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 December 31, 20172018
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, Colorado201 Redwood Shores Parkway, Suite 315, Redwood City
California		 80027

94065

(Address of Principal Executive Offices) (Zip Code)

 

(303) 222-2128

(650) 206-4507

(Registrant’s Telephone Number, including Area Code)

 

AntriaBio, Inc.

Not Applicable

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

 

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  ¨xSmaller reporting company x
(Do not check if a smaller reporting company) 
 Emerging Growth Company  ¨

 

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

 

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

¨YesxNo

 

Number of shares of issuer’s common stock outstanding as of February 14, 2018: 54,073,309

11, 2019: 61,866,319

 

 

 

 

 

 

TABLE OF CONTENTS

 

 Page
PART I – FINANCIAL INFORMATION2
  
ITEM 1.PART I - FINANCIAL STATEMENTSINFORMATION21
  
ITEM 1.  FINANCIAL STATEMENTS1
Unaudited Condensed Consolidated Balance Sheets – December 31, 20172018 and June 30, 2017201821
  
Unaudited Condensed Consolidated Statements of Operations – Three and six months ended December 31, 20172018 and 2016201732
  
Unaudited Condensed Consolidated StatementsStatement of Stockholders’ Equity – From June 30, 2017 toDeficit - Six months ended December 31, 2017201843
  
Unaudited Condensed Consolidated Statements of Cash Flows – Six months ended December 31, 20172018 and 2016201754
  
Notes to Unaudited Condensed Consolidated Financial Statements65
  
ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS1517
ITEM 3.  QUANTITATIVE AND QUALITATIVE AND QUANTITATIVE DISCUSSIONDISCLOSURES ABOUT MARKET RISK1724
ITEM 4.  CONTROLS AND PROCEDURES1824
  
PART II – OTHER INFORMATION1825
  
ITEM 1.  LEGAL PROCEEDINGS1825
ITEM 1A.  RISK FACTORS1825
ITEM 2.  UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS1825
ITEM 3.  DEFAULTS UPON SENIOR SECURITIES1825
ITEM 4.  MINE SAFETY DISCLOSUREDISCLOSURES1825
ITEM 5.  OTHER INFORMATION1925
ITEM 6.  EXHIBITS1925
SIGNATURES26

 

 i

 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.

 1

 ii

 

PART I –- FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS.

 

Rezolute, Inc.

Unaudited Condensed Consolidated Balance Sheets

 

  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 

  December 31,  June 30, 
  2018  2018 
Assets        
         
Current assets:        
Cash $258,188  $1,645,872 
Assets held for sale  72,537   - 
Other current assets  91,553   361,915 
Total current assets  422,278   2,007,787 
         
Non-current assets:        
Intangibile assets, net  33,384   37,030 
Fixed assets, net  -   368,374 
Lease deposits and other  -   89,691 
Total assets $455,662  $2,502,882 
         
Liabilities and Stockholders' Deficit        
Current liabilities:        
Accounts payable and accrued expenses $2,091,017  $1,706,154 
Accrued payroll  872,431   770,976 
Convertible notes payable, net  10,000   3,434,611 
Interest payable  2,762   148,372 
Embedded derivative liability  -   73,904 
Deferred lease liability  -   113,997 
Total current liabilities  2,976,210   6,248,014 
         
Non-current liabilities:        
Convertible notes payable, net  5,005,774   - 
Interest payable on convertible notes payable  761,372     
Exclusivity Payment  1,500,000   - 
Long-term portion of deferred lease liability  -   190,577 
Sublease deposit liability  -   25,046 
Total liabilities  10,243,356   6,463,637 
         
Commitments and contingencies (Notes 10 and 11)        
         
Stockholders' deficit:        
Preferred stock, $0.001 par value; 20,000,000 shares authorized;        
15,000,000 shares designated as Series A; no shares issued  -   - 
Common stock, $0.001 par value, 200,000,000 shares authorized;        
61,866,319 and 62,166,309 shares issued and outstanding as of December 31, 2018 and June 30, 2018, respectively  61,869   62,168 
Additional paid-in capital  91,860,840   90,160,815 
Accumulated deficit  (101,710,403)  (94,183,738)
Total stockholders' deficit  (9,787,694)  (3,960,755)
Total liabilities and stockholders' deficit $455,662  $2,502,882 

 

See accompanying notes to unaudited condensed consolidated financial statementsstatements.

 

 1

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Operations

  Three Months  Six Months 
  Ended December 31,  Ended December 31, 
  2018  2017  2018  2017 
Operating expenses:                
Research and development:                
Compensation and benefits $371,428  $1,482,946  $928,819  $2,983,810 
Consultants and outside costs  126,457   233,798   173,162   364,159 
Material manufacturing costs  472,589   227,602   545,521   653,691 
Clinical trial costs  547   581,988   3,731   1,561,754 
License costs  50,000   407,605   50,000   1,178,505 
Facilities and other costs  288,072   479,149   537,769   981,807 
                 
Total research and development  1,309,093   3,413,088   2,239,002   7,723,726 
                 
General and administrative:                
Compensation and benefits  1,381,852   1,672,494   2,631,548   3,467,921 
Professional fees  85,618   213,399   207,541   436,993 
Investor relations  13,947   133,705   57,960   193,576 
Other general and administrative  291,721   318,272   531,061   645,872 
Loss on sale of fixed assets  45,679   -   22,827   - 
Impairment of long-lived assets  33,039   -   33,039   - 
                 
Total general and administrative  1,851,856   2,337,870   3,483,976   4,744,362 
                 
Operating loss  (3,160,949)  (5,750,958)  (5,722,978)  (12,468,088)
                 
Non-operating income (expense):                
Interest income  35   524   63   861 
Gain on lease termination  167,788   -   167,788   - 
Rent income  63,605   31,838   153,071   63,676 
Interest expense  (1,286,911)  (147)  (2,198,513)  (147)
Derivative gains  55,000   156   73,904   498 
                 
Total non-operating income (expense)  (1,000,483)  32,371   (1,803,687)  64,888 
                 
Net loss $(4,161,432) $(5,718,587) $(7,526,665) $(12,403,200)
                 
Net loss per common share - basic and diluted $(0.07) $(0.11) $(0.12) $(0.23)
                 
Weighted average number of common shares outstanding - basic and diluted  62,123,919   53,762,538   62,144,998   53,327,558 

See accompanying notes to unaudited condensed consolidated financial statements.

2 

 

Rezolute, Inc.

 

Rezolute, Inc.

Unaudited Condensed Consolidated StatementsStatement of OperationsStockholders’ Deficit

 

For the Six Months Ended December 31, 2018

  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 

        Additional     Total 
  Common Stock  Paid-in  Accumulated  Stockholders' 
  Shares  Amount  Capital  Deficit  Deficit 
                
Balances, June 30, 2018  62,166,309  $62,168  $90,160,815  $(94,183,738) $(3,960,755)
                     
Stock-based compensation  -   -   1,693,369   -   1,693,369 
Fair value of warrants issued to consultants  -   -   6,357   -   6,357 
Shareholder surrender of shares for no consideration  (299,990)  (299)  299   -   - 
Net loss  -   -   -   (7,526,665)  (7,526,665)
                     
Balances, December 31, 2018  61,866,319  $61,869  $91,860,840  $(101,710,403) $(9,787,694)

 

See accompanying notes to unaudited condensed consolidated financial statementsstatements.

 

 3 

 

 

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ EquityCash Flows

From June 30, 2016 to

For the Six Months Ended December 31, 2018 and 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 
  2018  2017 
       
CASH FLOWS FROM OPERATING ACTIVITIES:        
Net loss $(7,526,665) $(12,403,200)
Amortization of intangible assets  3,646   3,646 
Accretion of debt discount and issuance costs  1,581,163   - 
Depreciation and amortization expense  38,832   533,394 
Gain on lease termination  (167,788)  - 
Loss on sale of fixed assets  22,827   - 
Impairment of long-lived assets  33,039     
Stock-based compensation expense  1,693,369   2,701,728 
Derivative gains  (73,904)  (498)
Fair value of warrants issued to consultants  6,357   535,303 
Changes in operating assets and liabilities:        
Decrease in other assets  264,173   146,287 
Decrease (increase) in deferred lease asset  (14,926)  11,462 
Increase in accounts payable and accrued expenses  486,318   469,177 
Increase in interest payable  615,762   - 
Decrease in deferred lease liability  (45,026)  (49,950)
Net Cash Used In Operating Activities  (3,082,823)  (8,052,651)
         
CASH FLOWS FROM INVESTING ACTIVITIES:        
Proceeds from sale of equipment  195,139   - 
Purchase of fixed assets  -   (5,816)
Net Cash Provided By (Used In) Investing Activities  195,139   (5,816)
         
CASH FLOWS FROM FINANCING ACTIVITIES:        
Proceeds from Series AA financing Exclusivity Payment  1,500,000   - 
Proceeds from issuance of common stock  -   4,500,000 
Payment of offering costs  -   (60,000)
Net Cash Provided by Financing Activities  1,500,000   4,440,000 
         
Net decrease in cash  (1,387,684)  (3,618,467)
Cash at beginning of period  1,645,872   4,486,538 
Cash at end of period $258,188  $868,071 
         
SUPPLEMENTARY CASH FLOW INFORMATION:        
Cash paid for interest $-  $- 
Cash paid for income taxes  -   - 
         
Non-Cash Investing and Financing Activities:        
Transfer of fixed assets to assets held for sale $72,537  $- 
Shareholder surrender of 299,990 shares for no consideration  -   - 

 

See accompanying notes to unaudited condensed consolidated financial statementsstatements.

 

 4 

 

 

Rezolute, Inc.

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 notesNotes to consolidated financial statements

 5

Rezolute, Inc.

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

 

Note 11. Nature of Operations and Consolidation

 

The Company is a clinical stage biopharmaceutical company. 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.All significant intercompany balances and transactions have been eliminated.

 

Note 22. 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 (“U.S. GAAP”) and the rules and regulations of the United States Securities and Exchange Commission (“SEC”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.

 

The condensed consolidated balance sheet as of June 30, 2018, has been derived from the Company’s audited consolidated financial statements. The unaudited interim financial statements should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the SEC on September 22, 2017,October 15, 2018, which contains the Company’s audited financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition and Results of Operations, for the year ended June 30, 2017.2018.

 

Certain information orand footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of AmericaU.S. GAAP have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange CommissionSEC for interim financial reporting. Accordingly, they do not include all the information and footnotesfootnote disclosures necessary for a comprehensive presentation of financial position, results of operations, orand cash flows. It is management’smanagement's opinion, however, that all material adjustments (consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The interim results for the periodthree and six months ended December 31, 20172018 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the full fiscal year.year ending June 30, 2019.

 

Comprehensive Income (Loss)

Comprehensive income (loss) is used to refer to net income (loss) plus other comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under U.S. GAAP are reported as separate components of stockholders’ deficit instead of net income (loss). There are no differences between comprehensive loss and net loss for the three and six months ended December 31, 2018 and 2017.

Use of Estimates

 

The preparation of financial statements in conformity with U.S. generally accepted accounting principlesGAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the consolidated financial statements and the accompanying notes. SuchThe Company bases its estimates and assumptions impact, among others,on current facts, historical experience, and various other factors that it believes are reasonable under the following:circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant accounting estimates include, but are not necessarily limited to, estimated useful lives and impairment of depreciablefixed 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.

 

Long-Lived Assets Held for Sale

Long-lived assets classified as held for sale are initially measured at the lower of carrying amount or the fair value less cost to sell. A loss is recognized for any initial adjustment of the long-lived asset’s carrying amount in the period in which held for sale criteria are met.

  65 

 

 

Fixed AssetsRezolute, Inc.

 

Fixed assets are carried at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the estimated useful lives.Notes to Unaudited Condensed Consolidated Financial Statements

 

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, 20172018 and June 30, 20172018 due to the relatively short maturity of the respective instruments. Due to the complex and unique terms of the convertible notes payable discussed in Note 6 and the Exclusivity Payment discussed in Note 7, it was not reasonably practicable to determine the current fair value for those financial instruments.

 

The warrantembedded derivative liability recorded as of December 31, 2017 and June 30, 2017discussed in Note 6 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. As of December 31, 2018, the significant assumptions in Note 8.inputs to the calculation are a remaining term of one month and a weighted probability of zero percent.

Recent Accounting Pronouncements

In March 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (“ASU”) No. 2016-09, Improvements to Employee Share-Based Payment, aimed at simplifying the accounting for share-based transactions. The following table sets forth a reconciliationstandard included modifications to the accounting for income taxes upon vesting or settlement of changesequity awards, employer tax withholding on share-based compensation and financial statement presentation of excess tax benefits. The Company decided to maintain its current practice of recognizing forfeitures in the fair valueperiod that the forfeiture occurs rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation. ASU 2016-09 was effective for the Company on July 1, 2018 and the adoption did not have a material impact on the Company’s consolidated financial instruments classified as level 3 in the fair value hierarchy:

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

Recent Accounting Pronouncementsstatements.

 

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 startingthe Company on July 1, 2018. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.

In February 2018, the FASB issued ASU No. 2018-03,Technical Corrections and earlyImprovements 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). The adoption of this ASU is not permitted. We are currently evaluatingexpected to have a material impact on the impact that the standard will have on ourCompany’s consolidated financial statements.

 

In May 2017, the FASB issued ASU 2017-9,Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting. This ASU includes guidance on what changes to share-based payment awards would require modification accounting and is effective for annual periods beginning after December 15, 2017. We adopted this ASU on July 1, 2018. The adoption of the new provisions did not have a material impact on the Company’s financial condition or results of operations.

6

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). This updateASU requires organizationsthe Company 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 applicationEarly adoption is permitted, for all entities as ofand the beginning of an interim or annual period. We will benew standard was required to adopt ASU 2016-02 starting onbe adopted retrospectively to each prior reporting period presented upon initial adoption. However, in July 1, 2019. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.

 7

In March 2016,2018 the FASB issued ASU 2016-09.No. 2018-11 Compensation – Stock Compensation (Topic 718):Targeted Improvements, which provides lessees the option to Employee Share-Based Payment Accounting.apply the new leasing standard to all open leases as of the adoption date by recognizing a cumulative-effect adjustment to accumulated deficit in the period of adoption without restating prior periods. The updateCompany is still evaluating which transition approach will affect all entities that issue share-based payment awards to their employees andbe implemented upon adoption of ASU No. 2016-02. This ASU is currently effective for annual periods beginning after December 15, 2016the Company 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.its fiscal year ending June 30, 2020.

 

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

Note 33. Going Concern

 

As reflected in the accompanying unaudited condensed consolidated financial statements, the Company has a net loss of $12,403,200 and net cash used in operations of $8,052,651 for the six months ended December 31, 2017,2018 the Company incurred a net loss of $7.5 million and net cash used in operating activities amounted to $3.1 million. As of December 31, 2018, the Company had a working capital deficit of $1,087,141 and$2.6 million, a stockholders’ equitydeficit of $3,801,798$9.8 million, and an accumulated deficit of $76,725,162 at December 31, 2017.$101.7 million.  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.

 

As discussed in Note 11, in January 2019 the Company closed an offering with two new investors (the “New Investors”) for an aggregate of 2.5 million shares of Series AA Preferred Stock that resulted in gross proceeds of $25.0 million (including application of the $1.5 million Exclusivity Payment received in December 2018, as discussed in Note 7). Closing occurred on January 30, 2019 and resulted in receipt of the remaining proceeds of $23.5 million. The shares of Series AA Preferred Stock owned by the New Investors are immediately convertible into an aggregate of approximately 113.6 million shares of common stock. Due to the closing of the Series AA Financing, the Fiscal 2018 Notes discussed in Note 6 converted for an aggregate principal balance of $5,340,000 plus accrued interest to approximately 771,000 shares of Series AA Preferred Stock, which are immediately convertible into an aggregate of approximately 35.0 million shares of common stock. All of the Series AA Shares will automatically convert into shares of common stock upon receipt of stockholder approval for an increase in the number of authorized shares of common stock to at least 500.0 million shares. The holders of Series AA Preferred Stock are entitled to vote on an as converted basis with common stockholders whereby the New Investors have a majority of the votes required to increase the Company’s authorized shares of common stock.

As a result of the $23.5 million capital infusion from the Series AA Financing, less a $5.9 million license payment paid in February 2019, net proceeds of approximately $17.6 million are now available primarily to advance the Company’s clinical programs. The Company expects that its current cash resources as well as expected lackalso granted options to the New Investors to purchase up to an aggregate of operating cash flows will not be sufficient to sustain operations for a period greater than one year. The ability$20.0 million of shares of the Company’s common stock prior to December 31, 2020 at a per share price equal to the greater of $0.29 or 75% of the volume weighted average closing price of the Company’s common stock over 30 consecutive trading days prior to the exercise of the option.

As a result of the completion of the Series AA Financing, management currently believes the Company has adequate capital resources to continue(i) meet its operations is dependent on Management’scontractual licensing obligations over the next 12 months, (ii) move forward with its plans which include continuing to raise capital through equity or debt based financings. There can beadvance ongoing clinical programs, and (iii) repay past due payables and accrued expenses. The Company currently expects to request additional funding from the New Investors during the second half of calendar 2019. However, there are no assurances that the New Investors will elect to exercise their rights to invest up to an additional $20.0 million, or that the Company would be able to obtain additional financing through other sources, such capital willas equity offerings and bank financings. Even if these other financing sources are available, they may not be availableon terms that are acceptable to us on acceptable terms, or at all.management. These conditions raise substantial doubt about the Company’s ability to continue as a going concern.

 

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.

 

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Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 44. Fixed Assets

 

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

 

 Useful       Useful December 31, June 30, 
 Life  December 31, 2017  June 30, 2017  Life 2018  2018 
Furniture and fixtures  5 - 7 years  $118,450  $118,450  5 - 7 years $-  $118,450 
Lab equipment  3 - 15 years   3,951,855   3,946,040  3 - 15 years  -   738,415 
Leasehold Improvements  5 - 7 years   3,247,038   3,247,038  5 - 7 years  -   29,296 
      7,317,343   7,311,528 
Less: accumulated depreciation and amortization      (2,519,520)  (1,986,127)
     $4,797,823  $5,325,401 
Total fixed assets  -   886,161 
Less accumulated depreciation and amortization  -   (517,787)
Net fixed assets $-  $368,374 

 

Depreciation and amortization expense wasamounted to $12,664 and $266,781 and $278,074 for the three months ended December 31, 2018 and 2017, respectively. Depreciation and 2016, respectivelyamortization expense amounted to $38,832 and was $533,394 and $546,429 for the six months ended December 31, 2018 and 2017, respectively

For the three months ended September 30, 2018, the Company completed sales of furniture, fixtures, and 2016, respectivelylaboratory equipment for proceeds of $187,139. This resulted in the Company recording a gain on sale of fixed assets of $22,852. For the three months ended December 31, 2018, the Company completed an additional sale of furniture and fixtures for proceeds of $8,000. This sale resulted in the Company recording a loss on sale of fixed assets of $45,679.

Additionally, in December 2018 the Company vacated its leased office and laboratory space in Louisville, Colorado, resulting in an impairment charge of $33,039 related to leasehold improvements, laboratory equipment, furniture and fixtures that the Company is not expected to receive any further economic benefit from. As of December 31, 2018, the Company classified the remaining laboratory equipment with an estimated fair value of $72,537 as assets held for sale. In January 2019, the Company sold this equipment and collected the net proceeds of $72,537.

 

Note 55. Related Party Transactions

 

DuringOn February 26, 2018, the three andCompany issued a secured convertible promissory note for $500,000 that is payable to a former member of the Board of Directors. On April 3, 2018, the Company issued a second convertible promissory note for $500,000 to this same former member of the Board of Directors. This second promissory note replaced a note with similar terms that was issued on January 25, 2018.

In December 2017, the Company entered into an exclusive license agreement with Xoma Corporation (“Xoma”). For the six months ended June 30, 2018, pursuant to the license agreement the Company issued shares of common stock to Xoma that resulted in ownership of approximately 13% of the Company’s outstanding common stock as of December 31, 2017, the Company incurred investor relations expense of $33,322 and $33,322 and general and administrative expenses of $67,439 and $67,439, see2018. This license was amended in January 2019 as discussed in Note 8 for discussion related to warrants issued as compensation for such services. During the three and six months ended December 31, 2016, the Company incurred investor relations expense of $31,050 and $67,275 and general and administrative expenses of $13,928 and $13,928 for services performed by related parties of the Company and were included in the statement of operations.11. As of December 31, 2017, and June 30, 2017, there were none and $25,200, respectively, related party expenses recorded in2018, accounts payable and accrued expense – related party.expenses include approximately $449,000 of payables due to Xoma.

8

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

 

Note 66. Convertible Notes Payable

Summary of Convertible Notes

 

As of December 31, 2017, and June 30, 2017,2018, the Company's convertible note outstanding balance was $10,000 and $10,000, respectively. Asnotes payable consist of December 31, 2017, the outstanding convertible note has matured and payment is due. The convertible note which has not been repaid or converted continues to accrue interest at a rate of 8%.following:

 

  Interest   Principal  Unaccreted  Net Carrying  Accrued 
Issuance Date Rate   Balance  Debt Discount  Value  Interest 
                 
May 10, 2010  8.0% $10,000 $- $10,000 $2,762
February 26, 2018  15.0%(1)  500,000   36,428   463,572   88,767 
April 3, 2018  15.0%(1)  4,040,000   288,924   3,751,076   539,257 
April 3, 2018  15.0%(1)  700,000   1,826   698,174   120,526 
April 11, 2018  15.0%(1)  100,000   7,048   92,952   12,822 
Total       5,350,000   334,226   5,015,774   764,134 
Less current maturities       (10,000)  -   (10,000)  (2,762)
Long-term debt      $5,340,000  $334,226  $5,005,774  $761,372 

On January 30, 2018,

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

Note 7 Shareholders’ Equity

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

The Company also entered into a private placement transaction 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, 2017,2018.

For the three and six months ended December 31, 2018, the Company closedrecognized accrued interest expense of $407,138 and $613,000, respectively, related to its outstanding convertible notes payable. For the three and six months ended December 31, 2018, the Company recognized debt discount accretion expense of $878,542 and $1,581,163, respectively. Accretion expense is a component of interest expense in the accompanying unaudited condensed consolidated statements of operations.

In connection with the Series AA financing discussed in Note 11, the Fiscal 2018 Notes converted for an aggregate principal balance of $5,340,000 plus accrued interest of approximately $829,000 as of January 30, 2019, into an aggregate of approximately 771,000 shares of Series AA preferred stock. Pursuant to the terms of the notes, the conversion price was approximately $8.00 per share which was a 20% discount to the terms set forth in the Series AA financing. Due to the issuance of preferred stock to settle the obligations under the convertible notes, the Company classified the principal and the related accrued interest balances as long-term liabilities as of December 31, 2018.

May 2010 Note

As of December 31, 2018, the Company had a convertible note outstanding with a balance of $10,000, which consists of notes which were not converted at the time of an equity transaction in 2017. This convertible note bears interest at 8% per annum. As of December 31, 2018, this outstanding convertible note is due on demand, but the holder has not requested payment.

Fiscal 2018 Notes

On February 26, 2018, the Company issued a convertible promissory note for gross proceeds of $500,000 to a former member of the Company’s board of directors. The note provides for interest at 15% per annum and matures one year from issuance.

During the quarter ended March 31, 2018, the Company issued two additional convertible promissory notes for gross proceeds of $700,000, including an additional private placement transactionnote for $500,000 to the same former member of the board of directors. These additional notes provided for interest at a rate of 12% per annum and mature one year from issuance or 10 days after the closing of a financing of at least $10 million. These notes included a default interest rate provision, in which the stated interest rate increased to 15% during an event of default. Beginning on July 1, 2018, the interest rate increased to 15% since a default existed due to the failure to make quarterly interest payments. These two notes were modified on April 3, 2018 whereby the notes and accrued interest will automatically convert to common stock at a 20% discount to the terms set forth in an equity financing for at least $15 million (a “Qualified Financing”). In addition, the maturity date on both notes was amended to January 31, 2019.

On April 3, 2018 and April 11, 2018, the Company issued common stock to accredited investors at an offering price of $1.00 per share. The Company received netpromissory notes and warrants for gross proceeds of $4.44$4.1 million, after the placement agent compensationbefore deduction of $60,000.cash issuance costs of approximately $239,000. The notes bear interest at 12% per annum, with a 15% default interest rate provision, and mature on January 31, 2019.

 9 

 

 

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Lincoln Park TransactionContingent Beneficial Conversion Feature – On December 22, 2017, we entered

Each of the Fiscal 2018 Notes discussed above contained a mandatory conversion feature that was triggered if the Company completed an equity financing for between $10 million and $20 million, whereby the notes would automatically convert into the Lincoln Park Purchase Agreement pursuant tosecurities issued in the financing at a 20% discount. This feature that enables conversion at a 20% discount upon completion of a future equity financing is a contingent beneficial conversion feature (“BCF”) that is not calculated and recorded until the contingent event has occurred. As discussed in Note 11, on January 30, 2019, the Company closed the Series AA Financing which Lincoln Park has agreed to purchase from us up to an aggregate of $10.0 millionresulted in the conversion of the Company’s common stock (subject to certain limitations) from time to time overFiscal 2018 Notes whereby a BCF was incurred for approximately $5.9 million. This BCF will be recognized as additional interest expense on the 36-month term ofFiscal 2018 Notes for 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.fiscal quarter ending March 31, 2019.

 

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.Embedded Derivative Liability

 

The Lincoln Park Purchase Agreement andFebruary 26, 2018 promissory note shown in the registration rights agreement contain customary representations, warranties, agreements and conditions to completing future sale transactions, indemnification rights and obligationstable above also contains an embedded derivative for the acceleration of the parties.maturity date if the note is paid prior to maturity, whereby a $25,000 penalty plus all unpaid interest to be accrued through the maturity date is due. The Company hasinitial measurement of this embedded derivative liability of $100,000 was reflected as a debt discount that is being accreted to interest expense using the right to terminate the purchase agreement at any time, at no cost or penalty. During any “eventeffective interest method. The following table sets forth a reconciliation 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,changes in the eventfair value of bankruptcy proceedings by or against the Company,embedded derivative liability for the purchase agreement will automatically terminate.six months ended December 31, 2018:

Liability as of June 30, 2018 $73,904 
Gain from reduction in fair value of embedded derivative  (73,904)
Liability as of December 31, 2018 $- 

Note 7. Stockholders’ Deficit

 

Actual sales of shares of common stock to Lincoln Park underChanges in Stockholders’ Deficit

For changes in stockholders’ deficit for 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 assix months ended December 31, 2018, please refer to the appropriate sourcesunaudited condensed consolidated statement of fundingstockholders’ deficit. The following table presents changes in stockholders’ deficit 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.three months ended December 31, 2018:

        Additional     Total 
  Common Stock  Paid-in  Accumulated  Stockholders' 
  Shares  Amount  Capital  Deficit  Deficit 
                
Balances, September 30, 2018  62,166,309  $62,168  $91,043,622  $(97,548,971) $(6,443,181)
Stock-based compensation  -   -   815,418   -   815,418 
Fair value of warrants issued to consultants  -   -   1,501   -   1,501 
Shareholder surrender of shares for no consideration  (299,990)  (299)  299   -   - 
Net loss  -   -   -   (4,161,432)  (4,161,432)
                     
Balances, December 31, 2018  61,866,319  $61,869  $91,860,840  $(101,710,403) $(9,787,694)

 

 10 

 

 

TheRezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Changes in stockholders’ deficit for each of the three months ended September 30, 2017 and December 31, 2017 are as follows:

        Additional     Total 
  Common Stock  Paid-in  Accumulated  Stockholders' 
  Shares  Amount  Capital  Deficit  Deficit 
                
Balances, June 30, 2017  49,228,640  $49,230  $72,800,699  $(64,321,962) $8,527,967 
Issuance of common stock, net of issuance costs of $60,000  4,500,000   4,500   4,435,500       4,440,000 
Stock-based compensation  -   -   1,507,699   -   1,507,699 
Fair value of warrants issued to consultants  -   -   14,847   -   14,847 
Net loss  -   -   -   (6,684,612)  (6,684,612)
                     
Balances, September 30, 2017  53,728,640   53,730   78,758,745   (71,006,574)  7,805,901 
Stock-based compensation  -   -   1,194,029   -   1,194,029 
Fair value of warrants issued to consultants  -   -   520,455   -   520,455 
Commitment fee for issuance of common stock  344,669   345   (345)  -   - 
Net loss  -   -   -   (5,718,587)  (5,718,587)
                     
Balances, December 31, 2017  54,073,309  $54,075  $80,472,884  $(76,725,161) $3,801,798 

Since its inception, the Company has not declared or paid any dividendsdividends.

Series AA Preferred Stock Exclusivity Payment

In December 2018, two New Investors expressed interest in investing in the Company and affirmed their intent to enter into exclusive diligence and negotiations regarding a potential equity financing (“Transaction”). In exchange for the receipt of a total of $1.5 million ("Exclusivity Payment"), the Company 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 returned(iii) December 21, 2018, the Company agreed to cease any capitaland all discussions and negotiations with all other third parties. In the event that both or either New Investor elected not to common stockholdersenter into a Transaction, then at such New Investors' sole election, it had the ability to either: (a) request that the Company refund the applicable Exclusivity Payment; or (b) elect to convert the applicable Exclusivity Payment into shares of the Company's Common Stock at a price per share to be agreed upon. As discussed in Note 11, on January 7, 2019, the New Investors decided to proceed with consummation of the Transaction whereby closing occurred on January 30, 2019. Since the Exclusivity Payment was refundable at the New Investors’ option, it is classified as a liability in the accompanying unaudited condensed consolidated balance sheet as of December 31, 2017.

Note 8 Stock-Based Compensation

Options –On March 26, 2014,2018. Since the Company adoptedTransaction closed on January 30, 2019, the AntriaBio, Inc. 2014 Stock and Incentive PlanExclusivity Payment did not require existing working capital which allows the Company to issue up to 3,750,000 of common stockresults 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 Companyclassification as of June 30, 2017 and no additional grantsa long-term liability as of December 31, 2017. The options have an exercise price from $1.29 to $3.44 per share. The options vest monthly over four years, with some options subject to a one year cliff before options begin to vest monthly.2018.

11

Rezolute, Inc.

 

On February 23, 2015, the Company adopted the AntriaBio, Inc. 2015 Non Qualified Stock Option Plan which allows the CompanyNotes 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.Unaudited Condensed Consolidated Financial Statements

 

On October 31, 2016, the Board adopted the AntriaBio, Inc. 2016 Non Qualified Note 8. Stock-Based Compensation and Warrants

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.Options

 

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

The Company has computed the fair value of all options granted during the six months ended December 31, 20172018:

     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  (1,839,642)  1.62     
Outstanding, December 31, 2018  18,700,604   1.58   7.6 
             
Exercisable, December 31, 2018  11,744,856   1.86   6.2 

Effective July 1, 2018, the Company adopted ASU 2016-09 to maintain its current practice of recognizing forfeitures in the period that the forfeiture occurs rather than estimating the number of awards that are not expected to vest. The unrecognized stock-based compensation expense as of December 31, 2018 is $3,046,814.

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

  Three Months  Six Months 
  Ended December 31,  Ended December 31, 
  2018  2017  2018  2017 
             
Research and development $61,063  $281,814  $190,672  $580,769 
General and administrative  754,355   912,215   1,502,697   2,120,959 
Total $815,418  $1,194,029  $1,693,369  $2,701,728 

The aggregate fair value of stock options granted for 1,125,000 shares of common stock for the six months ended December 31, 2018 amounted to $445,189, or $0.40 per share as of the grant date. Fair value was computed using the Black-Scholes valuation model and will result in the recognition of compensation cost ratably over the vesting period of the stock options which approximates the requisite service period. For the six months ended December 31, 2018, the fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, with the following weighted-average assumptions:

 11

 

Expected volatility  84%
Risk free interest rate  2.0 - 2.212.83%
Expected term (years)  7 
Dividend yield  0%

 

Stock option activity is as follows:Warrants

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

Stock-based compensation expense related toThe Company has issued warrants in conjunction with various debt and equity financings and for services. For the fair value of stock options was included in the statement of operations as research and development – compensation and benefits expense of $281,814 and $444,801 and as general and administrative – compensation and benefits expense of $912,215 and $792,137 for the threesix months ended December 31, 20172018, no warrants expired, and 2016, respectively. Stock-based compensation expense related to the fair valuenone were exercised. Presented below is a summary 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 $1,376,196warrant activity for the six months ended December 31, 2017 and 2016, respectively. The unrecognized stock-based compensation expense at December 31, 2017 is $8,637,760. The Company determined the fair value as of the date of grant using the Black-Scholes option pricing method and expenses the fair value ratably over the vesting period.

Warrants – The Company issued warrants to agents in conjunction with the closing of various financings and issued warrants in private placements as follows:2018:

 

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

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

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.

     Weighted  Weighted Average 
  Number of  Average  Remaining 
  Warrants  Exercise Price  Contractual Life 
Outstanding, June 30, 2018  45,635,217  $1.37   3.4 
Warrants issued for consulting services  31,248   1.00     
Outstanding, December 31, 2018  45,666,465   1.37   2.8 

 

 12 

 

 

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.Rezolute, Inc.

 

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.Notes to Unaudited Condensed Consolidated Financial Statements

 

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:

Expected volatility53% - 85% 
Risk free interest rate1.76% - 2.37% 
Warrant term (years) 1 - 10
Dividend yield0%

Note 99. 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.

  

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

 

Note 1010. Commitments and Contingencies

 

Lease Commitments –and Termination

In May 2014, the Company entered into a lease offor approximately 27,000 square feet of office, laboratory and clean room space to be leased for seventy-two months. The lease requiresrequired monthly payments of $28,939 adjusted annually by approximately 3% plus triple net expenses monthly of $34,381 adjusted annually. TheAs of June 30, 2018, the Company also madehad a security deposit of $750,000in place for $187,500 which iswas held by the landlord of which $375,000 has been returnedand this amount was applied to monthly lease payments for the Company and the remaining balance will be returned gradually over the next several years.three months ended December 31, 2018.

 13

 

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

$56,851. On March 17, 2017, the Company sub-leased their original approximately 10,000 square feet of office space under the May 2014 lease to another company.this unrelated party. The sublease iswas for eighty-two months unlessand provided for monthly payments to the Company is unable to extend our current lease then the sub-lease will expire on March 31, 2020. The Company is to receive monthly payments of $12,523 adjusted annually plus triple net expenses monthly of $12,828 adjusted annually.approximately $25,000. The Company also received a security deposit of $25,046 which will be returnedin connection with this sub-lease. On July 1, 2018 the Company also sub-leased approximately 14,100 square feet of office space, clean room and lab space to other companies. These sub-leases provided for monthly payments of approximately $38,300.

On December 14, 2018 the Company entered into surrender agreements with its landlord, sub-landlord and sub-lessees to terminate all remaining lease and sub-lease obligations. In connection with this transaction, the Company was relieved of its remaining obligations under the leases and relinquished its rights under the lease and sublease agreements whereby no cash was exchanged by the parties. Accordingly, the Company recognized a net gain of $167,788. This gain resulted from the elimination of net deferred rent obligations of $199,583 and the sublease security deposit of $25,046 for a total of $224,629; partially offset by forfeiture of the Company’s security deposit for $56,841 to arrive at the endnet gain of $167,788. Additionally, the lease.

Company recognized an impairment charge of $10,163 for the unamortized leasehold improvement costs. As of December 31, 2017,2018, the minimum rental commitment under the leases are as follows:Company has no remaining lease commitments.

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

 

License Agreements: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.

 14

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, 2017,2018, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the Company’s results of our operations. There At each reporting period, the Company evaluates whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450,Contingencies. Legal fees are no proceedingsexpensed as incurred.

13

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 11. Subsequent Events

XOMA License Agreement

On December 6, 2017, the Company entered into a license agreement (“License Agreement”) with XOMA Corporation (“XOMA”), through its wholly-owned subsidiary, XOMA (US) LLC, pursuant to which XOMA granted an exclusive global license to the Company to develop and commercialize XOMA 358 (formerly X358, now RZ358) for all indications. XOMA and the Company concurrently entered into a common stock purchase agreement (the “Purchase Agreement” and, together with the License Agreement, the “Transaction Documents”) pursuant to which the Company would issue equity securities to XOMA in connection with certain financing milestones.  On March 30, 2018, XOMA and the Company amended the Transaction Documents to add terms specifying the financial responsibility for certain tasks related to the technology transfer and to adjust the number of shares issuable to XOMA under the Purchase Agreement.

On January 7, 2019, the parties further amended the Transaction Documents.  The License Agreement was amended to eliminate the requirement that equity securities be issued to XOMA upon the closing of a Qualified Financing (as defined in the License Agreement) and to replace it with a requirement for the Company to make five cash payments to XOMA totaling $8,500,000 on or before specified staggered future dates (the “Future Cash Payments”) upon the closing of a Qualified Financing.  The Future Cash Payments are payable for $1.5 million by September 30, 2019, $1.0 million by December 31, 2019, $2.0 million by March 31, 2020, $2.0 million by June 30, 2020, and $2.0 million by September 30, 2020. As a result of this amendment to the License Agreement, during the fiscal quarter ending March 31, 2019, the Company will recognize a liability for the $8.5 million of future payments that are required.

Until the Future Cash Payments are fully paid, the Company is required to pay XOMA 15% of the net proceeds of each Future Financing (“Early Payments”) to be credited against the remaining unpaid Future Cash Payments in reverse order of their future payment date.  Obligations to make the Future Cash Payments following a Qualified Financing and the obligations to make Early Payments shall end when the Future Cash Payments are fully paid for the total of $8.5 million. 

In addition to the Future Cash Payments, XOMA was entitled to receive $5,925,000 in cash upon the closing of the Series AA Financing discussed below, which anyconsists of our$5,476,000 of consideration for the license, $50,000 for a delay fee, and payment of the Company’s share of expenses of approximately $399,000 (of which a total of $449,000 is included in accounts payable and accrued expenses as of December 31, 2018). The Company will recognize an expense of $5,476,000 upon payment of the license fee for the fiscal quarter ending March 31, 2019. The Company satisfied the aggregate payment obligation of $5,925,000 on February 11, 2019 from a portion of the net proceeds from the Series AA Financing discussed below.

In addition, the amendment to the License Agreement revised the amount the Company is required to expend on development of RZ358 and related licensed products and revised provisions with respect to the Company’s diligence efforts in conducting clinical studies.  Finally, the amendment to the License Agreement eliminated XOMA’s right to appoint a member to the Company’s board of directors.

Series AA Financing

On January 7, 2019, the Company entered into a Purchase Agreement for Shares of Series AA Preferred Stock (the “Purchase Agreement”) with the New Investors discussed in Note 7 whereby the New Investors agreed to purchase shares of newly designated Series AA Preferred Stock (the “Series AA Shares”) for aggregate gross proceeds to the Company of $25.0 million (inclusive of the $1.5 million Exclusivity Payment (the “Series AA Financing”). On January 18, 2018, the board of directors officersauthorized the designation of 5,000,000 shares of the Company’s preferred stock as Series AA Preferred Stock. On January 30, 2019, the Company closed the Series AA Financing and issued an aggregate of 2,500,000 Series AA Shares to the New Investors at a purchase price of $10.00 per share. A condition to closing the Series AA Financing was the resignation of a majority of the Company’s former directors and the appointment of the New Investors as directors whereby the New Investors collectively control the board of directors with two of the three members. As a result of the issuance of the Series AA Shares, the New Investors collectively own 54% of the Company’s Common Stock on an as-converted basis which resulted in a change of control. In addition, the Company granted the Purchasers a board nomination right whereby so long as the New Investors and their affiliates collectively hold at least 40% of the aggregate Series AA Shares, they shall have the right to nominate three members of the Company’s board of directors.

14

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The Series AA Shares have an effective conversion price of $0.22 per share of common stock whereby the shares of Series AA Preferred Stock held by the New Investors are immediately convertible, at the option of the holders, into an aggregate of approximately 113.6 million shares of the Company’s common stock. The Series AA Shares will automatically convert into shares of the Company’s common stock upon receipt of shareholder approval for an increase in the number of authorized shares of common stock to at least 500,000,000 shares. The Series AA Preferred Stock is subject to customary anti-dilution adjustments for stock dividends, stock splits and similar events.

The Company agreed to use commercially reasonable efforts to, (i) prepare and file with the SEC within sixty calendar days after the closing of the Series AA Financing, a registration statement under the U.S. Securities Act of 1933, as amended (the “Registration Statement”), to permit the resale of shares of common stock issuable upon the conversion of the Series A Shares purchased in the Series AA Financing.  The Company also agreed to use commercially reasonable efforts to cause the Registration Statement to be declared effective within ninety calendar days following the closing of the Series AA Financing.

The Company granted each of the New Investors a call option whereby upon the earlier of (i) December 31, 2020 and (ii) such date that the Company requests the New Investors to provide additional financing, each New Investor may elect to purchase up to $10.0 million of common stock at a purchase price equal to the greater of (i) $0.29 per share or affiliates,(ii) 75% of the volume weighted average closing price of the Company’s common stock during the thirty consecutive trading days prior to the date of the notice.

Automatic Conversion of Promissory Notes

Due to closing of the Series AA Financing for gross proceeds of $25.0 million, the Fiscal 2018 Notes converted for an aggregate of approximately $6,167,000, which consisted of the aggregate principal balance of $5,340,000 plus accrued interest through January 30, 2019 of approximately $827,000. As discussed in Note 6, the Fiscal 2018 Notes were convertible at a discount of 20% from the issuance price paid by the New Investors. Therefore, the total balance of the Fiscal 2018 Notes of $6,167,000 was exchanged for approximately 771,000 Series A Shares resulting in an effective issuance price of $8.00 per share to give effect to the 20% adjustment in the Fiscal 2018 Notes. The Series AA Shares held by the former holders of the Fiscal 2018 Notes are immediately convertible, at the option of the holders, into an aggregate of approximately 35.0 million shares of common stock.

The weighted average price of the Company’s common stock on the issuance date of the Fiscal 2018 Notes was $0.58 per share compared to the effective conversion price of $0.176 per share, due to the 20% discount to the Series AA Financing terms. Accordingly, the Company expects to recognize an aggregate BCF of approximately $5.9 million as additional interest expense for the fiscal quarter ending March 31, 2019.

Presented below is a summary of the total original issue price and conversion terms for all Series AA Shares outstanding as of January 30, 2019:

  Number  Total  Conversion  Shares of 
Holder of Shares  Issue Price  Price  Common Stock 
             
New Investors  2,500,000  $25,000,000  $0.22   113,636,364 
Fiscal 2018 Note holders  771,000   7,710,000   0.22   35,045,455 
                 
Total  3,271,000  $32,710,000       148,681,818 

Since the Company does not currently have an adequate number of authorized shares of common stock available to accommodate conversion of the Series AA Shares and all outstanding stock options and warrants, the Series AA Shares are expected to be classified as a long-term liability until such time as stockholders approve an increase in the authorized number of shares of common stock to at least 500,000,000 shares. The holders of Series AA Preferred Stock are entitled to vote on an as converted basis with common stockholders whereby the New Investors have a majority of the votes required to increase the Company’s authorized shares of common stock. Management currently expects to schedule a special meeting of stockholders in March or any registered or beneficial shareholders,April 2019 to approve the increase in the authorized shares of common stock.

15

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Headquarters Lease

On January 25, 2019, the Company entered into a lease for a new headquarters location in Redwood City, California. The leased space consists of approximately 3,500 square feet of office space and provides for monthly rent of $21,000 through the expiration date in March 2022. The Company provided a security deposit of $31,000 which is an adverse party or hasrefundable upon expiration of the lease.

Bend, Oregon Lease

On February 7, 2019, the Company entered into a material interest adverse to our interest.lease for ancillary office space in Bend, Oregon. The lease space consists of approximately 1,500 square feet of office space and provides for monthly rent of $2,700 through the expiration date in February 2021. The Company provided a security deposit of $3,700 which is refundable upon expiration of the lease.

Contractual Obligations for Subsequent Events

The table below summarizes the Company’s operating lease commitments and the payment obligations under the amended License Agreement with Xoma, for the subsequent events discussed above:

Fiscal Year Ending June 30, 

Operating

Leases

  Licensing
Liability		 
       
2019 $112,598  $- 
2020  274,295   6,500,000 
2021  272,658   2,000,000 
2022  148,643   - 
  $808,194  $8,500,000 

16

 

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 unaudited condensed consolidated financial statements and the 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

 

In June 2017, we filed an IND for AB101This discussion and analysis should be read in conjunction with the FDAaccompanying unaudited condensed consolidated financial statements and the 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 July 2017, we dosed our first patient in the Phase 1 first-in-human clinical study (the “Study”). The study isthese forward-looking statements as a first-in-human single ascending dose study to assess the safety and tolerability, pharmacokinetics and pharmacodynamicsresult of AB101 in patients with Type 1 Diabetes Mellitus. The first part of the study is a sequential cohort dose ranging of AB101 and there is an optional second study part to compare one or more tested doses of AB101 to Lantus®. In addition to safety and pharmacokinetic assessments, the time-action pharmacology of AB101 (onset, peak, and end of action) is being evaluated using several measures of glycemic response, including the hyperinsulinemic euglycemic clamp technique, continuous glucose monitoring, and background insulin use. In Q4 ofmany factors.

For calendar year 2017, we completed the first of up to five potential cohorts of the Study and having conducted the interim safety and dose escalation review meeting from that cohort, we plan on proceeding to a higher dose in the second cohort as planned per protocol. However, we will not begin dosing patients in the second cohort until2019, we have raised additional capital. Further, asthe following objectives to advance our clinical study is ongoing and we have not dose escalated beyonddevelopment strategy: (i) initiate 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 treatmentprogram for RZ358 in the US and/or Europe, (ii) complete the necessary toxicology studies for RZ402 to enable the filing of an ultra-orphan pediatric indication, congenital hyperinsulinism (the “CHI Program”). We believe thatIND and initiation of clinical studies, and (iii) complete the CHI Program is a compelling opportunity given that there is no approved therapyongoing Phase 1 study for this devastating childhood disease.AB101.

 

We believe thatIn January 2019, we announced and closed on a $25.0 million private placement with Handok, Inc. and Genexine, Inc., two publicly traded South Korean-based pharmaceutical companies. The investors acquired the CHI ProgramCompany’s securities at an implied price of $0.22 per common share. An option exists for the investors to purchase up to an additional $20.0 million of shares of our common stock prior to December 31, 2020, at a price per common share equal to the greater of $0.29 or 75% of the volume weighted average closing price of Rezolute’s common stock over 30 consecutive trading days prior to the exercise of the option to purchase.

This financing has provided us with the needed capital to pursue our development strategy. In parallel with this financing, we relocated our headquarters to Redwood City, California, took steps to advance our clinical programs, and the PKI Portfolio complementbegan expanding our endogenous super long acting basal program, AB101, currentlyteam in Phase 1key areas such as 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.operations. We are seeking to raise $3,000,000now embarking upon our development strategy and are no longer conducting in-house manufacturing or moreresearch. As such, in December 2018, we closed our Colorado facilities including the Debt Financingmanufacturing and lab suites.

In the last month we have conducted our firstbegun actively preparing RZ358 for aggregate gross proceeds of $500,000clinical studies, initiated project meetings for RZ402, and initiated activities to resume the AB101 clinical studies in January of 2018.

Southern California.

 

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

 

  1517 

 

 

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, 20172018 and 20162017

 

Results of operations for the three months ended December 31, 2018 and 2017 (the “2018 quarter”)reflect net losses of approximately $4.2 million and $5.7 million, respectively. Presented below is a discussion of the key factors that resulted in our net losses for these periods.

Revenues

We did not generate any revenues for the three months ended December 31, 2016 (the “2017 quarter”2018 and 2017. We are at an early stage of development as a proprietary product specialty pharmaceutical company and we do not currently have any commercial products. Our existing product candidates will require extensive additional clinical evaluation, regulatory review, significant marketing efforts and substantial investment before they generate any revenues. We do not expect to be able to market any of our product candidates for a number of years.

Research and Development Expenses

Research and development (“R&D”) reflected lossescosts decreased from approximately $3.4 million for the three months ended December 31, 2017 to $1.3 million for the three months ended December 31, 2018, a decrease of $2.1 million. This decrease was primarily attributable to our decision to terminate our manufacturing activities in April 2018, which resulted in a decrease in compensation and benefits expense of $1.1 million, a decrease in facilities costs of $0.2 million, and a decrease in consulting costs of $0.1 million. Other decreases in R&D costs for the three months ended December 31, 2018 were due a reduction in clinical trial costs of $0.6 million and a reduction in license costs of $0.4 million.

The reduction in clinical trial costs was due to $0.6 million incurred for the AB101 Phase 1 Trial for the three months ended December 31, 2017, whereas these costs were substantially eliminated for the three months ended December 31, 2018. For the three months ended December 31, 2017, we incurred $0.4 million under the Active Site Agreement compared to $50,000 for a financing delay fee under our agreement with XOMA for the three months ended December 31, 2018.

The aforementioned decreases in R&D expenses totaled approximately $2.4 million and were partially offset by an increase of $0.2 million in material manufacturing costs. The increase in material manufacturing costs for the three months ended December 31, 2018 was primarily due to $0.4 million incurred under our agreement with Xoma related to RZ358, whereas we incurred $0.2 million for AB101 for the three months ended December 31, 2017. The $1.2 million decrease in compensation and benefits for our R&D employees included a $0.2 million decrease in stock-based compensation expense that was triggered by a reduction in our workforce that resulted in forfeiture of stock options.

As discussed below under the caption Liquidity and Capital Resources, we intend to use the proceeds from our recently completed Series AA Financing to advance our clinical programs. Accordingly, we expect to incur a significant increase in our research and development costs during calendar 2019, including a charge of approximately $5,751,000$5.5 million for license fees incurred with Xoma in January 2019.

General and $4,888,000, respectively.Administrative Expenses

General and administrative (“G&A”) expenses decreased from approximately $2.3 million for the three months ended December 31, 2017 to $1.9 million for the three months ended December 31, 2018, a decrease of $0.4 million. This decrease was primarily attributable to a decrease in compensation and benefits for our administrative workforce of $0.3 million, a decrease in professional fees of $0.1 million, and a decrease in investor relations costs of $0.1 million. These decreases in G&A expense totaled $0.5 million and were partially offset by an aggregate increase in impairment and losses from the sale of fixed assets of $0.1 million, due to the disposal of substantially all fixed assets from our former location in Colorado. The $0.3 million decrease in compensation and benefits for our G&A employees included a $0.2 million decrease in stock-based compensation expense that was triggered by stock option forfeitures due to the reduction in our administrative workforce.

18

Non-Operating Income (Expense)

Non-operating income (expense) decreased by approximately $1.0 million from income of approximately $32,000 for the three months ended December 31, 2017 to expense of $1.0 million for the three months ended December 31, 2018. This decrease was primarily attributable to an increase in interest expense of $1.3 million due to accrued interest and accretion of discount on the Fiscal 2018 Notes in the principal amount of $5.3 million.

These notes were issued during the first half of calendar 2018 and converted to Series AA Shares in January 2019. Therefore, no interest expense will be recognized after the conversion date. However, the Fiscal 2018 Notes contained a contingent beneficial conversion feature (“BCF”) that is expected to result in the recognition of additional non-cash interest expense of approximately $5.9 million for the fiscal quarter ending March 31, 2019. For the three months ended December 31, 2018, the increase in interest expense of $1.3 million was partially offset by a gain of $0.2 million from the termination of our lease and sublease agreements in Colorado, and a gain of $0.1 million for embedded derivatives related to the Fiscal 2018 Notes.

Income Taxes

The Tax Cuts and Jobs Act of 2017 (the “Tax Act”) was enacted on December 22, 2017 and significantly revises U.S. tax law. The Tax Act reduces the U.S. federal corporate tax rate from 35% to 21%, limits the tax deduction for interest expense to 30% of adjusted earnings, limits the deduction for newly generated net operating losses to 80% of current year taxable income, eliminates net operating loss (“NOL”) carrybacks, provides for immediate deductions for certain new investments instead of deductions for depreciation expense over time, and modifies or repeals many business deductions and credits. As of June 30, 2018, we made reasonable estimates for each of these items and recognized a provisional decrease in our deferred tax assets of approximately $8.9 million, which was fully offset by a corresponding change in the valuation allowance for such deferred tax assets. As of December 31, 2018, we determined that our provisional adjustment is considered final. However, we are continuing to analyze the effects of the Tax Act on our financial statements and operations, whereby our current estimates may subsequently be revised based on evolving analyses and interpretation of the Tax Act and related accounting guidance.

As of June 30, 2018, we had NOL carryforwards of approximately $60.7 million for federal and state income tax purposes. Federal and state NOL carryforwards, to the extent not used, will expire starting in 2031. Under provisions of the Internal Revenue Code, substantial changes in ownership of the Company may result in limitations on the amount of NOL carryforwards that can be utilized in future years. Due to the closing of the Series AA Financing in January 2019, we experienced a change of control that is expected to result in significant limitations to the future use of our NOL carryforwards. We are in the process of quantifying the extent of such limitations.

Six Months Ended December 31, 2018 and 2017

 

Results of operations for the six months ended December 31, 2018 and 2017 (the “2018 period”)reflect net losses of approximately $7.5 million and $12.4 million, respectively. Presented below is a discussion of the key factors that resulted in our net losses for these periods.

Revenues

As a clinical stage company, we did not generate any revenues for the six months ended December 31, 2016 (the “2017 period”) reflected losses of approximately $12,468,0002018 and $8,704,000, respectively.2017.

 

Revenues

We are a clinical stage companyResearch and have not generated any revenues since inception.

Development Expenses

 

Research and development (“R&D”) 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 weredecreased from approximately $3,413,000 in the 2018 quarter compared to $3,075,000 in the 2017 quarter. Research and development costs were approximately $7,723,000 in the 2018 period compared to $5,561,000 in the 2017 period. The main increases are due to the Company continuing to hire staff to manufacture clinical material during the 2018 period as well as the start of the first clinical trial in the 2018 period.

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

Impact of the U.S. Tax Reform

On December 22, 2017, the U.S. President signed the Tax Cuts and Jobs Act (the “Act”) into law. Effective January 1, 2018, among other changes, the Act (a) reduces the U.S. federal corporate tax rate to 21 percent, provides for a deemed repatriation and taxation at reduced rates on historical earnings (a “transition tax”) of certain non-US subsidiaries owned by U.S. companies and establishes new mechanisms to tax such earnings going forward. The Act has wide ranging implications$7.7 million for the Company. However, the impact on the Company’s financial statements for the three and six-month periodssix months ended December 31, 2017 is immaterial,to $2.2 million for the six months ended December 31, 2018, a decrease of $5.5 million. This decrease was primarily becauseattributable to our decision to terminate our manufacturing activities in April 2018, which resulted in a decrease in compensation and benefits expense of $2.1 million, a decrease in facilities costs of $0.4 million, and a decrease in consulting costs of $0.2 million. Other decreases in R&D costs for the Company hassix months ended December 31, 2018 were due a full valuation allowance on deferred tax assetsreduction in the U.S., which resultsclinical trial costs of $1.6 million and a reduction in there being no U.S. deferred tax assets or liabilities recorded on the balance sheet that need to be remeasured at the new 21% rate. The Company will continue to analyze the effectslicense costs 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.$1.1 million.

 

  1619 

 

 

LiquidityThe $2.1 million decrease in compensation and Capital Resources

Asbenefits for our R&D employees included a $0.4 million decrease in stock-based compensation expense that was triggered by a reduction in our workforce that resulted in forfeiture of stock options. The reduction in clinical trial costs was primarily due to $1.6 million incurred for the AB101 Phase 1 Trial for the six months ended December 31, 2017, we have approximately $0.8 million in cash on hand and working capital deficit of approximately $1.1 million. Duringwhereas these costs were substantially eliminated for the yearsix months 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. DuringDecember 31, 2018. For the six months ended December 31, 2017, we incurred license costs of $1.1 million primarily due to the Active Site Agreement compared to only $50,000 incurred for the six months ended December 31, 2018, which was due to a financing delay fee under our agreement with XOMA. For the six months ended December 31, 2018, we also had a $0.1 million decrease in material manufacturing costs. The decrease in material manufacturing costs for the six months ended December 31, 2018 was primarily due to $0.5 million incurred under our agreement with Xoma related to RZ358, whereas we incurred $0.6 million for AB101 for the six months ended December 31, 2017.

General and Administrative Expenses

General and administrative (“G&A”) expenses decreased from approximately $4.7 million for the six months ended December 31, 2017 to $3.5 million for the six months ended December 31, 2018, a decrease of $1.2 million. This decrease was primarily attributable to a decrease in compensation and benefits for our administrative workforce of $0.8 million, a decrease in professional fees of $0.2 million, and a decrease in investor relations and other administrative costs of $0.2 million. These decreases in G&A expense totaled $1.2 million and were partially offset by an additional closeaggregate increase in impairment and losses from the sale of fixed assets of $0.1 million, both of which resulted from the disposal of substantially all fixed assets from our former location in Colorado. The $0.8 million decrease in compensation and benefits for our G&A employees included a $0.6 million decrease in stock-based compensation expense that was triggered by stock option forfeitures due to the reduction in our administrative workforce.

Non-Operating Income (Expense)

Non-operating income (expense) decreased by approximately $1.9 million from income of approximately $65,000 for the six months ended December 31, 2017 to expense of $1.8 million for the six months ended December 31, 2018. This decrease was primarily attributable to an increase in interest expense of $2.2 million due to accrued interest and accretion of discount on the Fiscal 2018 Notes in the principal amount of $5.3 million. For the six months ended December 31, 2018, the increase in interest expense was partially offset by (i) a gain of $0.2 million from the termination of our lease and sublease agreements in Colorado, (ii) a gain of $0.1 million for embedded derivatives related to the Fiscal 2018 Notes, and (iii) an equity transactionincrease in rental income from subleases of $0.1 million.

As a result of the termination of our lease and subleases in Colorado in December 2018, we do not expect to recognize rental income in the future.

20

Liquidity and Capital Resources

As of December 31, 2018, we have approximately $0.3 million of cash and a working capital deficit of approximately $2.6 million. We have incurred cumulative net losses of $101.7 million since our inception and as a clinical stage company we have not generated any revenue to date. Presented below is a discussion of subsequent events that have a significant impact on our future liquidity, as discussed further in Note 11 to the unaudited condensed consolidated financial statements included in Part I, Item I of this Report.

Series AA Financing and Conversion of Fiscal 2018 Notes

In January 2019 we closed an offering with two pharmaceutical companies that have elected to make a strategic investment in us for an aggregate of 2.5 million shares of Series AA Preferred Stock that resulted in gross proceeds of $25.0 million (including application of a $1.5 million Exclusivity Payment that we received in December 2018). Closing occurred on January 30, 2019 and resulted in our receipt of the remaining proceeds of $23.5 million. The shares of Series AA Preferred Stock owned by the New Investors are immediately convertible into an aggregate of approximately 113.6 million shares of our common stock.

Due to the closing of the Series AA Financing for gross proceeds of $25.0 million, our Fiscal 2018 Notes which we issued straightconsisted of the aggregate principal balance of $5.3 million plus accrued interest of $0.8 million through January 30, 2019, converted to shares of Series AA Preferred Stock. The aggregate principal and accrued interest balance of $6.2 million was exchanged for approximately 771,000 Series A Shares which are immediately convertible into an aggregate of 35.0 million shares of our common stock.

All of the Series AA Shares will automatically convert into shares of our common stock upon receipt of shareholder approval for an increase in the number of authorized shares of common stock.stock to at least 500.0 million shares. The Company receivedholders of Series AA Preferred Stock are entitled to vote on an as converted basis with common stockholders whereby the New Investors have a majority of the votes required to increase the Company’s authorized shares of common stock. We currently expect to schedule a special meeting of shareholders in March or April 2019 to approve the increase in the authorized shares of common stock. The Series AA Preferred Stock is subject to customary anti-dilution adjustments for stock dividends, stock splits and similar events.

A condition to closing the Series AA Financing was the resignation of a majority of our former directors and the appointment of the New Investors as directors whereby the representatives of the New Investors comprise two of the three members of our current board of directors. Additionally, the New Investors collectively own 54% of our common stock on an as-converted basis which resulted in a change of control.

Xoma License Agreement

In January 2019, we entered into an amendment of our December 2017 License Agreement with Xoma to eliminate the previous requirement that equity securities would be issued to XOMA upon the closing of a qualified financing. In exchange, we agreed to make five cash payments to XOMA totaling $8.5 million on or before specified staggered future dates.  The $8.5 million liability is payable for $1.5 million by September 30, 2019, $1.0 million by December 31, 2019, $2.0 million by March 31, 2020, $2.0 million by June 30, 2020, and $2.0 million by September 30, 2020. Until the $8.5 million liability is fully paid, we are required to pay XOMA 15% of the net proceeds of any future financings to be credited against the remaining unpaid liability in reverse order of their future payment date.  

In addition, we agreed to pay Xoma approximately $5.9 million in cash upon the closing of the Series AA Financing, which consists of (i) costs incurred through December 31, 2018 of $0.4 million and a financing delay fee of $50,000, and (ii) $5.5 million of additional consideration for the license. In February 2019, we satisfied this payment obligation to Xoma of $5.9 million.

Use of Proceeds

As a result of the $23.5 million capital infusion from the Series AA Financing, less the $5.9 million payment to Xoma, net proceeds of approximately $14$17.6 million fromare available primarily to advance our clinical programs including: (i) initiate a Phase 2 program for RZ358 in the transactions above.U.S. and/or Europe, (ii) complete the necessary toxicology studies for RZ402 to enable the filing of an IND and initiation of clinical studies, and (iii) complete an ongoing Phase 1 study for AB101.

 

We also agreed to allow the New Investors to purchase up to an aggregate of $20.0 million of shares of our common stock prior to December 31, 2020 at a per share price equal to the greater of $0.29 or 75% of the volume weighted average closing price of our common stock over 30 consecutive trading days prior to the exercise of the option.

The Company is

21

As a result of the completion of the Series AA Financing, we currently conducting a convertible note financing to raise $3 million in whichbelieve we have closed on $500,000adequate capital resources to (i) meet our contractual obligations to Xoma for $2.5 million over the next 12 months, (ii) move forward with our plans to advance our clinical programs discussed above, and (iii) repay past due payables and accrued expenses. In order to meet our planned expenditures over the next 12 months, we intend to request that the New Investors invest up to an aggregate of $20.0 million during the note financing. The notes also come with warrants at the time the notes are issued. The Company will continue to close on the note financing while the Company works to complete an Equity Financing. Theresecond half of calendar 2019. However, there are no assurances that any of the above financingsNew Investors will be completedexercise their options to invest up to an additional $20.0 million, or will be completed timely and on favorable terms.

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 willwould be able to obtain additional financing through either private placements, and/orother sources such as equity offerings and bank financings. Even if these other 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 financingsources are insufficient, we will have to raise additional working capital. No assurance can be given that additional financing will be available, or if available, willthey may not be on terms that are acceptable to us. These conditions raise substantial doubt about our ability to continue as a going concern.

Presented below is a pro forma balance sheet that gives effect to the Series AA Financing, conversion of the Fiscal 2018 Notes, and the amendment to the Xoma License Agreement, as if these events had occurred on December 31, 2018:

     Pro Forma Adjustments    
     Series AA  Conversion  Xoma Amendment  Contingent    
  Historical  Financing(1)  of Debt(2)  Payments(3)  Liability(4)  BCF(5)  Pro Forma 
Assets                            
                             
Current assets:                            
Cash $258,188  $23,500,000  $-  $(5,925,000) $-  $-  $17,833,188 
Other current assets  164,090   -   -   -   -   -   164,090 
Total current assets  422,278                       17,997,278 
                             
Non-current assets:                            
Intangibile assets, net  33,384   -   -   -   -   -   33,384 
Total assets $455,662  $23,500,000  $-  $(5,925,000) $-  $-  $18,030,662 
                             
Liabilities and Stockholders' Deficit                            
                             
Current liabilities $2,976,210  $-  $-  $(449,000) $2,500,000  $-  $5,027,210 
                             
Non-current liabilities:                            
Convertible notes payable, net  5,005,774   -   (5,005,774)  -   -   -   - 
Interest payable on convertible notes payable  761,372   -   (761,372)  -   -   -   - 
Series AA financing exclusivity payment  1,500,000   (1,500,000)  -   -   -   -   - 
Long-term payable to Xoma  -   -   -   -   6,000,000   -   6,000,000 
Series AA Preferred stock, $0.001 par value;  5,000,000 shares authorized; pro forma  3,267,515 shares issued and outstanding  -   25,000,000   6,101,372   -   -   -   31,101,372 
Total liabilities  10,243,356   23,500,000   334,226   (449,000)  8,500,000   -   42,128,582 
                             
Stockholders' deficit:                            
Common stock, $0.001 par value, 200,000,000 shares authorized; 62,166,309 shares issued and outstanding  61,869   -   -   -   -   -   61,869 
Additional paid-in capital  91,860,840   -   -   -   -   5,900,000   97,760,840 
Accumulated deficit  (101,710,403)  -   (334,226)  (5,476,000)  (8,500,000)  (5,900,000)  (121,920,629)
Total stockholders' deficit  (9,787,694)  -   (334,226)  (5,476,000)  (8,500,000)  -   (24,097,920)
Total liabilities and stockholders' deficit $455,662  $23,500,000  $-  $(5,925,000) $-  $-  $18,030,662 

(1)Gives effect to the application of the Exclusivity Payment for $1.5 million received from the New Investors in December 2018, and issuance of 2.5 million shares of Series AA Preferred Stock in January 2019 for additional cash proceeds of $23.5 million.
(2)Gives effect to the conversion of the Fiscal 2018 Notes and accrued interest for $6.1 million of Series AA Preferred Stock in January 2019, and the write-off of unaccreted discount of $0.3 million as of December 31, 2018.
(3)Gives effect to the February 2019 cash payment required under the amended License Agreement with Xoma, including payment of the license fee of $5.5 million that will be charged to expense for the fiscal quarter ending March 31, 2019.
(4)Give effect to the obligation to make $8.5 million of future license payments under the amended License Agreement with Xoma, which will be charged to expense for the fiscal quarter ending March 31, 2019.
(5)Gives effect to the BCF for $5.9 million as a result of the conversion of the Fiscal 2018 Notes to Series AA Preferred Stock in January 2019.

For additional information on these pro forma adjustments, please refer to Note 11 to the unaudited condensed consolidated financial statements included in Part I, Item 1 of this Report.

22

Cash Flows Used in Operating Activities

For the six months ended December 31, 2018 and 2017, cash flows used in operating activities amounted to $3.1 million and $8.1 million, respectively. The key components in the calculation of our cash used in operating activities are as follows:

  2018  2017  Change 
          
Net loss $(7,526,665) $(12,403,200) $4,876,535 
Non-cash expenses, net  3,137,541   3,773,573   (636,032)
Changes in operating assets and liabilities, net  1,306,301   576,976   729,325 
             
Total $(3,082,823) $(8,052,651) $4,969,828 

For the six months ended December 31, 2018, our net loss was $7.5 million which is an improvement of $4.9 million compared to the same period of the prior year. For further discussion about changes in our operating results, please refer to Results of Operations above for the six months ended December 31, 2018 and 2017.

For the six months ended December 31, 2018, net non-cash expenses amounted to $3.1 million and were primarily comprised of $1.6 million of accretion of debt discounts and issuance costs related to the Fiscal 2018 Notes, stock-based compensation expense of $1.7 million, and depreciation and impairment expense of $0.1 million. These non-cash expenses total $3.4 million for the six months ended December 31, 2018, and were partially offset by a $0.2 million gain from the December 2018 termination of leases and subleases for our former Colorado facility, and a $0.1 million gain on the change in fair value of embedded derivatives. For the six months ended December 31, 2017, net non-cash expenses amounted to $3.8 million and were primarily comprised of stock-based compensation expense of $2.7 million, depreciation expense of $0.5 million, and warrant expense of $0.5 million.

For the six months ended December 31, 2018, net changes in operating assets and liabilities improved operating cash flow by $1.3 million which was primarily due to an increase in accrued interest expense of $0.6 million on the Fiscal 2018 Notes, a decrease in other assets of $0.3 million, and an increase in accounts payable and accrued expenses of $0.5 million. These increases amount to $1.4 million and were partially offset by a decrease in the deferred lease liability of $0.1 million primarily due to our lease termination agreement in Colorado. For the six months ended December 31, 2017, net changes in operating assets and liabilities improved operating cash flow by $0.6 million which was primarily due to an increase in accounts payable and accrued expenses of $0.5 million.

Cash Flows Provided by Investing Activities

Net cash provided by investing activities for the six months ended December 31, 2018 amounted to $0.2 million which consisted of proceeds from the sale of equipment. In December 2018, we terminated our former lease for facilities in Colorado and we sold a portion of the remaining equipment for gross proceeds of $0.2 million. For the six months ended December 31, 2017, investing cash flow were insignificant.

Cash Flows Provide by Financing Activities

Net cash provided by financing activities for the six months ended December 31, 2018 amounted to $1.5 million. In December 2018, two new investors expressed interest in investing in the Company and affirmed their intent to enter into exclusive diligence and negotiations regarding a potential equity financing. The New Investors provided an exclusivity payment for $1.5 million in exchange for our agreement to cease any and all discussions and negotiations with all other third parties. In January 2019, the New Investors decided to proceed and closing of the Series AA Financing occurred on January 30, 2019.

Our sole source of net cash provided by financing activities for the six months ended December 31, 2017 resulted from a private placement of 4.5 million shares of our common stock to accredited investors at an offering price of $1.00 per share. The net proceeds of this private placement amount to $4.4 million, after deducting placement agent commissions of $0.1 million.

 

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.

 

23

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

 

Not required for smaller reporting companies.

 17

 

ITEM 4. CONTROLS AND PROCEDURES.

 

Evaluation of Disclosure Controls and Procedures

 

As of the end of the period covered by this Quarterly Report on Form 10-Q, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer (our principal executive officer) and our Chief 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 December 31, 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.

 

24

PART II – OTHER INFORMATION

 

ITEM 1. LEGAL PROCEEDINGS.

 

None

 

ITEM 1A. RISK FACTORS.

 

Certain factors exist which may affect the Company’s business and could cause actual results to differ materially from those expressed in any forward-looking statements. The Company has not experienced any material changes from thosefollowing risks have been identified as additional risk factors and should be read in conjunction with the 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”).

Conversion of Series AA Preferred Stock may result in stockholder dilution.

As disclosed in our Current Report on Form 8-K filed with the SEC on January 7, 2018, we entered into a Purchase Agreement with Handok, Inc. and Genexine, Inc., (the “Purchasers”) whereby subject to certain closing conditions the Purchasers agreed to purchase shares of the Company’s newly designated Series AA Preferred Stock for aggregate gross proceeds of $25,000,000.  Additionally, the aggregate principal and accrued interest of approximately $6.2 million related to the Fiscal 2018 Notes was exchanged for shares of Series AA Preferred Stock. The Series AA Preferred Stock shall automatically convert upon the occurrence of: (i) the vote or consent of holders of two thirds of the voting power of the then outstanding Series AA Preferred Stock; or (ii) the amendment to our Certificate of Incorporation to increase the number of shares of common stock authorized to be issued to at least 500,000,000. Upon conversion of the shares of Series AA Preferred Stock into common stock, the additional issuance of common stock will dilute our existing common stockholders.

Additional capital may result in stockholder dilution or may have rights senior to those of our common stockholders.

From time to time, we may seek to obtain additional capital, either through equity, equity-linked or debt securities. The decision to obtain additional capital will depend on, among other things, our business plans, operating performance and condition of the capital markets. If we raise additional funds through the issuance of equity, equity-linked or debt securities, those securities may have rights, preferences, or privileges senior to the rights of our common stock, and our stockholders may experience dilution. Any large equity or equity-linked offering could also negatively impact our stock price.

 

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.

 18

 

ITEM 5. OTHER INFORMATION.

 

None.

 

ITEM 6. EXHIBITS.

 

Exhibit Number Description of Exhibits
   
10.110.1* LicenseAmendment No. 2 to the Xoma Common Stock Purchase Agreement with XOMA*%
10.210.2*% Common Stock PurchaseAmendment No. 2 to the Xoma License Agreement with XOMA*%
10.3* Purchase agreement for shares of Series AA Preferred Stock
31.131.1* Certification of Chief Executive Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
31.2* 
31.2Certification of Chief AccountingFinancial Officer as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002*
32.1* 
32.1Certification of Chief Executive Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*
32.2* 
32.2Certification of Chief AccountingFinancial Officer as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002*

101.INS* XBRL Instance Document
101101.SC* The following materials from our Quarterly Report on Form 10-Q for the quarter ended December 31, 2017 formatted in XBRL (eXtensible Business Reporting Language): (i) Balance Sheet, (ii) Statement of Operations, (iii) Statements of Cash Flows, (iv) Statements of Stockholders Equity and (v) related notes to these financial statements*Taxonomy Extension Schema
101.CA*XBRL Taxonomy Extension Calculation Linkbase
101.DEF*XBRL Taxonomy Extension Definition Linkbase
101.LA*XBRL Taxonomy Extension Label Linkbase
101.PRE*XBRL Taxonomy Extension Presentation Linkbase

 

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

*  Filed herewith

% Certain portions of this exhibit have been redacted pursuant to a confidential treatment request filed with the Commission on February 14, 2019.

 

  1925 

 

 

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:  February 14, 20182019By:/s/ Nevan Elam
  Nevan Elam
  Chief Executive Officer
  (Principal Executive Officer)
   
Date:  February 14, 20182019By:/s/ Morgan FieldsKeith Vendola
  Morgan FieldsKeith Vendola
  Chief AccountingFinancial Officer
  (Principal Accounting Officer)

 

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