UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended | ||
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 |
REZOLUTE, INC
(Exact Name of Registrant as Specified in its Charter)
Delaware | 27-3440894 | |
(State of other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
1450 Infinite Drive, Louisville, Colorado | 80027 | |
(Address of Principal Executive Offices) | (Zip Code) |
(303) 222-2128
(Registrant’s Telephone Number, including Area Code)
AntriaBio, Inc.
(Former name, former address and former fiscal year, if changed since last report)
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, or 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 | Smaller reporting company x |
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 of shares of issuer’s common stock outstanding as of FebruaryDecember 14, 2018: 54,073,309
62,166,309
TABLE OF CONTENTS
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q 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, 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:
• | 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.
PART I –- FINANCIAL INFORMATION
Consolidated Balance Sheets
September 30, 2018 | June 30, 2018 | |||||||
(Unaudited) | ||||||||
Assets | ||||||||
Current assets | ||||||||
Cash | $ | 400,871 | $ | 1,645,872 | ||||
Other current assets | 372,114 | 361,915 | ||||||
Total current assets | 772,985 | 2,007,787 | ||||||
Non-current assets | ||||||||
Fixed assets, net | 178,719 | 368,374 | ||||||
Intangible assets, net | 35,207 | 37,030 | ||||||
Deferred lease asset | 25,439 | 32,850 | ||||||
Deposits | 56,841 | 56,841 | ||||||
Total non-current assets | 296,206 | 495,095 | ||||||
Total Assets | $ | 1,069,191 | $ | 2,502,882 | ||||
Liabilities and Stockholders' (Deficit) Equity | ||||||||
Current liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 1,788,387 | $ | 1,706,154 | ||||
Accrued payroll | 868,565 | 770,976 | ||||||
Convertible notes payable, net | 4,137,232 | 3,434,611 | ||||||
Embedded derivative liability | 55,000 | 73,904 | ||||||
Deferred lease liability, current portion | 132,922 | 113,997 | ||||||
Interest payable | 356,996 | 148,372 | ||||||
Total current liabilities | 7,339,102 | 6,248,014 | ||||||
Non-current liabilities: | ||||||||
Deferred lease liability, less current portion | 148,224 | 190,577 | ||||||
Deposit liability | 25,046 | 25,046 | ||||||
Total non-current liabilities | 173,270 | 215,623 | ||||||
Total Liabilities | 7,512,372 | 6,463,637 | ||||||
Commitments and Contingencies (Note 10) | ||||||||
Stockholders' (deficit) 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; 62,166,309 shares issued and outstanding, September 30, 2018 and June 30, 2018 | 62,168 | 62,168 | ||||||
Additional paid-in capital | 91,043,622 | 90,160,815 | ||||||
Accumulated deficit | (97,548,971 | ) | (94,183,738 | ) | ||||
Total stockholders' deficit | (6,443,181 | ) | (3,960,755 | ) | ||||
Total Liabilities and Stockholders' Deficit | $ | 1,069,191 | $ | 2,502,882 |
See accompanying notes to consolidated financial statements
Consolidated Statements of Operations
Three Months | ||||||||
Ended September 30, | ||||||||
2018 | 2017 | |||||||
(Unaudited) | ||||||||
Operating expenses | ||||||||
Research and development | ||||||||
Compensation and benefits | $ | 557,391 | $ | 1,500,864 | ||||
Consultants and outside costs | 46,705 | 130,361 | ||||||
Material manufacturing costs | 72,932 | 426,089 | ||||||
Clinical trial costs | 3,184 | 979,766 | ||||||
License costs | - | 770,900 | ||||||
Facilities and other costs | 249,698 | 502,657 | ||||||
929,909 | 4,310,637 | |||||||
General and administrative | ||||||||
Compensation and benefits | 1,249,696 | 1,795,427 | ||||||
Professional fees | 121,923 | 223,594 | ||||||
Investor relations | 44,013 | 59,871 | ||||||
General and administrative | 239,340 | 327,600 | ||||||
Loss (Gain) on sale of fixed assets | (22,852 | ) | - | |||||
1,632,120 | 2,406,492 | |||||||
Total operating expenses | 2,562,029 | 6,717,129 | ||||||
Loss from operations | (2,562,029 | ) | (6,717,129 | ) | ||||
Other income (expense) | ||||||||
Interest income | 28 | 337 | ||||||
Rent income | 89,466 | 31,838 | ||||||
Interest expense | (911,602 | ) | - | |||||
Derivative gains | 18,904 | 342 | ||||||
Total other income | (803,204 | ) | 32,517 | |||||
Net loss | $ | (3,365,233 | ) | $ | (6,684,612 | ) | ||
Net loss attributable to common stock | (3,365,233 | ) | (6,684,612 | ) | ||||
Net loss per common share - basic and diluted | $ | (0.05 | ) | $ | (0.13 | ) | ||
Weighted average number of common shares outstanding - basic and diluted | 62,166,309 | 52,887,981 |
See accompanying notes to consolidated financial statements
Consolidated Statements of Stockholders' Deficit
From June 30, 2018 to September 30, 2018 (Unaudited)
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 |
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 (Unaudited) | - | - | 1,507,699 | - | 1,507,699 | |||||||||||||||
Fair value of warrants issued (Unaudited) | - | - | 14,847 | - | 14,847 | |||||||||||||||
Issuance of common stock, net of issuance costs of $60,000 (Unaudited) | 4,500,000 | 4,500 | 4,435,500 | - | 4,440,000 | |||||||||||||||
Net loss for the three months ended September 30, 2017 (Unaudited) | - | - | - | (6,684,612 | ) | (6,684,612 | ) | |||||||||||||
Balance at September 30, 2017 (Unaudited) | 53,728,640 | $ | 53,730 | $ | 78,758,745 | $ | (71,006,574 | ) | $ | 7,805,901 | ||||||||||
Additional | Total | |||||||||||||||||||
Common Stock, $0.001 Par Value | Paid-in | Accumulated | Stockholders' | |||||||||||||||||
Shares | Amount | Capital | Deficit | Deficit | ||||||||||||||||
Balance at June 30, 2018 | 62,166,309 | $ | 62,168 | $ | 90,160,815 | $ | (94,183,738 | ) | $ | (3,960,755 | ) | |||||||||
Stock-based compensation (Unaudited) | - | - | 877,951 | - | 877,951 | |||||||||||||||
Fair value of warrants issued (Unaudited) | - | - | 4,856 | - | 4,856 | |||||||||||||||
Net loss for the three months ended September 30, 2018 (Unaudited) | - | - | - | (3,365,233 | ) | (3,365,233 | ) | |||||||||||||
Balance at September 30, 2018 (Unaudited) | 62,166,309 | $ | 62,168 | $ | 91,043,622 | $ | (97,548,971 | ) | $ | (6,443,181 | ) |
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
(Unaudited)
Three Months | ||||||||
Ended September 30 | ||||||||
2018 | 2017 | |||||||
CASH FLOWS FROM OPERATING ACTIVITIES: | ||||||||
Net loss | $ | (3,365,233 | ) | $ | (6,684,612 | ) | ||
Amortization of intangible asset | 1,823 | 1,823 | ||||||
Amortization of debt discount and debt issuance costs | 702,621 | - | ||||||
Depreciation expense | 25,368 | 266,613 | ||||||
Gain on sale of fixed assets | (22,852 | ) | - | |||||
Stock-based compensation expense | 877,951 | 1,507,699 | ||||||
Derivative gains | (18,904 | ) | (342 | ) | ||||
Warrant expense | 4,856 | 14,847 | ||||||
Changes in operating assets and liabilities: | ||||||||
(Increase) decrease in other current assets | (10,199 | ) | 92,845 | |||||
Decrease in deferred lease asset | 7,411 | 5,731 | ||||||
Increase (decrease) in accounts payable and accrued expenses | 179,822 | (84,636 | ) | |||||
Increase in interest payable | 208,624 | - | ||||||
Decrease in deferred lease liability | (23,428 | ) | (24,975 | ) | ||||
Net Cash Used In Operating Activities | (1,432,140 | ) | (4,905,007 | ) | ||||
CASH FLOWS FROM INVESTING ACTIVITIES: | ||||||||
Purchase of fixed assets | - | (5,816 | ) | |||||
Proceeds from sale of equipment | 187,139 | - | ||||||
Return of security deposit | - | - | ||||||
Net Cash Provided By (Used) In Investing Activities | 187,139 | (5,816 | ) | |||||
CASH FLOWS FROM FINANCING ACTIVITIES: | ||||||||
Payments on lease payable | - | - | ||||||
Proceeds from issuance of equity financing | - | 4,500,000 | ||||||
Payment of placement agent compensation and issuance costs | - | (60,000 | ) | |||||
Net Cash Provided by Financing Activities | - | 4,440,000 | ||||||
Net decrease in cash | (1,245,001 | ) | (470,823 | ) | ||||
Cash - Beginning of Period | 1,645,872 | 4,486,538 | ||||||
Cash - End of Period | $ | 400,871 | $ | 4,015,715 | ||||
SUPPLEMENTARY CASH FLOW INFORMATION: | ||||||||
Cash Paid During the Period for: | ||||||||
Taxes | $ | - | $ | - | ||||
Interest | $ | - | $ | - |
See accompanying notes to consolidated financial statements
5
Consolidated Statements of Operations
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
Consolidated Statements of Stockholders’ Equity
From June 30, 2016 to December 31, 2017 (Unaudited)
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 |
See accompanying notes to consolidated financial statements
Consolidated Statements of Cash Flows
(Unaudited)
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 |
See accompanying notes to consolidated financial statements
Notes to Consolidated Financial StatementsDecember 31, 2017September 30, 2018
(Unaudited)
Note 1 Nature of Operations
These financial statements represent the consolidated financial statements of Rezolute, Inc. (“Rezolute”), 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.
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 and the rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.
The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed on September 22, 2017,October 15, 2018, which contains the 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, 2017.2018.
Certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation of financial position, results of operations, or 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 period ended December 31, 2017September 30, 2018 are not necessarily indicative of results for the full fiscal year.
Use of Estimates
The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts in the financial statements and the accompanying notes. Such estimates and assumptions impact, among others, the following: estimated useful lives and impairment of depreciable assets, the fair value of share-based payments and warrants, fair value of derivative instruments, management’s assessment of going concern, 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 risk and uncertainties including financial, operational, regulatory and other risks associated with a clinical stage company, including the potential risk of business failure. See Note 3 regarding going concern matters.
6
Fixed Assets
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 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 relate to research and development costs without an allocation of general and administrative expenses.
Fair Value of Financial Instruments
Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal 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 value are as follows:
· | 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. |
The carrying amounts of financial instruments including cash, accounts payable and accrued expenses and convertible note payable approximated fair value as of December 31, 2017September 30, 2018 and June 30, 20172018 due to the relatively short maturity of the respective instruments.
The warrantembedded derivative liability recorded as of December 31, 2017 and June 30, 2017 is recorded at an estimated fair value based on a Black-Scholes pricing model.the present value of the probability of the weighted exercise of the payment obligation. The warrantembedded derivative liability is a level 3 fair value measurement with the entire change in the balance recorded through earnings. Seeearnings each reporting period. The significant assumptions ininputs to the calculation are a term of one year and a weighted probability of 50%. Refer to Note 8.6 for further discussion. The following table sets forth a reconciliation of changes in the fair value of financial instruments classified as level 3 in the fair value hierarchy:
Balance as of June 30, 2017 | $ | (588 | ) | |||||
Balance as of June 30, 2018 | 73,904 | |||||||
Total unrealized gains (losses): | ||||||||
Included in earnings | 498 | (18,904 | ) | |||||
Balance as of December 31, 2017 | $ | (90 | ) | |||||
Balance as of September 30, 2018 | $ | 55,000 |
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU 2016-01,Financial Instruments – Overall: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 bewas effective for us starting on July 1, 2018, and early adoption is not permitted. We are currently evaluating theThe adoption of this ASU did not have a material impact that the standard will have on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-03,Technical Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities, that clarifies the guidance in ASU No. 2016-1, Financial Instruments-Overall (Subtopic 825-10) related to: Equity Securities without a Readily Determinable Fair Value- Discontinuation, Equity Securities without a Readily Determinable Fair Value- Adjustments, Forward Contracts and Purchased Options, Presentation Requirements for Certain Fair Value Option Liabilities, Fair Value Option Liabilities Denominated in a Foreign Currency and Transition Guidance for Equity Securities without a Readily Determinable Fair Value. The adoption of this ASU is not expected to have a material impact on our 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 adopted the ASU 2017-9 on July 1, 2018. The adoption of the new provisions did not have a material impact on our financial condition or results of operations.
In July 2017, the FASB issued Accounting Standards Update (“ASU”) No. 2017-11.Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features, II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 revises the guidance for instruments with down round features in Subtopic 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, which is considered in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. An entity still is required to determine whether instruments would be classified in equity under the guidance in Subtopic 815-40 in determining whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer classified as liabilities. ASU 2017-11 is effective for annual and interim periods beginning December 15, 2018, and early adoption is permitted, including adoption in an interim. ASU 2017-11 provides that upon adoption, an entity may apply this standard retrospectively to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the opening balance of retaining earnings in the fiscal year and interim period adoption. The adoption of this ASU is not expected to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). This update requires organizations to recognize lease assets and lease liabilities on the balance sheet and also disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or after December 15, 2018, and interim periods within those annual periods. Earlier application is permittedASU 2016-02 requires modified retrospective adoption for all entities asleases existing at, or entered after, the date of the beginning ofinitial application, with an interim or annual period.option to use certain transition relief. We will be required to adopt ASU 2016-02 starting on July 1, 2019. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09.Compensation – Stock Compensation (Topic 718): Improvements 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.
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 provisionsthis ASU to have a material impact on our consolidated financial condition or results of operations.statements.
Subsequent Events
Two new investors (“New Investors”) have expressed interest in investing in Rezolute and have now affirmed their intent to enter into exclusive diligence and negotiations regarding potential investments in Rezolute (“Transaction”).
In exchange for the receipt of a total of $1.5 million ("Exclusivity Amount"), the Company has entered into an exclusivity agreement ("Exclusivity") with the New Investors. Pursuant to the terms of the Exclusivity, until the earlier to occur of: (i) the execution of a definitive agreement regarding a Transaction; (ii) the New Investors terminating the Exclusivity; or (iii) December 21, 2018, the Company is ceasing any and all discussions and negotiations with all other third parties including the Potential Lead. In the event that both or either New Investor elects not to enter into a Transaction, then at such New Investors' sole election, it may either: (a) request that Rezolute refund the applicable Exclusivity Amount; or (b) elect to convert the applicable Exclusivity Amount into shares of Rezolute's Common Stock at a price per share to be agreed upon.
8
Note 3 Going Concern
As reflected in the accompanying financial statements, the Company has a net loss of $12,403,200$3,365,233 and net cash used in operations of $8,052,651$1,432,140 for the sixthree months ended December 31, 2017,September 30, 2018, working deficit of $1,087,141$6,566,117 and stockholders’ equitydeficit of $3,801,798$6,443,181 and an accumulated deficit of $76,725,162$97,548,917 at December 31, 2017.September 30, 2018. In addition, the Company is in the clinical stage and has not yet generated any revenues. These factors raise substantial doubt about the Company’s ability to continue as a going concern.
The Company expects that its current cash resources as well as expected lack of operating cash flows will not be sufficient to sustain operations for a period greater than one year. The ability of the Company to continue its operations is dependent on Management’sManagement's plans, which include continuing to raise capital through equity or debt based financings. The Company is actively seeking additional equity funding from two investors, for which we are under an Exclusivity Agreement, as previously defined in subsequent events. There can be no assurances that such capital will be available to us on acceptable terms, or at all.
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.
Note 4 Fixed Assets
The following is a summary of fixed assets and accumulated depreciation:
Useful | Useful | |||||||||||||||||||||
Life | December 31, 2017 | June 30, 2017 | Life | September 30, 2018 | June 30, 2018 | |||||||||||||||||
Furniture and fixtures | 5 - 7 years | $ | 118,450 | $ | 118,450 | 5 - 7 years | $ | 118,451 | $ | 118,450 | ||||||||||||
Lab equipment | 3 - 15 years | 3,951,855 | 3,946,040 | 3 - 15 years | 474,815 | 738,415 | ||||||||||||||||
Leasehold Improvements | 5 - 7 years | 3,247,038 | 3,247,038 | 5 - 7 years | 29,296 | 29,296 | ||||||||||||||||
7,317,343 | 7,311,528 | 622,562 | 886,161 | |||||||||||||||||||
Less: accumulated depreciation and amortization | (2,519,520 | ) | (1,986,127 | ) | (443,843 | ) | (517,787 | ) | ||||||||||||||
$ | 4,797,823 | $ | 5,325,401 | $ | 178,719 | $ | 368,374 |
Depreciation expense was $266,781$25,368 and $278,074$266,613 for the three months ended December 31,September 30, 2018 and 2017, respectively.
During the period ended September 30, 2018, the Company completed sales of laboratory and 2016, respectively and was $533,394 and $546,429manufacturing fixed assets for an amount of $187,139. This resulted in the six months ended December 31, 2017 and 2016, respectivelyCompany recording a gain on sale of fixed assets of $22,852.
Note 5 Related Party Transactions
During the three and six months ended December 31,September 30, 2018 and 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 discussionentered into no 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.party transactions. As of December 31, 2017,September 30, 2018 and June 30, 2017, there were none and $25,200, respectively,no related party expenses recorded in accounts payable and accrued expense – related party.expense.
As discussed in Note 6, the Company issued a secured convertible promissory note on February 26, 2018 for gross proceeds of $500,000, which proceeds from this Note was received directly from a member of the Board of Directors. The Company also issued a second secured convertible promissory note in connection with the April 3, 2018 closing discussed in Note 6, with gross proceeds of $500,000 with this same member of the Board.
Note 6 Convertible Notes Payable
Historical Note
As of December 31, 2017, and JuneSeptember 30, 2017,2018, the Company had one historical convertible note outstanding with a balance wasof $10,000, and $10,000, respectively.which consists of notes which were not converted at the time of an equity transaction in 2017. As of December 31, 2017, theSeptember 30, 2018, this outstanding convertible note has matured, and payment ispayments were due. TheThis convertible note which has not been repaid or converted continues to accrue interest at a rate of 8%.
Q3 2018 Notes
On January 30,February 26, 2018, the Company issued a secured convertible promissory note for $500,000 as well as a warrant to purchase 250,000 sharesgross proceeds of common stock$500,000 to a related party. The note bears interest at a rate of 15% per annum and expires one year from issuance. The note contains an optional conversion feature in which if the Company raises $10 million then, at the investor’s option, the notes would convert into the financing at a 20% discount of the financing terms. With the promissory note, the investor also received warrants to purchase 500,000 shares of common stock which expire five years from date of issuance. The exercise price for these warrants was set on of June 29, 2018 at $0.52 per share. The note also contains an embedded derivative liability for the acceleration of the maturity date as discussed in Note bears2, which states a $25,000 penalty plus all unpaid interest to be accrued will be paid if note is paid prior to maturity. The initial measurement of the embedded derivative liability of $100,000 was reflected as a debt discount, is being amortized into interest expense over the life of the note.
During the quarter ended March 31, 2018, the Company issued two secured convertible promissory notes for gross proceeds of $700,000, of which one was to a related party for $500,000. The notes bore interest at a rate of 12% per annum and expire one year from issuance or 10 days after the closing of a financing of at least $10 million. The notes included a default interest rate provision, in which the stated interest rate will increase to 15% during an event of default. As of July 15, 2018, the stated interest rate has increased to 15% as the quarterly interest payment is past due. The notes contained an optional conversion feature in which if the Company raises $20 million then, at the investor’s option, the notes would convert into the financing at a 20% discount of the financing terms. This conversion feature was a contingent beneficial conversion feature that was not calculated and recorded until the contingent event has occurred. With the promissory note, the investors also received warrants to purchase 350,000 shares of common stock equal to one-half of the principal amount of the note. The warrants have an exercise price of $1.00 per share and are exercisable for five years from date of issuance.
The above two notes and related warrants to purchase shares of stock were modified on April 3, 2018 with four changes. The first being the optional conversion was amended to an automatic conversion in the event of a qualified financing. Second, the maturity date on both were amended to January 31, 2019 or if the Company successfully offers and sells at least $15 million of its securities in a single equity financing (a “Qualified Financing”), then the outstanding principal and interest due shall automatically be converted at the closing of the Qualified Financing at a 20% discount to the terms set forth in such Qualified financing. Third, the warrants issued were modified to a number of shares set by the principal amount divided by $0.41, which was set on June 29, 2018. Finally, the exercise price was amended from $1.00 to 120% the average closing price of the 10 days preceding July 1, 2018, or $0.52 for the year ended June 30, 2018.
As the debt issued in January and February 2018 was modified to mirror the terms of the April 3, 2018 financing closing, the Company completed a modification or extinguishment evaluation. As the future cash flows of the instruments fair value changed an amount greater than 10% and debt extinguishment accounting was applied. Accordingly, the net book value of the original note payable, including the unamortized debt discount of $626,797 was removed and the fair value of the modified notes payable and warrants was recorded as $683,737 and $545,257, respectively. This resulted in the Company recording a loss on the extinguishment of debt of $602,193.
Q4 2018 Notes
On April 3, 2018 and April 11, 2018, the Company closed on a series of Senior Secured Promissory Notes with gross proceeds of $4.1 million, which had cash issuance costs of approximately $239,000. The notes also include warrants to purchase common stock with the number of shares and exercise price to be determined at the at the close of the next financing or based on the average trading prices prior to July 1, 2018. As the Company did not complete a financing event prior to July 1, 2018, the warrant conversion share price was set based on the average closing price of the 20 trading days preceding July 1, 2018, or $0.41. The exercise price was set at 120% of the average closing price of the 10 trading days preceding July 1, 2019, or $0.52. As discussed in Note 8, the warrants had a fair value of $134,000. The notes bear interest at 12% per annum, with a 15% default interest rate provision, and matures at the earlier ofmature on January 31, 2019 or whenif the Company raises $10successfully offers and sells at least $15 million of its securities in ana single equity financing. The note willfinancing, then the outstanding principal and interest due shall automatically be secured by a perfected security interest inconverted at the tangible assetsclosing of the Company.Qualified Financing at a 20% discount to the terms set forth in such Qualified Financing. The notes contained a mandatory conversion feature, in which the notes will convert into shares at the close of a qualified financing. This conversion feature is a contingent beneficial conversion feature that is not calculated and recorded until the contingent event has occurred. The notes include a default interest rate provision, in which the stated interest rate will increase to 15% during an event of default.
With the promissory notes issued in April 2018, each investor also received warrants to purchase an adjustable number of shares of common stock at an adjustable exercise price. The number of shares was to be set at the conversion price of the convertible notes or if no Qualified Financing occurs prior to July 1, 2018, the shares are set by the average closing stock price for the 20-day period preceding July 1, 2018. The exercise price is to be determined at 120% of the conversion price of the Convertible note if a financing occurs or 120% of the average closing stock price of the Company for 10 days prior to July 1, 2018. As no qualifying financing event had occurred prior to July 1, 2018, the number of warrants to purchase common stock was fixed as of June 30, 2018, based on the preceding 20-day average stock price, and 11,685,176 of warrants to purchase shares of common stock were issued. The exercise price of the shares was also fixed at $0.52, which is 120% of the 10-day closing price for the period preceding July 1, 2018.
The value of the notes and warrants is determined using their relative fair values. The fair value of the promissory notes and warrants was $7,186,883 and $177,893 respectively, resulting in relative fair values of $2,319,000 allocated to notes and $1,821,000 allocated to warrants. As of September 30, 2018, the outstanding balance of the secured convertible promissory notes was $4,840,000, with a current debt discount outstanding of approximately $1,531,405 and unamortized debt issuance costs of approximately $152,000.
As of September 30, 2018 the Company's convertible note outstanding balance is as follows:
Date of Issuance | Face Value of Notes Payable | Unamortized Debt Discount & Debt Issuance Costs | Book Value | |||||||||
May 10, 2010 | 10,000 | - | 10,000 | |||||||||
February 26, 2018 | 500,000 | 62,780 | 437,220 | |||||||||
April 3, 2018 | 4,040,000 | 1,106,964 | 2,933,036 | |||||||||
April 3, 2018 | 700,000 | 16,263 | 683,737 | |||||||||
April 11, 2018 | 100,000 | 26,761 | 73,239 | |||||||||
5,350,000 | 1,212,768 | 4,137,232 |
Note 7 Shareholders’ Equity
During the yearthree months ended JuneSeptember 30, 2017,2018, the Company closed privatedid not enter into any additional placement transactions in which the Company issued 5,783,184 units to accredited investors. Each investor was issued either Class A Unitsagreements 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 in which the Company issued common stock to accredited investors at an offering price of $1.00 per share. As of June 30, 2017, the Company received net proceeds 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.
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.
financing agreements.
Lincoln Park Transaction – On December 22, 2017, we entered into the Lincoln Park Purchase Agreement pursuant to which Lincoln Park has agreed to purchase from us up to an aggregate of $10.0 million of the Company’s common stock (subject to certain limitations) from time to time over the 36-month term of the agreement. We also entered into a registration rights agreement with Lincoln Park pursuant to which the Company filed with the Securities and Exchange Commission (the “SEC”) the registration statement to register for resale under the Securities Act of 1933, as amended, or the Securities Act, the shares of common stock that have been or may be issued to Lincoln Park under the Purchase Agreement.
As a result, on December 22, 2017, 344,669 newly issued shares of the Company’s common stock, equal to three percent of the $10 million availability, were issued to Lincoln Park as consideration for Lincoln Park’s commitment to purchase shares of the Company’s common stock under the agreement.
Under the terms and subject to the conditions of the Lincoln Park Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $10.0 million worth of shares 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 stock during the twelve (12) consecutive business days ending on the business day immediately preceding such purchase date (in each case, 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.
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.
The Company has not declared or paid any dividends or returned any capital to common stockholders as of December 31, 2017.September 30, 2018.
Note 8 Stock-Based Compensation and Warrants
Options –On March 26, 2014,
During the quarter ended September 30, 2018, the Company adopted the AntriaBio, Inc. 2014 Stock and Incentive Plan which allows the Companygranted 1,125,000 options to issue up to 3,750,000 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. The1,702,767 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 employees 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 1,550,000 of the cancelled 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.
forfeited. The Company has computed the fair value of all options granted that have begun vesting using the Black-Scholes option pricing model. The optionsOptions that require specific events before they begin to vest are valued at the grant date, however; have not valued untilbeen recorded as the specific event has occurred.is not probable of occurring. 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 calculatehas estimated a forfeiture rate but simply accounts for forfeituresof zero as they occur.the value of each option holder is calculated individually. 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.
The CompanyRezolute has computed the fair value of all options granted during the sixthree months ended December 31, 2017September 30, 2018 using the following assumptions:
Expected volatility | 84 | % | ||
Risk free interest rate | % | |||
Expected term (years) | ||||
Dividend yield | 0 | % |
Stock option activity is as follows:
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 |
Weighted | Weighted Average | |||||||||||
Number of | Average | Remaining | ||||||||||
Options | Exercise Price | Contractual Life | ||||||||||
Outstanding, June 30, 2018 | 19,415,246 | $ | 1.55 | 7.8 | ||||||||
Granted | 1,125,000 | $ | 0.52 | |||||||||
Forfeited | (1,702,767 | ) | $ | 1.62 | ||||||||
Outstanding, September 30, 2018 | 18,837,479 | $ | 1.65 | 7.7 | ||||||||
Exercisable at September 30, 2018 | 10,901,335 | $ | 1.89 | 6.3 |
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 $281,814$129,609 and $444,801$298,955 and as general and administrative – compensation and benefits expense of $912,215$748,342 and $792,137$1,208,744 for the three months ended December 31,September 30, 2018 and 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, 2017September 30, 2018 is $8,637,760.$3,994,793. The Company determinedexpenses the fair value as of the date of grant using the Black-Scholes option pricing method and expenses the fair valuestock comparison 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 placements as follows:
Weighted | Weighted Average | Weighted | Weighted Average | |||||||||||||||||||||
Number of | Average | Remaining | Number of | Average | Remaining | |||||||||||||||||||
Warrants | Exercise Price | Contractual Life | Warrants | Exercise Price | Contractual Life | |||||||||||||||||||
Outstanding, June 30, 2017 | 32,796,448 | $ | 1.71 | 3.7 | ||||||||||||||||||||
Outstanding, June 30, 2018 | 45,635,217 | $ | 1.37 | 3.40 | ||||||||||||||||||||
Warrants issued for consulting services | 650,000 | $ | 1.03 | 15,624 | $ | 1.00 | ||||||||||||||||||
Warrants expired | (285,407 | ) | $ | 2.43 | - | $ | - | |||||||||||||||||
Outstanding, December 31, 2017 | 33,161,041 | $ | 1.69 | 3.2 | ||||||||||||||||||||
Outstanding, September 30, 2018 | 45,650,841 | $ | 1.37 | 3.09 |
For the SixThree Months Ended December 31, 2017:September 30, 2018: The Company issued warrants to purchase 100,00015,624 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.
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.
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, warrants 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.
The warrants exercisable for 100,000 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 $66,643 and recorded as additional paid-in-capital and as general and administrative expenses. The warrants exercisable for 50,000 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 $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 calculated for the three months ended December 31, 2017 were as follows:
Note 9 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.changes during the year ended June 30, 2018.
In the three and six months ended December 31, 2017,September 30, 2018, the Company did not record any income tax provision due to expected future losses and full valuation allowance on its deferred tax assets.
Note 10 Commitments and Contingencies
Lease Commitments –
In May 2014, the Company entered into a lease of approximately 27,000 square feet of office, laboratory 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. The Company also made a security deposit of $750,000 which is held by the landlord, of which $375,000$562,500 has been returned to the Company and the remaining balance of $187,500 will be returned gradually over the next several years.
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 ourits 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.
On July 1, 2018 the Company also sub-leased approximately 4,100 square feet of office space and 6,770 square feet of clean room and lab space to other companies. The Company is to receive monthly payments of approximately $30,300 for this sublease through the conclusion of the lease.
On July 1, 2018, the Company sub-leased approximately 3,200 square feet of lab space to another company. The Company is to receive monthly payments of approximately $8,000 for this space through the conclusion of the lease.
As of December 31, 2017,September 30, 2018, the minimum rental commitment under the leases are as follows:
Operating Leases | Sub-lease Income | Total | Operating Leases | Sub-lease Income | Total | |||||||||||||||||||
Year Ending June 30, | ||||||||||||||||||||||||
2018 | 365,680 | (76,866 | ) | 288,814 | ||||||||||||||||||||
2019 | 747,953 | (157,187 | ) | 590,766 | 596,155 | (309,246 | ) | 286,909 | ||||||||||||||||
2020 | 688,892 | (148,551 | ) | 540,341 | 688,892 | (390,076 | ) | 298,816 | ||||||||||||||||
2021 | 338,392 | - | 338,392 | 338,392 | - | 338,392 | ||||||||||||||||||
2022 | 347,836 | - | 347,836 | 347,836 | - | 347,836 | ||||||||||||||||||
2023 | 357,279 | - | 357,279 | |||||||||||||||||||||
Thereafter | 569,364 | - | 569,364 | 212,085 | - | 212,085 | ||||||||||||||||||
$ | 3,058,117 | $ | (382,604 | ) | $ | 2,675,513 | $ | 2,540,639 | $ | (699,322 | ) | $ | 1,841,317 |
License Agreements:Legal Matters 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.
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 December 31, 2017,September 30, 2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on 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.
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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 consolidated 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
Our stated strategy has been to build a metabolic focused biopharmaceutical company by in-licensing compelling compounds that we believe clearly target different diseases where there is an unmet need. In JuneDecember 2017, we filedcompleted the latest phase of this strategy by in-licensing RZ358, a fully human monoclonal antibody that is currently in Phase 2 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 IND for AB101 withoral therapy to treat diabetic macular edema, the FDA andleading cause of blindness in July 2017, we dosed our first patientadults in the US, and (ii) our super-long-acting basal insulin, AB101, which is currently in Phase 1 first-in-human clinical study (the “Study”). The study is a first-in-human single ascending dose studydevelopment to assess the safety and tolerability, pharmacokinetics and pharmacodynamics of AB101 in patients with Typediabetes mellitus.
For fiscal and calendar year 2019, we have the following objectives to advance our development strategy: (i) initiate a Phase 2b clinical study for RZ358 in the US and Europe, (ii) complete the necessary toxicology studies for RZ402 to enable the filing of an IND and initiation of clinical studies, and (iii) complete the Phase 1 Diabetes Mellitus. The first part of the study is a sequential cohort dose ranging offor AB101 and there isexplore partnership opportunities. In order to meet these objectives, we need to raise additional capital through an optional second study part to compare one or more tested doses of AB101 to Lantus®equity financing ("Financing"). 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
Throughout calendar year 2017,2018, 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 dose in the second cohort as planned per protocol. However, we will not begin dosing patients 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 treatment 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 leveraging 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 $500,000 in January of 2018.
We have met with a variety of the large and mid-size health care funds ("Funds") to unveil the Rezolute story with RZ358 as we seek to raise at least $25 million (the “Equity Financing”)our lead pipeline program. Many of these Funds have expressed interest in Rezolute and to date, as the fundsmore than 10 Funds have begun doingconducted extensive due diligence on our programs and prospects involving many meetings and hundreds of hours of review and analysis.
While some Funds either declined to consider an investment in Rezolute or declined to invest following their diligence, by August 2018 various Funds concluded that they would be interested in investing in Rezolute as part of a syndicate on the condition that at least one Fund serve as the lead investor to prepare a term sheet and related documents. In the second half of August 2018, we have experienced very favorable receptionreceived a term sheet from one potential investor (the "Lead Investor"); however, we did not believe that the terms were in the best interests of the Company and its shareholders and continued evaluating alternatives.
Another Fund declined to serve as lead investor in Rezolute or to participate in a syndicate as part of the Financing; nonetheless, this Fund suggested that we consider a strategic business combination with one of their existing portfolio companies (the "Portfolio Company"). In the second half of September 2018, we engaged in a diligence process with the Portfolio Company culminating in our strategy and expanded pipeline. Nonetheless,receipt of a term sheet proposal from the Portfolio Company for a strategic transaction. Following discussions between the companies on October 11, 2018, we recognizeconcluded that it will take time to complete the Equity Financing as we do not anticipate closing such a transaction with the Portfolio Company was not the best option for Rezolute and its shareholders.
Two new investors (“New Investors”) have since expressed interest in investing in Rezolute.and have now affirmed their desire to enter into exclusive diligence and negotiations regarding a potential investment in Rezolute ("Transaction").
In exchange for the receipt of a total of $1.5 million ("Exclusivity Amount"), the Company has entered into an exclusivity agreement ("Exclusivity") with the New Investors. Pursuant to the terms of the Exclusivity, until the endearlier to occur of: (i) the execution of Q1 calendar yeara definitive agreement regarding a Transaction; (ii) the New Investors terminating the Exclusivity; or (iii) December 21, 2018, the Company is ceasing any and all discussions and negotiations with all other third parties including the Potential Lead. In the event that both or early Q2. Further,either New Investor elects not to enter into a Transaction, then at such New Investors' sole election, it may either: (a) request that Rezolute refund the applicable Exclusivity Amount; or (b) elect to convert the applicable Exclusivity Amount into shares of Rezolute's Common Stock at a price per share to be agreed upon.
While no assurance can be given that any such financingthat: (i) we will execute a term sheet with the New Investors; (ii) we will be completed orable to negotiate a purchase agreement that is satisfactory to all parties; (iii) we will be timely completed on favorable terms. Currently,able to generate enough interest from other Funds to raise sufficient capital; (iv) that we cannot sustainwill be able to raise additional bridge financing to continue operations withoutpending the Debtcompletion of the Transaction, we believe that this financing strategy is the best option for the Company and its shareholders. Our inability to either secure additional bridge funding or complete the Financing would materially and without the larger Equity Financing we cannotadversely impact our ability to continue to advance all of our current programs.as a going concern.
Significant Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of the consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to the estimated useful lives and impairment of depreciable assets, the fair value of share-based payments and warrants, fair value of derivative instruments, estimates of the probability and potential magnitude of contingent liabilities, and income tax valuation allowances.allowances and going concern. Management bases its estimates and judgments on historical experience and on various factors that are believed to be reasonable under the circumstance, 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. 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 accounting policies have a significant impact on the results we report in our consolidated financial statements.
Results of Operations
For Three and Six Months Ended December 31,September 30, 2018 and 2017 and 2016
Results of operations for the three months ended December 31, 2017September 30, 2018 (the “2018“2019 quarter”) and the three months ended December 31, 2016September 30, 2017 (the “2017“2018 quarter”) reflected losses of approximately $5,751,000$3,365,233 and $4,888,000,$6,684,612, respectively.
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.
Revenues
We are a clinical stage company and 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$930,000 in the 2019 quarter compared to $4,311,000 in the 2018 quarter. The decrease in the 2019 quarter was due to reduced manufacturing costs as the Company is no longer manufacturing product at its Colorado location. This included both expenses incurred during the manufacturing process, as well as $1,100,000 decrease in compensation and benefits, including salaries, benefits and stock compensation, with the decreased headcount. Additionally, the Company incurred $771,000 of license expense in the 2018 quarter compared to $3,075,000zero license expense in the 20172019 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 start of the first clinical trial in the 2018 period.
General and administrative costs were approximately $2,338,000$1,632,000 in the 2019 quarter compared to $2,406,000 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 increasedecrease is due to an increase ina decrease of employee related expenses, including a stock compensation decrease of $460,402 and decrease of $87,115 of payroll expense duringfrom the 2018 period as options were grantedquarter, offset partially by a $22,852 gain on sale of fixed assets recorded in the 2016 Stock Option Plan that were not in the 2017 period.period ended September 30, 2018.
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 statements for the three and six-month periods ended December 31, 2017 is immaterial,September 30, 2018 was not significant, primarily because the Company has a full valuation allowance on deferred tax assets in the U.S., which results in there being no U.S. deferred tax assets or liabilities recorded on the balance sheet that need to be remeasuredin which remeasurement was not significant at the new 21% rate. The Company will continue to analyze the effects 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.
Liquidity and Capital Resources
As of December 31, 2017,September 30, 2018, we have approximately $0.8 million$401,000 in cash on hand and working capital deficit of approximately $1.1$6.57 million. During the year ended June 30, 2017, we closed on an equity transaction 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$1.5 million subsequent to September 20, 2018 from the transactionsexclusivity agreement disclosed above.
TheAs previously discussed, the Company is currently conducting a convertible noteseeking additional funding of approximately $40 million to cover operating expenses, continue clinical trials of RZ358, bringing RZ402 through an IND filing, continuing clinical trials of AB101 and continuing research and development of our product pipeline through the calendar year end 2019. Due to the Company's low cash balance, in the interim, we may have to seek additional bridge financing to raise $3 million in which we have closed on $500,000continue operations pending the completion of the note financing. The notes also come with warrants atTransaction disclosed above. There is no guarantee that the time the notes are issued. The Company will be able to obtain bridge financing until the Financing closes and our inability to do so would materially and adversely impact our ability to 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.as a going concern.
Going Concern
The continuation of our business is dependent upon obtaining further financing and achieving a break even or profitable level of operations in our business. The issuance of additional equity securities by us could result in a significant dilution in 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. There are no assurances that we will be able to obtain additional financing through either private placements, and/or bank financing or other loans necessary to support our working capital requirements. To the extent that funds generated from operations and any private placements, public offerings and/or bank financing 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 terms acceptable to us. These conditions raise substantial doubt about our ability to continue as a going concern.
17
Recent Accounting Pronouncements
See Note 2 to the consolidated financial statements included in this Form 10-Q regarding the impact of certain accounting pronouncements on our consolidated financial statements.
Off-Balance Sheet Arrangements
We had no off-balance sheet transactions.
ITEM 3. QUALITATIVE AND QUANTITATIVE DISCUSSION ABOUT MARKET RISK.
Not required for smaller reporting companies.
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 AccountingFinance Officer (our principal 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, 2018, our internal control over financial reporting was not effective due to material weaknesses in the system of internal control. A material weakness described below, ouris 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 concludedwere that (1) we have not segregated duties as one employee can initiate and complete transactions in the general ledger system, (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 review from within the Company and (4) the Company did not maintainhave effective disclosurereview controls over financial reporting over the financial statements 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 believesregulation. We do not believe that these deficiencies, whichcontrol weaknesses resulted in deficient financial reporting as the aggregate constitute a material weakness, are due tochief executive officer and chief financial officer were aware of their responsibilities under the small size of our staff, which makes it challenging to maintain adequate disclosure controls.SEC reporting requirement and personally certified the financial reports.
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.
None
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 changes from those risk factors as previously disclosed in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 22, 2017October 15, 2018 (the “Form 10-K”).
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
None.
Exhibit Number | Description of Exhibits | |
Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002* | ||
31.2 | Certification of Chief | |
32.1 | Certification of Chief Executive Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002* | |
32.2 | Certification of Chief | |
101 | The following materials from our Quarterly Report on Form 10-Q for the quarter ended |
* Filed herewith
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: | By: | /s/ Nevan Elam |
Nevan Elam | ||
Chief Executive Officer | ||
(Principal Executive Officer) | ||
Date: | By: | /s/ |
Chief | ||
(Principal Accounting Officer) |