4 
Granted  33,950   0.29     
Forfeited  (1,390)  0.47     
Outstanding, end of period  46,425   0.68   8.8 
             
Vested, end of period  16,365   1.27   7.1 

(1)Represents the weighted average exercise price.

 

Expected volatility(2)Represents the weighted average remaining contractual term for the number of years until the stock options expire.

Stock-based compensation expense is included in compensation and benefits under the following captions in the unaudited condensed consolidated statements of operations (in thousands):

  Three Months Ended 
  September 30, 
  2019  2018 
Research and development $574  $130 
General and administrative  820   748 
         
Total $1,394  $878 

Unrecognized stock-based compensation expense related to stock options that provide solely for time-based vesting as of September 30, 2019 is approximately $5.3 million. This amount is expected to be recognized over a remaining weighted average period of 2.4 years. The Company has not completed its Monte Carlo valuation of stock options with hybrid vesting criteria so the related unrecognized compensation has not yet been determined. The three-year vesting period for these stock options commences upon achievement of all three of the market, performance and service conditions discussed above. If the market condition is not achieved by July 31, 2023, the stock options will expire. Unrecognized compensation related to stock options with hybrid vesting criteria will be based on a derived service period and is expected to be recognized starting when it is considered probable that the performance criterion will be achieved.

For the three months ended September 30, 2019, the aggregate fair value of stock options granted for approximately 22.7 million shares of Common Stock that provide solely for time-based vesting, amounted to $4.1 million or approximately $0.18 per share as of the grant date. Fair value was computed using the Black-Scholes-Merton (“BSM”) option-pricing model and will result in the recognition of compensation cost ratably over the expected vesting period of the stock options. For the three months ended September 30, 2019, the fair value of each time-based option was estimated on the date of grant using the BSM option-pricing model, with the following weighted-average assumptions:

Valuation Inputs   
Fair value of common stock on grant date $0.21 
Exercise price of stock options  0.29 
Expected volatility  118%
Risk free interest rate  1.9%
Expected term (years)  6.5 
Dividend yield  0%

 53% - 85% 
Risk free interest rate1.76% - 2.37% 
Warrant term (years) 1 - 1013 

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Warrants

The Company has issued warrants in conjunction with various debt and equity financings and for services. For the three months ended September 30, 2019, no warrants were granted or exercised. Presented below is a summary of warrant activity for the three months ended September 30, 2019 (shares in thousands):

  Shares  Price(1)  Term(2) 
Outstanding, beginning of period  45,997  $1.34   2.3 
Warrant expirations  (451)  1.85     
             
Outstanding, end of period  45,546   1.33   2.1 

Dividend yield(1)Represents the weighted average exercise price.

0(2)%Represents the weighted average remaining contractual term for the number of years until the warrants expire.

 

Note 7—COMMITMENTS AND CONTINGENCIES

Employment Agreements

As of September 30, 2019, the Company is subject to employment agreements with three executive officers and two employees that provide for aggregate annual base salaries of approximately $1.8 million. In addition, the employment agreements provide for potential annual bonus compensation ranging from 25% to 60% of the officers’ base salaries. In the event the Company terminates employment of the executive officers without cause, severance benefits include (i) between six-months and three years of base salary which range from $280,000 to $490,000, (ii) up to 150% of annual target bonuses applicable to the terminated executive, and (iii) continuation of certain medical and dental benefits. In addition, vesting is generally accelerated for unvested stock options that would have otherwise vested during the period that the severance benefits are paid out.

Legal Matters

From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of September 30, 2019, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the Company’s results of operations. At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450,Contingencies. Legal fees are expensed as incurred.

Note 8—RELATED PARTY TRANSACTIONS

Equity Issuances

As discussed in Note 5, on July 23, 2019 the New Investors agreed to purchase an aggregate of approximately 69.0 million shares of Common Stock at an issuance price of $0.29 per share for gross proceeds of $20.0 million. This purchase was made pursuant to the terms of the call option that was issued in connection with an equity offering in January 2019. The New Investors currently own an aggregate of approximately 62% of the Company’s outstanding shares of Common Stock.

Master Services Agreement

Effective July 1, 2019, the Company entered into a Master Services Agreement (“MSA”) with the New Investors whereby the Company agreed to assist the New Investors in an evaluation of their long acting growth hormone program referred to as GX-H9. For the three months ended September 30, 2019, the Company charged the New Investors for employee services of $103,000 and reimbursable expenses incurred with unrelated parties of $144,000, for a total of approximately $247,000. This amount is included in Receivables from Related Parties in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2019. In October 2019, the Company collected $125,000 of these receivables. Amounts charged under the MSA for employee services are reflected as a reduction of research and development compensation costs in the accompanying unaudited condensed consolidated statement of operations for the three months ended September 30, 2019.

14

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 9 Income Taxes—SUPPLEMENTAL FINANCIAL INFORMATION

Bonuses and Termination of Employment Agreement

On July 31, 2019, the Board of Directors approved cash bonus payments to three executive officers for past services totaling $448,000. The liability is included in accrued compensation and benefits in the consolidated balance sheet as of June 30, 2019. In August 2019, the Company paid the cash bonus payments to the three executive officers. On July 31, 2019, the Company also entered into an employment agreement with an executive officer that provided for an annual base salary of $265,000, which was subsequently terminated in August 2019.

Interest Expense

Between January 2018 and April 2018, the Company entered into convertible note agreements (the “Fiscal 2018 Notes”) for total borrowings of $5.3 million, with interest at 15.0% per annum that was payable at maturity. Debt discount and issuance costs amounted to an aggregate of $3.2 million that was accreted to interest expense using the effective interest method. The Fiscal 2018 Notes plus accrued interest were converted to equity in January 2019. For the three months ended September 30, 2019 and 2018, interest expense was solely attributable to the Fiscal 2018 Notes as follows (in thousands):

  2019  2018 
Interest expense at contractual rate $-  $208 
Accretion of discount  -   703 
Total interest expense $-  $911 

Depreciation and Amortization

Depreciation and amortization expense related to property and equipment amounted to approximately $3,000 and $25,000 for the three months ended September 30, 2019 and 2018, respectively. Amortization expense related to intangible assets amounted to approximately $2,000 for each of the three months ended September 30, 2019 and 2018.

Restructuring

In April 2018, the Company implemented a restructuring plan to discontinue manufacturing activities in Colorado. The restructuring plan consisted of a reduction in the Company’s workforce by 30 employees, the decision to sell substantially all laboratory equipment and other manufacturing assets, and the decision to begin efforts to terminate operating leases in Colorado. Through June 30, 2018, the Company sold a significant portion of the equipment for proceeds of approximately $1.6 million. For the three months ended September 30, 2018, the Company completed additional sales of furniture, fixtures, and laboratory equipment for proceeds of $187,000. These transactions resulted in a gain on sale of approximately $23,000 for the three months ended September 30, 2018. In December 2018, the Company entered into agreements that resulted in the termination of all operating leases and subleases for facilities in Colorado.

Note 10—INCOME TAXES

 

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date income,operating results, plus any significant unusual or infrequently occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating incomeresults for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes. In connection with the New Tax Cuts and Jobs Act, all gross deferred tax assets and liabilities have been remeasured at the 21% Federal statutory rate. There was no change to the net deferred tax asset recorded as the valuation allowance was also adjusted offsetting these changes.

 

In

15

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the three and six months ended December 31, 2017,September 30, 2019, the Company did not record any income tax provisionbenefit due to expected future losses anda full valuation allowance on its deferred tax assets. The Company did not have any material changes to its conclusions regarding valuation allowances for deferred income tax assets or uncertain tax positions for the three months ended September 30, 2019 and 2018. 

 

Note 10 Commitments and Contingencies11—EARNINGS PER SHARE

 

For the three months ended September 30, 2019 and 2018, basic and diluted net loss per share were the same since all common stock equivalents were anti-dilutive. As of September 30, 2019 and 2018, the following potential common stock equivalents outstanding were excluded from the computation of diluted net loss per share since the impact of inclusion was anti-dilutive (in thousands): 

  2019  2018 
Stock options  46,425   18,837 
Warrants  45,546   45,651 
         
Total  91,971   64,488 

Note 12—FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS

Lease Commitments –In May 2014,

Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company entered into a lease of approximately 27,000 square feet of office, laboratoryconsiders the principal or most advantageous market in which it transacts and clean room space to be leased for seventy-two months. The lease requires monthly payments of $28,939 adjusted annually by approximately 3% plus triple net expenses monthly of $34,381 adjusted annually.considers assumptions that market participants would use when pricing the asset or liability. The Company also made a security depositapplies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of $750,000 whichinput that is held by the landlord, of which $375,000 has been returnedavailable and significant to the Company and the remaining balance will be returned gradually over the next several years.fair measurement:

 

Level 1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2—Other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly through market collaboration, for substantially the full term of the asset or liability.

Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any market activity for the asset or liability at measurement date.

Due to the relatively short maturity of the respective instruments, the fair value of cash and cash equivalents, restricted cash, receivables from related parties, accounts payable and accrued liabilities approximated their carrying values as of September 30, 2019 and June 30, 2019. The Company did not have any assets and liabilities measured at fair value on a recurring basis as of September 30, 2019 and June 30, 2019. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the three months ended September 30, 2019 and 2018, the Company did not have any transfers of its assets or liabilities between levels of the fair value hierarchy.

Significant Concentrations

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents at high-quality financial institutions. Cash deposits often exceed the amount of federal insurance provided on such deposits. As of September 30, 2019 and June 30, 2019, the Company had cash, cash equivalents, and restricted cash with a single financial institution with an aggregate balance of $25.2 million and $11.6 million, respectively. The Company has never experienced any losses related to its investments in cash and cash equivalents.

  13

On March 17, 2017, the Company entered into a lease of approximately 20,000 square feet of office space to be leased for eighty-two months. The lease requires monthly payments of $28,425 adjusted annually plus triple net expenses monthly of $28,410 adjusted annually. The Company also made a security deposit of $56,851 which will be returned at the end of the lease.

On March 17, 2017, the Company sub-leased their original approximately 10,000 square feet of office space to another company. The sublease is for eighty-two months unless the Company is unable to extend our current lease then the sub-lease will expire on March 31, 2020. The Company is to receive monthly payments of $12,523 adjusted annually plus triple net expenses monthly of $12,828 adjusted annually. The Company also received a security deposit of $25,046 which will be returned at the end of the lease.

As of December 31, 2017, the minimum rental commitment under the leases are as follows:

  Operating Leases  Sub-lease Income  Total 
Year Ending June 30,            
2018  365,680   (76,866)  288,814 
2019  747,953   (157,187)  590,766 
2020  688,892   (148,551)  540,341 
2021  338,392   -   338,392 
2022  347,836   -   347,836 
Thereafter  569,364   -   569,364 
  $3,058,117  $(382,604) $2,675,513 

License Agreements: On August 4, 2017, the Company entered into a Development and License Agreement (“License Agreement”) with ActiveSite Pharmaceuticals, Inc.  (“ActiveSite”) pursuant to which the Company acquired the rights to ActiveSite’s Plasma Kallikrein Inhibitor program (“PKI Program”).  The Company desires to use the PKI Program to develop, file, manufacture, market and sell products for diabetic macular edema and other human therapeutic indications.  The Company was required to make an upfront payment of $750,000 payable within five (5) days of the date of the parties executed the License Agreement, which was expensed as research and development costs. The Company is required to pay up to an additional aggregate of $36.5 million in development and regulatory milestone payments if certain clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are required to pay up to an aggregate of $10.0 million in sales milestone payments if certain annual sales targets are achieved.

On December 6, 2017, the Company entered into a License Agreement and Common Stock Purchase Agreement (collectively “Transaction Documents”) with XOMA LLC (“XOMA”) pursuant to which the Company acquired the exclusive rights to develop and commercialize XOMA 358 (now RZ358) for an orphan indication, Congenital Hyperinsulinism. The Company is responsible for all development, regulatory, manufacturing and commercialization activities associated with RZ358. Pursuant to the Transaction Documents, the Company is required to pay XOMA $6 million and to issue XOMA $12 million of the Company’s common stock based upon the Company’s financing activities in 2018. The Company would be required to issue additional shares and a put option to XOMA if certain financing activities did not occur in 2018, as more fully described in the license agreement. The Company also has a required development spend every year related to RZ358. The Company is also required to make certain clinical, regulatory and annual net sales milestone payments of up to $222 million in the aggregate. The Company is also obliged to pay XOMA royalties ranging from the high single digits to the mid-teens based upon annual net sales of RZ358. Finally, under the terms of the License Agreement, the Company is required to pay XOMA a low single digit royalty on sales of the Company’s other products.

 1416 

 

 

Legal Matters – From timeNote 13—SUBSEQUENT EVENT

The Company held a special meeting of stockholders that concluded on October 28, 2019, whereby the stockholders approved an amendment to time, the Company may be involved in litigation relatingCompany’s Certificate of Incorporation to claims arising outprovide authority for the Company’s Board of operations inDirectors to subsequently effect a Reverse Stock Split of the normal course of business. As of December 31, 2017, there were no pending or threatened lawsuits that could reasonably be expectedCompany’s $0.001 par value Common Stock at a ratio ranging between 1-to-20 and 1-to-100. Please refer to have a material effect onNote 5 for additional information about the results of our operations. There are no proceedings in which any of our directors, officers or affiliates, or any registered or beneficial shareholders, is an adverse party or has a material interest adverse to our interest.Reverse Stock Split.

17

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

General

This discussion and analysis should be read in conjunction with the accompanying financial statements and related notes. This discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of many factors.

Summary

 

Certain figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.

Recent Developments

Presented below is a summary of Recent Developments. For additional details, reference is made to the footnotes to our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report. As discussed further in Note 13, on October 28, 2019, our stockholders approved an amendment to our Certificate of Incorporation to provide authority for the Board of Directors to subsequently effect a Reverse Stock Split of our $0.001 par value Common Stock at a ratio ranging between 1-to-20 and 1-to-100. To date, our Board of Directors has not exercised its authority to effect the Reverse Stock Split.

As discussed further in Note 5, in July 2019 the New Investors exercised their call options, resulting in the issuance of an aggregate of approximately 69.0 million shares of Common Stock at a purchase price of $0.29 per share for gross cash proceeds of $20.0 million. In addition, during July and August 2019 other investors purchased an aggregate of approximately 14.0 million shares of Common Stock at a purchase price of $0.29 per share for gross cash proceeds of approximately $4.1 million. Pursuant to a financial advisory agreement entered into in June 2017,2019, we filedagreed to pay a fee of 6.0% of the gross proceeds received from these private placements. The total advisory fees and other offering costs related to these issuances in July and August 2019 amounted to approximately $1.5 million, resulting in net proceeds of $22.6 million for the three months ended September 30, 2019.

As discussed further in Note 4, the financings completed in July and August 2019 resulted in our obligation to make Early Payments of approximately $3.4 million under the License Agreement with Xoma. The Early Payments were paid in August 2019 and eliminated the requirement to make Future Cash Payments that would have otherwise been due on September 30, 2020 for $2.0 million and on June 30, 2020 for approximately $1.4 million.

As discussed further in Note 6, in July 2019 we adopted a new stock option plan that provides authority to grant 15.0 million shares of our Common Stock. We granted stock options for an aggregate of approximately 34.0 million shares of Common Stock to our officers and employees at an exercise price of $0.29 per share.

As discussed further in Note 8, we entered into a Master Services Agreement with the New Investors in July 2019, whereby certain of our employees are providing services on behalf of the New Investors. Under this agreement, the New Investors owe us a total of approximately $247,000 for services and reimbursable expenses incurred through September 30, 2019.

For our fiscal year ending June 30, 2020, we have the following objectives to advance our development strategy: (i) initiate the Phase 2b clinical study for RZ358 in the US and/or Europe, (ii) complete the necessary toxicology studies for RZ402 to enable the filing of an IND for AB101 withand the FDAinitiation of clinical studies thereafter, and in July 2017, we dosed our first patient in(iii) complete the Phase 1 first-in-humanstudy for AB101 and explore partnership opportunities. We are also proceeding with our efforts to uplist our Common Stock to a national stock exchange during our fiscal year 2020.

Factors impacting our Results Operations

We have not generated any revenues since our inception in March 2010. Since inception, we have engaged in organizational activities, conducted private placements to raise additional capital, built out a manufacturing suite and produced material for our lead product candidate under good laboratory practices (“GLP”), conducted studies using the GLP material, subsequently changed our strategy to a licensing model that resulted in disposal of our manufacturing assets, and conducted other research and development activities on our pipeline product candidates.

Due to the time required to conduct clinical study (the “Study”). The studytrials and obtain regulatory approval for any of our product candidates, we anticipate it will be some time before we generate substantial revenues, if ever. We expect to generate operating losses for the foreseeable future; therefore we expect to continue efforts to raise additional capital to maintain our current operating plans beyond the next year. We cannot assure you that we will secure such financing or that it will be adequate for the long-term execution of our business strategy. Even if we obtain additional financing, it may be costly and may require us to agree to covenants or other provisions that will favor new investors over our existing stockholders.


Our stated strategy has been to build a metabolic focused biotechnology company by in-licensing compelling compounds that we believe clearly target different diseases where there is an unmet need. In December 2017, we completed the latest phase of this strategy by in-licensing RZ358 from Xoma Corporation. RZ358 is a first-in-human single ascending dose studyfully human monoclonal antibody that is currently in Phase 2b clinical development. RZ358 is being developed to treat congenital hyperinsulinism, a devastating ultra-orphan pediatric disease.

We believe that RZ358 complements our two other metabolic pipeline opportunities including: (i) our plasma kallikrein inhibitor, RZ402, which is a late stage preclinical program that offers the potential of an oral therapy to treat diabetic macular edema, the leading cause of blindness in adults in the US, and (ii) our super-long-acting basal insulin, AB101, which is currently in Phase 1 clinical development to assess the safety and tolerability, pharmacokinetics and pharmacodynamics of AB101 in patients with Type 1 Diabetes Mellitus. The first partdiabetes mellitus.

Key Components of the study is a sequential cohort dose rangingConsolidated Statements of AB101Operations

Research and there isdevelopment expenses. Research and development expenses consist primarily of material manufacturing costs, clinical trial costs and in-licensing costs. Our research and development expenses also include (i) an optional second study partallocable portion of our cash and stock-based compensation, employee benefits, and consulting costs related to compare one or more tested doses of AB101 to Lantus®. In addition to safety and pharmacokinetic assessments, the time-action pharmacology of AB101 (onset, peak, and end of action) is being evaluated using several measures of glycemic response, including the hyperinsulinemic euglycemic clamp technique, continuous glucose monitoring, and background insulin use. In Q4 of calendar year 2017, we completed the first of up to five potential cohorts of the Study and having conducted the interim safety and dose escalation review meeting from that cohort, we plan on proceeding to a higher dosepersonnel engaged in the second cohortdesign and development of product candidates and other scientific research projects, and (ii) an allocable portion of our facilities and overhead costs related to such personnel.

General and administrative expenses. General and administrative expenses consist primarily of (i) an allocable portion of our cash and stock-based compensation, employee benefits and consulting costs related to personnel engaged in our administrative, finance, accounting, and executive functions, and (ii) an allocable portion of our facilities and overhead costs related to such personnel. General and administrative expenses also include travel, legal, auditing, investor relations and other costs primarily related to our status as planned per protocol. However, we will not begin dosing patientsa public company.

Interest expense.  The components of interest expense include the amount of interest payable in cash at the stated interest rate, and accretion of debt discounts and issuance costs (“DDIC”) using the effective interest method. DDIC arises from the issuance of debt instruments at a discount to the original principal balance, the fair value of warrants issued in connection with a debt instrument, and incremental and direct costs incurred to consummate the financing.

Interest and other income. Interest and other income consist primarily of interest income earned on temporary cash investment, rental income related to subleases that were in effect until December 2018, and gains on changes in the second cohort until we have raised additional capital. Further, as our clinical study is ongoing and we have not dose escalated beyond the first cohort, we do not anticipate announcing any results with respect to the Study until next year.

On August 4, 2017, we licensed from ActiveSite Pharmaceuticals, Inc. (“ActiveSite”) their oral plasma kallikrein inhibitor portfolio (“PKI Portfolio”) targeting the treatmentfair value of diabetic macular edema (“DME”) and other plasma kallikrein-medicated diseases such as hereditary angioedema. ActiveSite has generated proof-of-concept data for their orally-administered plasma kallikrein inhibitors in clinically-relevant animal models of macular edema, and we are leveragingembedded derivatives that data to complete IND-enabling toxicology studies and prepare for human clinical trials.

On December 6, 2017, we completed the last phase of our corporate development strategy to create a focused metabolic disease company with multiple indications in which we in-licensed a fully human monoclonal antibody from XOMA LLC that is currently in Phase 2 clinical development targeting a treatment for an ultra-orphan pediatric indication, congenital hyperinsulinism (the “CHI Program”). We believe that the CHI Program is a compelling opportunity given that there is no approved therapy for this devastating childhood disease.

We believe that the CHI Program and the PKI Portfolio complement our endogenous super long acting basal program, AB101, currently in Phase 1 clinical development. We further believe that the combination of these assets creates a potential highly valuable biopharmaceutical enterprise with a compelling investment thesis attractive to institutional investors. While we believe that our prospects are bright, we are currently significantly capital constrained and have elected to conduct a secured, convertible note financing to bridge the Company (the “Debt Financing”) until the Equity Financing is complete. We are seeking to raise $3,000,000 or more in the Debt Financing and we have conducted our first for aggregate gross proceeds of $500,000were terminated in January of 2018.2019.

We have met with a variety of the large and mid-size health care funds to unveil the Rezolute story as we seek to raise at least $25 million (the “Equity Financing”) and to date, as the funds have begun doing diligence on our programs and prospects, we have experienced very favorable reception to our strategy and expanded pipeline. Nonetheless, we recognize that it will take time to complete the Equity Financing as we do not anticipate closing such a transaction until the end of Q1 calendar year 2018 or early Q2. Further, no assurance can be given that any such financing will be completed or will be timely completed on favorable terms. Currently, we cannot sustain operations without the Debt Financing and without the larger Equity Financing we cannot continue to advance all of our current programs.

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SignificantCritical Accounting Policies and Significant Judgments and Estimates

 

Overview

Our management’s discussion and analysis of financial condition and results of operations is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America.States. The preparation of thethese unaudited condensed consolidated financial statements requires managementus to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, andas well as the reported amounts ofrevenue and expenses during the reporting period. On an on-going basis, management evaluates itsperiods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates and judgments, including those related tocould occur in the estimated useful lives and impairment of depreciable assets, the fair value of share-based payments and warrants, fair value of derivative instruments,future. We base our estimates of the probability and potential magnitude of contingent liabilities and income tax valuation allowances. Management bases its estimates and judgments on historical experience and on various other factors that we believe are believed to be reasonable under the circumstance,circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions. The methods, estimates, and judgments used by us in applying these most critical

With respect to our significant accounting policies have a significant impact on the results we reportthat are described in Note 1 to our consolidated financial statements.statements included in Item 8 of our 2019 Form 10-K and in Note 1 of this Report, we believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our unaudited condensed consolidated financial condition and results of operations. 


Research and Development

Research and development costs are expensed as incurred. Intangible assets related to in-licensing costs under license agreements with third parties are charged to expense unless we are able to determine that the licensing rights have an alternative future use in other research and development projects or otherwise.

Clinical Trial Accruals

Clinical trial costs are a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.

Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities, are deferred and recognized as expense in the period that the related goods are delivered, or services are performed.

Stock Options with Market, Performance and Service Conditions

From time to time, we grant stock options with vesting that is dependent on achieving certain market, performance and service criteria. For purposes of recognizing compensation cost, we determine the requisite service period as the longest of the explicit, implicit and derived vesting periods for each of the market, performance and service conditions, respectively. The derived vesting period for market conditions and the estimated fair value of the related stock options will be based on a valuation performed using a Monte Carlo model. Compensation cost is recognized beginning on such date that achievement of the performance criterion is considered probable and continuing through the end of the requisite service period.

If the stock options do not ultimately vest as a result of failure to achieve the service criterion, any previously recognized compensation cost will be reversed for options that never vest. However, if the service and performance criteria are achieved, compensation cost will not be reversed even if the market condition is never achieved.

Valuation of Stock Options and Warrants

We measure the fair value of services received in exchange for all stock options granted based on the fair market value of the award as of the grant date. We compute the fair value of stock options with time-based vesting using the Black-Scholes-Merton (“BSM”) option-pricing model and recognize the cost of the equity awards over the period that services are provided to earn the award. For awards granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite service period as if the award was, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation.

Debt

DDIC incurred to obtain new debt financing or modify existing debt financing consists of incremental direct costs incurred for professional fees and due diligence services, and the fair value of warrants issued in connection with the financing. DDIC is accreted to interest expense using the effective interest method.

If we amend our debt arrangements, we evaluate the terms to determine if the amendment should be accounted for as a troubled debt restructuring (“TDR”), a modification or an extinguishment. If we determine that the lender has provided a concession and we are experiencing financial difficulties, we would generally recognize a TDR gain. If we conclude that accounting as a modification is required, then any costs incurred on behalf of the lenders is accounted for as additional DDIC. If we conclude that accounting as an extinguishment is required, we measure the extinguishment charge on the date of the amendment based on the amount by which the fair value of the new debt instrument exceeds the net carrying value of the original debt instrument, and all previously unaccreted issuance costs are charged to expense.

Leases

The Company determines if an arrangement includes a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, accrued and other current liabilities and other non-current liabilities on the Company's Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses the incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. The operating lease ROU asset also excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has elected not to apply the recognition requirements for short-term leases. For lease agreements with lease and non-lease components, the Company generally accounts for them separately.

20

 

Results of Operations

 

For Three and Six Months Ended December 31, 2017September 30, 2019 and 20162018

 

Results of operations for the three months ended December 31, 2017 (the “2018 quarter”)September 30, 2019 and 2018 reflect net losses of approximately $5.1 million and $3.4 million, respectively. Our unaudited condensed consolidated statements of operations for the three months ended December 31, 2016 (the “2017 quarter”) reflected losses of approximately $5,751,000September 30, 2019 and $4,888,000, respectively.2018, along with the changes between periods, are presented below (in thousands):

 

Results

  2019  2018  Change 
Operating expenses:            
Research and development:            
Compensation and benefits, net of related party reimbursements $1,418  $557  $861 
Clinical trial costs  991   3   988 
Consulting and outside services  486   47   439 
Material manufacturing costs  187   73   114 
Facilities and other  152   250   (98)
             
Total research and development  3,234   930   2,304 
             
General and administrative:            
Compensation and benefits  1,336   1,250   86 
Professional fees  360   166   194 
Facilities and other  249   239   10 
Total general and administrative  1,945   1,655   290 
             
Gain on sale of equipment  -   (23)  23 
             
Net operating expenses  5,179   2,562   2,617 
             
Operating loss  (5,179)  (2,562)  (2,617)
             
Non-operating income (expense):            
Interest expense  -   (911)  911 
Interest and other income  99   108   (9)
             
Total non-operating income (expense)  99   (803)  902 
             
Net loss $(5,080) $(3,365) $(1,715)

Presented below is a discussion of the key factors that resulted in changes in our results of operations for the six months ended December 31, 2017 (the “2018 period”) and the six months ended December 31, 2016 (the “2017 period”) reflected losses of approximately $12,468,000 and $8,704,000, respectively.these periods.

 

RevenuesRevenue.

We are As a clinical stage company, we did not generate any revenue for the three months ended September 30, 2019 and 2018. We are at an early stage of development as a proprietary product specialty pharmaceutical company and we do not currently have any commercial products. Our existing product candidates will require extensive additional clinical evaluation, regulatory review, significant marketing efforts and substantial investment before they generate any revenues. We do not expect to be able to market any of our product candidates for several years.

Research and Development Expenses. Research and development (“R&D”) costs increased from approximately $0.9 million for the three months ended September 30, 2018 to $3.2 million for the three months ended September 30, 2019, an increase of $2.3 million. This increase was primarily attributable to increases in compensation and benefits, clinical trials costs, and consulting and outside services as discussed below.

For the three months ended September 30, 2019, we had an increase of $0.9 million in compensation and benefits for our R&D workforce, which was attributable to an increase of $0.4 million in stock-based compensation expense, and increased salaries and benefits cost of $0.6 million as we added eight employees to our R&D workforce between September 30, 2018 and September 30, 2019. The total increase in compensation and benefits for our R&D workforce amounted to $1.0 million and was partially offset by $0.1 million billed to the New Investors under the Master Services Agreement discussed in Note 8 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.


For the three months ended September 30, 2019, we had a $1.0 million increase in clinical trial costs. This increase was due to higher spending for the three months ended September 30, 2019, which consisted of $0.6 million related to RZ358 and $0.4 million for AB101. For the three months ended September 30, 2018, we did not have any material spending related to our clinical trials.

For the three months ended September 30, 2019, consulting and outside services increased from approximately $47,000 for the three months ended September 30, 2018 to $0.5 million for the three months ended September 30, 2019. This increase was due to higher spending for the three months ended September 30, 2019, which consisted of $0.1 million related to RZ358, $0.1 million for RZ402, and $0.2 million for patent defense costs. For the three months ended September 30, 2018, consulting and outside services of $47,000 was primarily comprised of contract laboratory consulting costs of $32,000.

Material manufacturing costs increased from $0.1 million for the three months ended September 30, 2018 to $0.2 million for the three months ended September 30, 2019. This increase was due to higher spending for the three months ended September 30, 2019, which consisted of $0.1 million related to RZ358 and a total of $0.1 million for AB101 and RZ402. For the three months ended September 30, 2018, substantially all of our $0.1 million of material manufacturing costs was related to AB101.

Costs allocable to R&D activities for facilities and other costs decreased from $0.2 million for the three months ended September 30, 2018 to $0.1 million for the three months ended September 30, 2019. The reduction in facilities costs was attributable to our decision to sublease and ultimately terminate our facility leases in Colorado in December 2018.

As discussed below under the captionLiquidity and Capital Resources, we intend to use the proceeds from our recently completed financings to advance our clinical programs and fulfill our development obligations under the amended License Agreement with Xoma, and our milestone payments under the ActiveSite License Agreement entered into in August 2017. Accordingly, we expect to continue increasing our R&D spending over the next 12 months.

General and Administrative Expenses. General and administrative (“G&A”) expenses increased from approximately $1.6 million for the three months ended September 30, 2018 to $1.9 million for the three months ended September 30, 2019, an increase of $0.3 million. This increase was primarily attributable to an increase in professional fees of $0.2 million and compensation and benefits for our administrative and executive workforce of $0.1 million. The increase in professional fees was attributable to higher costs for the filing of our 2019 Form 10-K, costs incurred for our proxy statement to approve the Reverse Stock Split, costs related to our application to uplist to the Nasdaq Capital Market, and incremental professional fees associated with several complex transactions that occurred during the three months ended September 30, 2019. The increase of $0.1 million in compensation and benefits was primarily attributable to an increase in stock-based compensation expense.

Our facilities and other costs amounted to $0.2 million for each of the three months ended September 30, 2019 and 2018. However, the mix of costs in this category changed where facilities costs decreased by $0.1 million and other administrative costs increased by $0.1 million. The reduction in facilities costs was attributable to our decision to sublease and ultimately terminate our facility leases in Colorado in December 2018. The Colorado facilities were replaced by leasing smaller facilities in California and Oregon in 2019 at lower monthly rental costs.

In order to support increases in our planned spending for R&D over the next 12 months, we expect to also increase our G&A spending in comparison to our historical results for the 12 months ended September 30, 2019.

Gain on Sale of Property and Equipment. For the three months ended September 30, 2018, we sold excess laboratory and other equipment from our former facility in Colorado for proceeds of $0.2 million, which resulted in recognition of a gain of $23,000. For the three months ended September 30, 2019, we did not recognize any gains or losses from the sale of property and equipment.

Interest Expense.  Interest expense was approximately $0.9 million for the three months ended September 30, 2018. Due to the repayment of the Fiscal 2018 Notes in January 2019, we did not incur any interest expense for the three months ended September 30, 2019. Interest expense attributable to the Fiscal 2018 Notes for the three months ended September 30, 2018 consisted of accretion of discount of $0.7 million, and interest expense of $0.2 million based on the contractual rate of 15.0%.

Interest and Other Income. Interest and other income decreased from $108,000 for the three months ended September 30, 2018 to $99,000 for the three months ended September 30, 2019, a decrease of $9,000. Interest and other income for the three months ended September 30, 2019 was primarily attributable interest income earned on temporary cash investments. For the three months ended September 30, 2018, interest and other income was primarily attributable to rental income of $89,000 that was derived from subleases that terminated in December 2018, and gains on changes in the fair value of embedded derivatives of $19,000. Effective with the conversion of the Fiscal 2018 Notes to equity in January 2019, we no longer have any embedded derivatives.


Income Taxes.For the three months ended September 30, 2019 and 2018, we did not recognize any income tax benefit due to our net losses and our determination that a full valuation allowance was required for our deferred tax assets.

As of June 30, 2019, we had NOL carryforwards of approximately $81.0 million for U.S. federal income tax purposes, of which approximately $41.0 million does not expire and $40.0 million will begin to expire in 2030. Under provisions of the Internal Revenue Code, substantial changes in ownership may result in limitations on the amount of NOL carryforwards that we can utilize in future years. Due to our recent financing activities, we experienced ownership changes that are expected to result in significant limitations to the future use of our NOL carryforwards. We are in the process of quantifying the extent of such limitations, which could result in our inability to utilize a significant portion of our net operating loss carryforwards that were generated prior to any change of control.

Liquidity and Capital Resources

As of September 30, 2019, we have approximately cash, cash equivalent and restricted cash totaling approximately $25.2 million and working capital was approximately $20.4 million. We have incurred cumulative net losses of $132.0 million since our inception and as a clinical stage company we have not generated any revenues since inception.

Expenses

Research and development costs include salaries, benefits and other staff-related costs; consultants and outside costs; material manufacturing costs; and facilities and other costs. Research and development costs were approximately $3,413,000 in the 2018 quarter comparedrevenue to $3,075,000 in the 2017 quarter. Research and development costs were approximately $7,723,000 in the 2018 period compared to $5,561,000 in the 2017 period. The main increases are due to the Company continuing to hire staff to manufacture clinical material during the 2018 period as well as the startdate. Presented below is a discussion of the first clinical trial in the 2018 period.

General and administrative costs were approximately $2,338,000 in the 2018 quarter compared to $1,813,000 in the 2017 quarter. General and administrative costs were approximately $4,774,000 in the 2018 period compared to $3,151,000 in the 2017 period. The main increase is due to an increase in stock compensation expense during the 2018 period as options were granted in the 2016 Stock Option Plan that were not in the 2017 period.

Impact of the U.S. Tax Reform

On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Act”) into law. Effective January 1, 2018, among other changes, the Act (a) reduces the U.S. federal corporate tax rate to 21 percent, provides for a deemed repatriation and taxation at reduced rates on historical earnings (a “transition tax”) of certain non-US subsidiaries owned by U.S. companies and establishes new mechanisms to tax such earnings going forward. The Act has wide ranging implications for the Company. However, the impact on the Company’s financial statementsrecent developments for the three months ended September 30, 2019 that have resulted in a significant improvement in our liquidity.

July and six-month periods ended December 31, 2017 is immaterial, primarily becauseAugust 2019 Financings

In connection with the Company hasSeries AA offering completed with the New Investors in January 2019, we granted a full valuation allowance on deferred tax assets incall option to provide additional financing whereby the U.S., which results in there being no U.S. deferred tax assetsNew Investors were entitled to elect to purchase up to $20.0 million of our Common Stock at a purchase price equal to the greater of (i) $0.29 per share or liabilities recorded on(ii) 75% of the balance sheet that needvolume weighted average closing price (“VWAP”) of the our Common Stock during the thirty consecutive trading days prior to the date of the notice. In June 2019, we entered into a financial advisory agreement to undertake a private placement of (i) the shares of Common Stock issuable under the call option issued to the New Investors for a total of $20.0 million, plus (ii) between approximately $20 million and $30 million of equity or equity equivalent securities to be remeasuredissued to other investors. On July 23, 2019, we entered into a purchase agreement whereby the New Investors exercised their call option to purchase an aggregate of approximately 69.0 million shares of Common Stock for gross cash proceeds of $20.0 million. Since VWAP for the previous thirty consecutive trading days was $0.20 per share, the New Investors exercised the call option at the new 21% rate. The Company will continue to analyze the effectsa purchase price of the Act on its financial statements and operations. Any additional impacts from the enactment of the Act will be recorded as they are identified during the measurement period as provided for in Staff Accounting Bulletin 118.

 16

Liquidity and Capital Resources$0.29 per share.

 

AsPursuant to the financial advisory agreement entered into in June 2019, we issued approximately 14.0 million shares of December 31, 2017, we have approximately $0.8 millionCommon Stock in cash on handJuly and working capital deficitAugust 2019 to other investors in a private placement. These shares were issued at a purchase price of $0.29 per share and resulted in gross proceeds of approximately $1.1$4.1 million. DuringTotal advisory fees and other offering costs related to the year ended June 30, 2017, we closed on an equity transactionJuly and August 2019 financings amounted to approximately $1.5 million, resulting in which we issued units consisting of one share of common stock and a warrant to purchase either one-half or one share of common stock. During the year ended June 30, 2017, we also closed on an equity transaction in which we issued straight shares of common stock. During the six months ended December 31, 2017, we had an additional close on an equity transaction in which we issued straight shares of common stock.The Company received net proceeds of approximately $14 million from the transactions above.$22.6 million.

 

Xoma License Agreement

The Company is currently conducting

In January 2019, we entered into an amendment of our License Agreement with Xoma. This amendment eliminated the previous requirement that equity securities would be issued to Xoma upon the closing of a convertible notequalified financing in consideration for the payment to raise $3Xoma of approximately $5.9 million in whichcash in February 2019. Additionally, we have closed on $500,000agreed to make five cash payments to Xoma totaling $8.5 million (the “Future Cash Payments”) in quarterly installments between September 2019 and September 2020. We recognized a liability in January 2019 for the entire $8.5 million of the note financing. The notes also come with warrants at the time the notes are issued. The Company will continue to close on the note financing while the Company works to complete an Equity Financing. There are no assurances that any of the above financings will be completed or will be completed timely and on favorable terms.

Going ConcernFuture Cash Payments.

 

The continuationamended License Agreement provides that if future qualified financings occur before the Future Cash Payments are fully paid, we are required to pay Xoma 15% of the net proceeds from such financings (“Early Payments”) to be credited against the remaining unpaid Future Cash Payments in the reverse order of their future payment date.  Obligations to make the Future Cash Payments following a qualified financing and the obligations to make Early Payments shall end when the Future Cash Payments are fully paid for the total of $8.5 million.  The completion of equity financings in July and August 2019 for net proceeds of approximately $22.6 million triggered our obligation to make Early Payments of approximately $3.4 million. Presented below is a summary of the amounts payable under the amended License Agreement along with cash payments made for the three months ended September 30, 2019 (in thousands):


  Payable  Cash Activity  Payable 
  June 30,  Early  Scheduled  September 30, 
Future Payment Date 2019  Payments  Payments  2019 
September 30, 2019 $1,500  $-  $(1,500) $- 
December 31, 2019  1,000   -   -   1,000 
March 31, 2020  2,000   -   -   2,000 
June 30, 2020  2,000   (1,391)  -   609 
September 30, 2020  2,000   (2,000)  -   - 
                 
Total $8,500  $(3,391) $(1,500) $3,609 

The amendment to the License Agreement also revised the amount we are required to expend on development of RZ358 and related licensed products and revised provisions with respect to our diligence efforts in conducting clinical studies. Additionally, upon the future commercialization of RZ358, we will be required to pay royalties to Xoma based on the net sales of the related products. 

ActiveSite License Agreement

In August 2017, we entered into a Development and License Agreement with ActiveSite Pharmaceuticals, Inc.  (“ActiveSite”) pursuant to which we acquired the rights to ActiveSite’s Plasma Kallikrein Inhibitor program (“PKI Program”).  We are planning to use the PKI Program to develop, file, manufacture, market and sell products for diabetic macular edema and other human therapeutic indications. The ActiveSite License Agreement requires various milestone payments ranging from $1.0 million to $10.0 million when milestone events occur, up to an aggregate of $36.0 million of aggregate milestone payments. The first milestone payment for $1.0 million would be due after completion of the preclinical work and submission of an IND application to the FDA for AB101, which we are attempting to complete in calendar year 2020. We will also be required to pay royalties equal to 2.0% of any sales of products that use the PKI Program, up to a maximum of $10.0 million in total royalty payments. Through September 30, 2019, no milestone payments and royalties have been incurred.

Planned Spending

As a result of the equity financings completed in July and August 2019, we believe our existing cash balance of $25.2 million as of September 30, 2019, is adequate to carry out planned activities at least through November 2020. Our contractual obligations and other planned spending for the period from October 2019 through November 2020 include (i) contractual licensing obligations of $3.6 million to Xoma, (ii) planned spending on clinical programs of approximately $10.5 million to initiate a Phase 2b program for RZ358 in the U.S. and/or Europe, completion of the necessary toxicology studies for RZ402 to enable the filing of an IND and initiation of clinical studies, and completion of an ongoing Phase 1 study for AB101 along with related milestone payments, and (iii) net spending on compensation, benefits, rent, and public company costs for auditing and professional fees for approximately $8.9 million. Our planned spending on clinical programs includes $3.1 million of restricted cash that we are required to spend on development of RZ358 or our planned uplisting of our businessCommon Stock to a national stock exchange.

We expect to continue to pursue equity and/or debt financings to provided funding for planned activities for the fiscal year ending June 30, 2021 and beyond. To the extent that additional funding is dependent upon obtaining further financingobtained during the remainder of the fiscal year ending June 30, 2020, we plan to accelerate timing to complete clinical trials and achieving a break even or profitable level of operations in our business. The issuance of additional equity securities by us couldother research and development activities which would result in a significant dilution inincreased spending. However, we have the equity interests of our current or future stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments.flexibility to delay clinical programs to ensure that adequate capital resources are available. There are no assurances that we will be able to obtain any additional financing. Even if additional financing through either private placements, and/or bank financing or other loans necessary to support our working capital requirements. Tosources are available, they may not be pursued if the extent that funds generated from operations and any private placements, public offerings and/or bank financingterms are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, will be on termsnot acceptable to us.

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Cash Flows Summary

Presented below is a summary of our operating, investing and financing cash flows for the three months ended September 30, 2019 and 2018 (in thousands):

  2019  2018  Change 
Net cash provided by (used in):            
Operating activities $(8,929) $(1,432) $(7,497)
Investing activities  -   187   (187)
Financing activities  22,571   -   22,571 

Cash Flows Used in Operating Activities

For the three months ended September 30, 2019 and 2018, cash flows used in operating activities amounted to $8.9 million and $1.4 million, respectively. The key components in the calculation of our cash used in operating activities are as follows (in thousands):

  2019  2018  Change 
Net loss $(5,080) $(3,365) $(1,715)
Non-cash expenses  1,401   1,613   (212)
Non-cash gains  -   (42)  42 
Changes in operating assets and liabilities, net  (5,250)  362   (5,612)
             
Total $(8,929) $(1,432) $(7,497)

For the three months ended September 30, 2019, our net loss was $5.1 million compared to $3.4 million for the three months ended September 30, 2018. For further discussion about changes in our operating results for the three months ended September 30, 2019 and 2018, please refer toResults of Operations above.

For the three months ended September 30, 2019, non-cash expenses of $1.4 million was primarily attributable to stock-based compensation expense. For the three months ended September 30, 2018, non-cash expenses totaled $1.6 million, which consisted of stock-based compensation expense of $0.9 million, and accretion of debt discounts and issuance costs related to the Fiscal 2018 Notes of $0.7 million.

We did not have any non-cash gains for the three months ended September 30, 2019. For the three months ended September 30, 2018, non-cash gains consisted of a gain from the sale of equipment at our former Colorado facility of $23,000, and a gain of $19,000 on the change in fair value of embedded derivatives related to the Fiscal 2018 Notes which were converted to equity in January 2019.

For the three months ended September 30, 2019, net changes in operating assets and liabilities used operating cash flow of $5.3 million which was primarily due to a $4.9 million decrease in payables to Xoma under the amended License Agreement, a decrease in accrued compensation and other liabilities of $1.0 million, and an increase in related party receivables under our Master Services Agreement of $0.2 million. These conditions raise substantial doubt about our abilityuses of operating cash flow totaled $6.1 million and were partially offset by an increase in accounts payable of $0.8 million and a decrease in prepaid expenses and other assets of $0.1 million.

For the three months ended September 30, 2018, net changes in operating assets and liabilities resulted in operating cash flow of $0.4 million which was primarily due to continuean increase in accounts payable and accrued expenses of $0.2 million, and an increase in accrued interest on the Fiscal 2018 Notes of $0.2 million.

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Cash Flows Provided by Investing Activities

We did not have any cash flows from investing activities for the three months ended September 30, 2019. Net cash provided by investing activities for the three months ended September 30, 2018 amounted to $0.2 million which was attributable to proceeds from the sale of equipment that was no longer needed as a going concern.result of the termination of the leases for our former facilities in Colorado.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities for the three months ended September 30, 2019 amounted to $22.6 million. This amount consisted of (i) $20.0 million received from the New Investors in July 2019 for the purchase of approximately 69.0 million shares of Common Stock at a purchase price of $0.29 per share and (ii) $4.1 million received from other investors in July and August 2019 for the purchase of approximately 14.0 million shares of our Common Stock at a purchase price of $0.29 per share. The gross proceeds from these equity issuances totaled $24.1 million and was partially offset by fees of $1.5 million under a financial advisory agreement to result in net proceeds of $22.6 million. For the three months ended September 30, 2018, we did not have any financing cash flows.

 

Recent Accounting Pronouncements

 

SeePlease refer to Note 21 to the consolidated financial statements included in Part I, Item 1 of this Form 10-QReport regarding the impact of certain accounting pronouncements on our unaudited condensed consolidated financial statements.

 

Off-Balance Sheet Arrangements

 

We had nodid not have any off-balance sheet transactions.transactions for the periods covered by this Report.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE AND QUANTITATIVE DISCUSSIONDISCLOSURES ABOUT MARKET RISK.

 

Not required for smaller reporting companies.

 17

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief AccountingFinancial Officer (our principal financial and accounting officer), of the effectiveness of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (“Exchange Act”). Based on that evaluation andassessment under those criteria, our management has determined that, at September 30, 2019, our internal control over financial reporting was not effective due to material weaknesses in the system of internal control. A material weakness described below,is a deficiency, or combination of deficiencies, that creates a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely manner.

The material weaknesses identified by management were that (1) due to our management concludedlimited number of employees, we have not adequately segregated certain duties, (2) we have not implemented measures that would prevent employees from overriding the internal control system, (3) one employee was responsible for complex accounting issues without additional internal reviews, and (4) we did not maintainhave effective disclosurereview controls over financial reporting and procedures as of December 31, 2017related disclosures in ensuring that information that we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarizedaccordance with U.S. GAAP and reported within the time periods specified in the SEC rules and forms and that it is accumulated and communicated to the issuer’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Our management has identified control deficiencies regarding a lack of segregation of duties, a need for a stronger internal control environment, and minimal review of complex accounting issues. Our management believes that these deficiencies, whichregulations. Beginning in the aggregate constitutethree months ended March 31, 2019, we began mitigating these weaknesses through hiring additional employees and engaging a material weakness, are dueconsulting firm to the small size ofsupplement our staff, which makes it challenging to maintain adequate disclosure controls.technical accounting and financial reporting resources.

 

Changes in internal controls over financial reporting

 

During the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting (as defined in Rule 13(a)-15(f) or 15(d)-15(f)) that occurred during the period covered by this quarterly report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None

 

ITEM 1A. RISK FACTORS.

 

Certain factors exist which may affect the Company’s business and could cause actual results to differ materially from those expressed in any forward-looking statements. The Company has not experienced any material changesFactors that could cause our actual results to differ materially from those in this Report are any of the risks described in Item 1.A. Risk Factors of our 2019 Form 10-K. Any of these factors could result in a significant or material adverse effect on our results of operations or financial condition. Additional risk factors as previously disclosednot presently known to us or that we currently deem immaterial may also impair our business or results of operations.

Our ability to uplist our common stock to the NASDAQ Capital Market is contingent on us meeting applicable initial listing criteria.

We have applied for our common stock to be listed on the NASDAQ Capital Market, a national securities exchange. Each exchange requires companies desiring to list their common stock to meet certain listing criteria including total number of stockholders; minimum stock price, total value of public float, and in some cases total shareholders’ equity and market capitalization. Our failure to meet such applicable listing criteria could prevent us from listing our common stock on either exchange. In the event we are unable to uplist our common stock, our common stock will continue to trade on the OTCQB market, which is generally considered less liquid and more volatile than a national securities exchange. Our failure to uplist our common stock could make it more difficult for you to trade our common stock, could prevent our common stock trading on a frequent and liquid basis and could result in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 22, 2017 (the “Form 10-K”).value of our common stock being less than it would be if we were able to uplist

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

 

None.There were no reportable issuances of unregistered shares of the Company's equity securities other than as reported in the Company’s Current Reports on Form 8-K filed with the SEC on July 30, 2019 and August 13, 2019.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

 

None.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

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ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

Exhibit Number Description of Exhibits
   
10.110.1* LicenseMaster Services Agreement with XOMA*%Genexine, Inc. and Handok, Inc., effective as of July 1, 2019
10.231.1* Common Stock Purchase Agreement with XOMA*%
31.1Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2* 
31.2Certification of Chief AccountingFinancial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1* 
32.1Certification of Chief Executive Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2* 
32.2Certification of Chief AccountingFinancial Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
101.INS* XBRL Instance Document
101101.SC* The following materials from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheet, (ii) Statement of Operations, (iii) Statements of Cash Flows, (iv) Statements of Stockholders Equity and (v) related notes to these financial statements*Taxonomy Extension Schema
101.CA*XBRL Taxonomy Extension Calculation Linkbase
101.DEF*XBRL Taxonomy Extension Definition Linkbase
101.LA*XBRL Taxonomy Extension Label Linkbase
101.PRE*XBRL Taxonomy Extension Presentation Linkbase

 

*

* Filed herewith

%Certain portions of this exhibit have been redacted pursuant to a confidential treatment request filed with the Commission on February 14, 2018.

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SIGNATURES

 

In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 REZOLUTE, INC.
   
Date:  FebruaryNovember 14, 20182019By:/s/ Nevan Elam
  Nevan Elam
  Chief Executive Officer
  (Principal Executive Officer)
   
Date:  FebruaryNovember 14, 20182019By:/s/ Morgan FieldsKeith Vendola
  Morgan FieldsKeith Vendola
  Chief AccountingFinancial Officer
  (Principal Financial and Accounting Officer)

 

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