UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 20222023
ORor
☐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:File Number: 001-39683
REZOLUTE, INC.
(Exact Name of Registrant as Specified in its Charter)
| | |
Nevada | | 27-3440894 |
(State or other jurisdiction of incorporation or organization) | | (I.R.S. Employer Identification No.) |
| | |
| | 94065 |
(Address of principal executive offices) | | (Zip Code) |
(650) 206-4507
(Registrant’s telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, par value $0.001 per share | | RZLT | | Nasdaq Capital Market |
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. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted 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 such files.). ☒ Yes ☐ No
Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, and 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.
Large accelerated filer ☐ | Accelerated filer ☐ |
|
|
Non-accelerated filer ☒ | Smaller reporting company ☒ |
|
|
| Emerging |
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) ☐ Yes ☒ No
The registrant had 33,582,83136,827,567 shares of its $0.001 par value common stock outstanding as of May 6, 2022.8, 2023.
Table of Contents
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”) contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, 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:
● | our projected operating or financial results, including anticipated cash flows used in operations; |
● | our |
● | our expectation about the extent and duration of the COVID-19 pandemic (“COVID-19”) on our business; |
● | our beliefs and assumptions relating to our liquidity position, including our ability to obtain additional financing; |
● | our ability to obtain regulatory approvals and the speed of such 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 and unknown risks, uncertainties and other factors including, but not limited to, the risks described in Part II, Item 1.A Risk factors,Factors, as well as “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 20212022 (the “2021“2022 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on September 15, 2021 and as amended on September 27, 2021.2022.
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 Report, 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 Report 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 Report, except as otherwise required by applicable law.
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Rezolute, Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
| | | | | | |
|
| March 31, | | June 30, | ||
|
| 2022 |
| 2021 | ||
Assets | | | | | | |
Current assets: |
| |
|
| |
|
Cash and cash equivalents | | $ | 63,416 | | $ | 41,047 |
Prepaid expenses and other | | | 915 | | | 946 |
Total current assets | |
| 64,331 | |
| 41,993 |
| | | | | | |
Long-term assets: | | | | | | |
Restricted cash | | | 5,000 | | | — |
Right-of-use assets, net | |
| 175 | |
| 396 |
Deferred offering costs and other | | | 48 | | | 191 |
Property and equipment, net | |
| 19 | |
| 29 |
Total assets | | $ | 69,573 | | $ | 42,609 |
| | | | | | |
Liabilities and Shareholders' Equity | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 1,557 | | $ | 1,035 |
Accrued liabilities: | |
| | |
| |
Insurance premiums | | | — | | | 242 |
Compensation and benefits | | | 450 | | | 77 |
Other | | | 764 | | | 349 |
Current portion of operating lease liabilities | | | 107 | | | 265 |
Total current liabilities | |
| 2,878 | |
| 1,968 |
| | | | | | |
Long term liabilities: | | | | | | |
Long term debt, net of discount | |
| 14,286 | |
| 13,968 |
Operating lease liabilities, net of current portion | |
| 107 | |
| 187 |
Embedded derivative liabilities | | | 395 | | | 387 |
Total liabilities | |
| 17,666 | |
| 16,510 |
| | | | | | |
Commitments and contingencies (Notes 4 and 8) | |
|
| |
|
|
| | | | | | |
Shareholders' equity: | |
|
| |
|
|
Preferred Stock, $0.001 par value; 400 shares authorized; 0 shares issued and outstanding | |
| — | |
| — |
Common Stock, $0.001 par value, 40,000 shares authorized; 15,556 and 8,352 shares issued and outstanding as of March 31, 2022 and June 30, 2021, respectively | |
| 16 | |
| 8 |
Additional paid-in capital | |
| 251,666 | |
| 194,229 |
Accumulated deficit | |
| (199,775) | |
| (168,138) |
Total shareholders’ equity | |
| 51,907 | |
| 26,099 |
Total liabilities and shareholders’ equity | | $ | 69,573 | | $ | 42,609 |
| | | | | | |
|
| March 31, | | June 30, | ||
|
| 2023 |
| 2022 | ||
Assets | | | | | | |
Current assets: |
| |
| | |
|
Cash and cash equivalents | | $ | 33,743 | | $ | 150,410 |
Investments in marketable debt securities | | | 69,319 | | | — |
Prepaid expenses and other | | | 2,464 | | | 1,694 |
Total current assets | |
| 105,526 | |
| 152,104 |
| | | | | | |
Long-term assets: | | | | | | |
Investments in marketable debt securities | | | 26,210 | | | — |
Right-of-use assets | |
| 2,172 | |
| 152 |
Property and equipment, net | |
| 149 | |
| 16 |
Deposits and other | | | 148 | | | 148 |
Total assets | | $ | 134,205 | | $ | 152,420 |
| | | | | | |
Liabilities and Shareholders' Equity | |
|
| |
|
|
Current liabilities: | |
|
| |
|
|
Accounts payable | | $ | 2,947 | | $ | 1,132 |
Accrued liabilities: | |
| | |
| |
Accrued clinical and other | | | 1,121 | | | 979 |
Insurance premiums | | | — | | | 243 |
Current portion of operating lease liabilities | | | 319 | | | 108 |
Total current liabilities | |
| 4,387 | |
| 2,462 |
| | | | | | |
Long term liabilities: | | | | | | |
Operating lease liabilities, net of current portion | |
| 2,055 | |
| 80 |
Embedded derivative liabilities | | | 447 | | | 407 |
Total liabilities | |
| 6,889 | |
| 2,949 |
| | | | | | |
Commitments and contingencies (Notes 5, 9 and 10) | |
|
| |
|
|
| | | | | | |
Shareholders' equity: | |
|
| |
|
|
Preferred stock, $0.001 par value; 400 shares authorized; no shares issued and outstanding | |
| — | |
| — |
Common stock, $0.001 par value; 100,000 shares authorized; issued and outstanding 36,827 and 33,582 shares as of March 31, 2023 and June 30, 2022, respectively | |
| 37 | |
| 34 |
Additional paid-in capital | |
| 375,668 | |
| 358,635 |
Accumulated other comprehensive loss | | | (132) | | | — |
Accumulated deficit | |
| (248,257) | |
| (209,198) |
Total shareholders’ equity | |
| 127,316 | |
| 149,471 |
Total liabilities and shareholders’ equity | | $ | 134,205 | | $ | 152,420 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
13
Rezolute, Inc.
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
(In thousands, except per share amounts)
| | | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | | ||||||||
| | March 31, | | March 31, | | ||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | | ||||
Operating expenses: |
| |
|
| |
| | |
|
| |
| |
Research and development |
| $ | 8,686 |
| $ | 3,758 | | $ | 23,912 |
| $ | 10,598 | |
General and administrative |
| | 2,068 | |
| 1,725 | | | 6,632 | |
| 5,660 | |
Total operating expenses |
| | 10,754 | |
| 5,483 | | | 30,544 | |
| 16,258 | |
Operating loss |
| | (10,754) | |
| (5,483) | | | (30,544) | |
| (16,258) | |
Non-operating income (expense): |
| |
| |
|
| | |
| |
|
| |
Interest expense |
| | (442) | |
| — | | | (1,329) | |
| — | |
Gain (loss) from change in fair value of derivative liabilities | | | (12) | | | 1,784 | | | (8) | | | 1,784 | |
Employee retention credit | | | — | | | — | | | 231 | | | — | |
Interest and other income | | | — | | | 4 | | | 13 | | | 62 | |
Total non-operating income (expense), net |
| | (454) | |
| 1,788 | | | (1,093) | |
| 1,846 | |
Net loss | | $ | (11,208) | | $ | (3,695) | | $ | (31,637) | | $ | (14,412) | |
Net loss per common share - basic and diluted | | $ | (0.65) | | $ | (0.44) | | $ | (2.30) | | $ | (1.94) | |
Weighted average number of common shares outstanding - basic and diluted | |
| 17,218 | |
| 8,352 | |
| 13,748 | |
| 7,445 | |
| | | | | | | | | | | | |
| | Three Months Ended | | Nine Months Ended | ||||||||
| | March 31, | | March 31, | ||||||||
|
| 2023 |
| 2022 | | 2023 |
| 2022 | ||||
Operating expenses: |
| |
|
| |
| | |
|
| |
|
Research and development |
| $ | 14,231 |
| $ | 8,686 | | $ | 32,880 | | $ | 23,912 |
General and administrative |
| | 2,911 | |
| 2,068 | | | 8,872 | |
| 6,632 |
Total operating expenses |
| | 17,142 | |
| 10,754 | | | 41,752 | |
| 30,544 |
Operating loss |
| | (17,142) | |
| (10,754) | | | (41,752) | |
| (30,544) |
Non-operating income (expense): |
| |
| |
|
| | |
| |
|
|
Interest and other income, net | | | 1,484 | | | — | | | 2,733 | | | 13 |
Loss from change in fair value of derivative liabilities | | | (14) | | | (12) | | | (40) | | | (8) |
Employee retention credit | | | — | | | — | | | — | | | 231 |
Interest expense |
| | — | |
| (442) | | | — | |
| (1,329) |
Total non-operating income (expense), net |
| | 1,470 | |
| (454) | | | 2,693 | |
| (1,093) |
| | | | | | | | | | | | |
Net loss | | $ | (15,672) | | $ | (11,208) | | $ | (39,059) | | $ | (31,637) |
| | | | | | | | | | | | |
Other comprehensive loss: | | | | | | | | | | | | |
Net unrealized loss on available-for-sale marketable debt securities | | | (132) | | | — | | | (132) | | | — |
| | | | | | | | | | | | |
Comprehensive loss | | $ | (15,804) | | $ | (11,208) | | $ | (39,191) | | $ | (31,637) |
| | | | | | | | | | | | |
Net loss per common share: | | | | | | | | | | | | |
Basic and diluted | | $ | (0.30) | | $ | (0.65) | | $ | (0.76) | | $ | (2.30) |
| | | | | | | | | | | | |
Weighted average number of common shares outstanding: | |
| | | | | |
| | | | |
Basic and diluted | | | 51,409 | | | 17,218 | | | 51,113 | |
| 13,748 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
24
Rezolute, Inc.
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
Nine Months Ended March 31, 20222023 and 20212022
(In thousands)
| | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | Total | ||
| | Common Stock | | Paid-in | | Accumulated | | Shareholders' | ||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | ||||
Nine Months Ended March 31, 2022: | | | | | | | | | | | | | | |
Balances, June 30, 2021 |
| 8,352 | | $ | 8 | | $ | 194,229 | | $ | (168,138) | | $ | 26,099 |
Gross proceeds from issuance of equity securities for cash in Underwritten Public Offering: | | | | | | | | | | | | | | |
Common Stock | | 6,147 | | | 6 | | | 39,950 | | | — | | | 39,956 |
2021 pre-funded warrants | | — | | | — | | | 10,783 | | | — | | | 10,783 |
Gross proceeds from issuance of common stock for cash: | | | | | | | | | | | | | | |
In 2021 registered direct offering | | 769 | | | 1 | | | 4,999 | | | — | | | 5,000 |
Under Equity Distribution Agreement | | 138 | | | 1 | | | 1,518 | | | — | | | 1,519 |
Under LPC Purchase Agreement | | 116 | | | — | | | 1,172 | | | — | | | 1,172 |
Underwriting discounts and other equity offering costs | | — | | | — | | | (4,136) | | | — | | | (4,136) |
Share-based compensation | | — | | | — | | | 2,701 | | | — | | | 2,701 |
Commitment shares issued under LPC Purchase Agreement | | 34 | | | — | | | 450 | | | — | | | 450 |
Net loss |
| — | |
| — | |
| — | |
| (31,637) | |
| (31,637) |
Balances, March 31, 2022 | | 15,556 | | $ | 16 | | $ | 251,666 | | $ | (199,775) | | $ | 51,907 |
| | | | | | | | | | | | | | |
Nine Months Ended March 31, 2021: | | | | | | | | | | | | | | |
Balances, June 30, 2020 | | 5,867 | | $ | 6 | | $ | 154,595 | | $ | (147,236) | | $ | 7,365 |
Share-based compensation | | — | | | — | | | 2,305 | | | — | | | 2,305 |
Fair value of warrants issued to consultants for services | | — | | | — | | | 8 | | | — | | | 8 |
Issuance of common stock for cash | | 2,485 | | | 2 | | | 40,998 | | | — | | | 41,000 |
Advisory fees and other offering costs related to issuance of Units | | — | | | — | | | (3,550) | | | — | | | (3,550) |
Issuance of common stock for services | | — | | | — | | | 7 | | | — | | | 7 |
Reclassification of derivative liability for authorized share deficiency | | — | | | — | | | (3,591) | | | — | | | (3,591) |
Net loss | | — | | | — | | | — | | | (14,412) | | | (14,412) |
Balances, March 31, 2021 |
| 8,352 | | $ | 8 | | $ | 190,772 | | $ | (161,648) | | $ | 29,132 |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | Accumulated | | | | | | ||
| | | | | | | Additional | | Other | | | | Total | ||||
| | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Shareholders' | |||||||
|
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Equity | |||||
Nine Months Ended March 31, 2023: | | | | | | | | | | | | | | | | | |
Balances, June 30, 2022 |
| 33,582 | | $ | 34 | | $ | 358,635 | | $ | — | | $ | (209,198) | | $ | 149,471 |
Gross proceeds from issuance of common stock for cash in 2022 Private Placement | | 3,245 | | | 3 | | | 12,327 | | | — | | | — | | | 12,330 |
Underwriting commissions and other equity offering costs | | — | | | — | | | (759) | | | — | | | — | | | (759) |
Share-based compensation | | — | | | — | | | 5,465 | | | — | | | — | | | 5,465 |
Net change in accumulated other comprehensive loss | | — | | | — | | | — | | | (132) | | | | | | (132) |
Net loss |
| — | |
| — | |
| — | |
| — | |
| (39,059) | |
| (39,059) |
Balances, March 31, 2023 | | 36,827 | | $ | 37 | | $ | 375,668 | | $ | (132) | | $ | (248,257) | | $ | 127,316 |
| | | | | | | | | | | | | | | | | |
Nine Months Ended March 31, 2022: | | | | | | | | | | | | | | | | | |
Balances, June 30, 2021 | | 8,352 | | $ | 8 | | $ | 194,229 | | $ | — | | $ | (168,138) | | $ | 26,099 |
Gross proceeds from issuance of equity securities for cash in Underwritten Public Offering: | | | | | | | | | | | | | | | | | |
Common stock | | 6,147 | | | 6 | | | 39,950 | | | — | | | — | | | 39,956 |
Pre-Funded warrants | | — | | | — | | | 10,783 | | | — | | | — | | | 10,783 |
Gross proceeds from issuance of common stock for cash: | | | | | | | | | | | | | | | | | |
In Registered Direct Offering | | 769 | | | 1 | | | 4,999 | | | — | | | — | | | 5,000 |
Under Equity Distribution Agreement | | 138 | | | 1 | | | 1,518 | | | — | | | — | | | 1,519 |
Under LPC Purchase Agreement | | 116 | | | — | | | 1,172 | | | — | | | — | | | 1,172 |
Underwriting discounts and other equity offering costs | | — | | | — | | | (4,136) | | | — | | | — | | | (4,136) |
Share-based compensation | | — | | | — | | | 2,701 | | | — | | | — | | | 2,701 |
Issuance of commitment shares | | 34 | | | — | | | 450 | | | — | | | — | | | 450 |
Net loss | | — | | | — | | | — | | | — | | | (31,637) | | | (31,637) |
Balances, March 31, 2022 |
| 15,556 | | $ | 16 | | $ | 251,666 | | $ | — | | $ | (199,775) | | $ | 51,907 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
35
Rezolute, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
| | | | | | |
|
| Nine Months Ended | ||||
| | March 31, | ||||
|
| 2023 |
| 2022 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |
|
| |
|
Net loss | | $ | (39,059) | | $ | (31,637) |
Share-based compensation expense | | | 5,465 | | | 2,701 |
Non-cash lease expense | | | 233 | | | 221 |
Accretion of discounts and amortization of premiums on marketable debt securities, net | | | (708) | | | — |
Loss from change in fair value of derivative liabilities | | | 40 | | | 8 |
Depreciation and amortization expense | | | 21 | | | 10 |
Accretion of debt discount and issuance costs | | | — | | | 319 |
Changes in operating assets and liabilities: | |
|
| |
|
|
Decrease (increase) in prepaid expenses and other assets | |
| (770) | |
| 17 |
Increase in accounts payable | |
| 1,815 | |
| 548 |
Increase (decrease) in accrued liabilities | | | (168) | | | 307 |
Net Cash Used in Operating Activities | |
| (33,131) | |
| (27,506) |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| | | | |
Purchase of marketable debt securities | | | (94,954) | | | — |
Purchase of property and equipment | | | (153) | |
| — |
Total Cash Used in Investing Activities | |
| (95,107) | |
| — |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
|
| | |
|
Gross proceeds from issuance of equity securities for cash: | | | | | | |
2022 Private Placement | | | 12,330 | | | — |
Proceeds from 2021 Underwritten Public Offering | | | — | | | 50,738 |
Proceeds from 2021 Registered Direct Offering | | | — | | | 5,000 |
Under Equity Distribution Agreement | | | — | | | 1,519 |
Under LPC Purchase Agreement | | | — | | | 1,171 |
Payment of commissions and other offering costs | |
| (759) | | | (3,449) |
Payment of debt discount and issuance costs | |
| — | |
| (104) |
Net Cash Provided by Financing Activities | |
| 11,571 | |
| 54,875 |
| | | | | | |
Net increase (decrease) in cash, cash equivalents and restricted cash | | | (116,667) | | | 27,369 |
Cash, cash equivalents and restricted cash at beginning of period | |
| 150,410 | |
| 41,047 |
Cash, cash equivalents and restricted cash at end of period | | $ | 33,743 | | $ | 68,416 |
| | | | | | |
| | | | | | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
Rezolute, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows, Continued
(In thousands)
| | | | | | |
|
| Nine Months Ended | ||||
| | March 31, | ||||
|
| 2022 |
| 2021 | ||
CASH FLOWS FROM OPERATING ACTIVITIES: |
| |
|
| |
|
Net loss | | $ | (31,637) | | $ | (14,412) |
Share-based compensation expense | | | 2,701 | | | 2,305 |
Accretion of debt discount and issuance costs | | | 319 | | | — |
Non-cash lease expense | | | 221 | | | 214 |
Depreciation and amortization expense | | | 10 | | | 10 |
Loss (gain) from change in fair value of derivative liabilities | | | 8 | | | (1,784) |
Fair value of warrants issued for services | | | — | | | 8 |
Fair value of shares of common stock issued for services | | | — | | | 7 |
Changes in operating assets and liabilities: | |
|
| |
|
|
Decrease in prepaid expenses and other assets | |
| 17 | |
| 376 |
Increase (decrease) in accounts payable | |
| 548 | |
| (81) |
Increase (decrease) in other accrued liabilities | | | 307 | | | (45) |
Decrease in license fees payable to Xoma | |
| — | |
| (1,809) |
Net Cash Used in Operating Activities | |
| (27,506) | |
| (15,211) |
| | | | | | |
CASH FLOWS FROM INVESTING ACTIVITIES | |
| — | |
| — |
| | | | | | |
CASH FLOWS FROM FINANCING ACTIVITIES: | |
|
| | |
|
Proceeds from 2021 Underwritten Public Offering | | | 50,738 | | | — |
Proceeds from 2021 Registered Direct Offering | | | 5,000 | | | — |
Proceeds from issuance of Units | | | — | | | 41,000 |
Payment of commissions and other deferred offering costs | | | (3,449) | | | (3,680) |
Payment for debt discount and issuance costs | |
| (104) | | | (75) |
Proceeds from issuances of common stock | |
| 2,690 | |
| — |
Net Cash Provided by Financing Activities | |
| 54,875 | |
| 37,245 |
| | | | | | |
Net increase in cash, cash equivalents and restricted cash | | $ | 27,369 | | $ | 22,034 |
Cash, cash equivalents and restricted cash at beginning of period | |
| 41,047 | |
| 9,955 |
Cash, cash equivalents and restricted cash at end of period | | $ | 68,416 | | $ | 31,989 |
| | | | | | |
CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | | | | | | |
Cash and cash equivalents, end of period | | | 63,416 | | | 31,989 |
Restricted cash, end of period | | | 5,000 | | | — |
Total cash, cash equivalents and restricted cash, end of period | | $ | 68,416 | | $ | 31,989 |
| | | | | | |
SUPPLEMENTARY CASH FLOW INFORMATION: | |
|
| |
|
|
Cash paid for interest | | $ | 1,011 | | $ | — |
Cash paid for income taxes | | | — | | | — |
Right-of-use assets acquired in exchange for operating lease liabilities | | | — | | | 302 |
Cash paid for amounts included in the measurement of operating lease liabilities | | | 254 | | | 275 |
| | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
|
| |
|
|
Issuance of commitment shares for deferred offering costs subsequently charged to additional paid-in capital | | $ | 450 | | $ | — |
Reclassification of warrants and stock options from equity to derivative liability due to authorized share deficiency | | | — | | | 3,591 |
Increase in payables for debt issuance costs | | | — | | | 16 |
Furniture and equipment received as inducement under operating lease | | | — | | | 10 |
| | | | | | |
| | Nine Months Ended | ||||
| | March 31, | ||||
| | 2023 |
| 2022 | ||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | | | | | | |
Cash and cash equivalents, end of period | | $ | 33,743 | | $ | 63,416 |
Restricted cash, end of period | | | — | | | 5,000 |
Total cash, cash equivalents and restricted cash, end of period | | $ | 33,743 | | $ | 68,416 |
| | | | | | |
SUPPLEMENTARY CASH FLOW INFORMATION: | |
|
| |
|
|
Cash paid for interest | | $ | — | | $ | 1,011 |
Cash paid for income taxes | | | — | | | — |
Cash paid for amounts included in the measurement of operating lease liabilities | | | 87 | | | 254 |
Operating lease liabilities incurred in exchange for right-of-use assets | | | 2,204 | | | — |
| | | | | | |
NON-CASH INVESTING AND FINANCING ACTIVITIES: | |
|
| |
|
|
Issuance of commitment shares for deferred offering costs subsequently charged to additional paid-in capital | | $ | — | | $ | 450 |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
47
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Rezolute, Inc. (the “Company”) is a clinical stage biopharmaceutical companybusiness developing transformative therapies for metabolic diseases related to chronic glucose imbalance.
Change in Domicile
In June 2021, the Company merged with and into its wholly owned subsidiary, Rezolute Nevada Merger Corporation, The Company’s primary clinical assets consist of (i) RZ358, which is a Nevada corporation (“Merger Sub”), pursuant topotential treatment for congenital hyperinsulinism, an Agreement and Planultra-rare pediatric genetic disorder characterized by excessive production of Merger, dated as of June 18, 2021 (the “Reincorporation Merger Agreement”), between the Company and Merger Sub, with Merger Sub as the surviving corporation (the “Reincorporation Merger”). At the effective time of the Reincorporation Merger (the “Effective Time”), Merger Sub was renamed “Rezolute, Inc.” and succeeded to the assets, continued its business and assumed its rights and obligations by operation of law. The Reincorporation Merger Agreement was approvedinsulin by the Company’s shareholders atpancreas, and (ii) RZ402, which is an oral plasma kallikrein inhibitor (“PKI”) being developed as a potential therapy for the 2021 annual meetingchronic treatment of its shareholders held on May 26, 2021.diabetic macular edema.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the rules and regulations of the SEC for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X.
The condensed consolidated balance sheet as of June 30, 2021,2022, 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 20212022 Form 10-K, 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 fiscal year ended June 30, 2021.2022.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all information and footnote disclosures necessary for a comprehensive presentation of financial position, results of operations, and cash flows. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments) that are necessary for a fair financial statement presentation have been made. The interim results for the three and nine months ended March 31, 20222023 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the fiscal year ending June 30, 2022.2023.
Consolidation
The Company has 2two wholly owned subsidiaries consisting of Rezolute (Bio) Ireland Limited, and Rezolute Bio UK, Ltd. The accompanying consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.
5
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and the accompanying notes. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the 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, determination if other than temporary impairment exists for marketable debt securities, the fair value of derivative liabilities, fair value of share-based payments, management’s assessment of going concern, and clinical trial accrued liabilities. Actual results could differ from those estimates.
Risks and Uncertainties
The Company’s operations may be subject to significant risks and uncertainties including financial, operational, regulatory and other risks associated with a clinical stage company,business, including the potential risk of business failure, and the future impact of COVID-19 as discussed in Note 8.COVID-19.
8
Significant Accounting Policies
TheThere have been no changes to the Company’s significant accounting policies arefrom those described in Note 1 to the financial statements in Item 8 of the 20212022 Form 10-K.10-K other than the policy described below.
Investments in Marketable Debt Securities
Under the investment policy approved by the Company’s Board of Directors, eligible investments in fixed income debt securities must be denominated and payable in U.S. dollars, including eligible corporate bonds, corporate commercial paper, U.S. government obligations, and money market funds. This investment policy only permits investments in the debt securities of issuers that meet stringent credit quality ratings on the date of the investment. The investment policy also places restrictions on the length of maturities and concentrations by type and issuer. The Company’s cash and investments are held or issued by financial institutions that management believes are of high credit quality. However, they are exposed to credit risk in the event of default by the third parties that hold or issue such assets. The Company classifies investments in marketable debt securities that mature in less than one year as short-term assets. For investments that mature in more than one year, the investments are classified as long-term assets unless management intends to liquidate the investments to fund current operations before the scheduled maturity dates.
The Company accounts for its investments in marketable debt securities as available-for-sale securities whereby they are recorded in the unaudited condensed consolidated balance sheet at fair value. Interest income is recognized in the unaudited condensed consolidated statement of operations, consisting of accrued interest earned based on the coupon rate of the security, plus the impact of accreting discounts and amortizing premiums to maturity using the straight-line method which approximates the interest method. Unrealized gains and losses due to subsequent changes in fair value of the investments are reported in shareholders’ equity as a component of accumulated other comprehensive income (loss). The Company reviews the components of its portfolio of available-for-sale debt securities, using both quantitative and qualitative factors, to determine if declines in fair value below amortized cost have resulted from a credit-related loss or other factors. If declines in fair value are due to a deterioration of credit quality of the issuer, the Company recognizes (i) a loss in other comprehensive income (loss) if the reduction in fair value is considered temporary, or (ii) a loss in the consolidated statement of operations if the reduction in fair value is considered other than temporary. For a decline in fair value that is solely due to changes in interest rates, impairment is not recognized if the Company has the ability and intent to hold the investment until maturity. The cost basis of any securities sold prior to maturity will be determined using the specific identification method.
Recent Accounting Pronouncements
Recently Adopted Standard. The following standard was adopted during the nine months ended March 31, 2023:
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method. The Company adopted this standard using the full retrospective transition method effective July 1, 2022. The adoption did not have any impact on the Company’s consolidated financial statements.
Standard Required to be Adopted in Future Periods. The following accounting standards arestandard is not yet effective; management has not completed its evaluation to determine the impact that adoption of this standard will have on the Company’s consolidated financial statements.
9
In June 2016, the Financial Accounting Standards Board (“FASB”)FASB issued Accounting Standards Update (“ASU”)ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019, ASU 2016-13 was amended by ASU 2019-10, Financial Instruments- Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) whereby the effective date for ASU 2016-13 for smaller reporting companies is now required for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements.
In August 2020, the FASB issued ASU 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method and is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. The Company plans to early adopt this standard using the full retrospective transition method effective July 1, 2022. The Company does not expect the impact of adoption will have a material effect on the Company’s financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not currently expected to have a material impact on the Company’s financial statements upon adoption.
6
NOTE 2 — LIQUIDITY
The Company is in theAs a clinical stage andbusiness, the Company has not yet generated any revenues.revenues and had an accumulated deficit of $248.3 million as of March 31, 2023. For the nine months ended March 31, 2022,2023, the Company incurred a net loss of $31.6$39.1 million and net cash used in operating activities amounted to $27.5$33.1 million. For the fiscal year ended June 30, 2021,2022, the Company incurred a net loss of $20.9$41.1 million and net cash used in operating activities amounted to $20.4$39.6 million. As of March 31, 2022,2023, the Company had an accumulated deficitCompany’s capital resources consist of $199.8 million, unrestricted cash and cash equivalents of $63.4$33.7 million, short-term investments in marketable debt securities of $69.3 million and long-term investments in marketable debt securities of $26.2 million.
As of March 31, 2023, the Company has total liabilities of $6.9 million, including current liabilities of $2.9$4.4 million.
As discussed in Note 4,5, the Company is subject to license agreements that provide for future contractual payments upon achievement of various milestone events. Pursuant to the ActiveSite License Agreement (as defined below), a $3.0 million milestone payment will be duewas paid in February 2023 upon dosing of the first patient in a Phase 2 clinical trial for RZ402. Additionally, pursuantPursuant to the XomaXOMA License Agreement (as defined below), a $5.0 million milestone payment will be due upon dosing of the first patient in a Phase 3 clinical trial for RZ358.
As discussed in Note 6, in October and November 2021 the Company completed an underwritten public offering for net proceeds of $47.3 million and a registered direct offering for net proceeds of $5.0 million, resulting in aggregate net proceeds of approximately $52.3 million. In addition, for the nine months ended March 31, 2022, the Company received net proceeds of approximately $2.7 million from equity issuances under the Equity Distribution Agreement and the LPC Purchase Agreement discussed in Note 6.
As discussed in Note 13, the Company received gross proceeds of approximately $117.6 million upon closing of a registered direct offering on May 4, 2022. This amount consists of $41.6 million related to the issuance of 10.9 million Class B pre-funded warrants where exercise is subject to shareholder approval of an increase in our authorized shares, and the remainder relates to unrestricted issuances of equity securities. Underwriting discounts and commissions amounted to $7.1 million related to the registered direct offering. In addition, the Company entered into a securities purchase agreement on May 1, 2022, to sell Class C pre-funded warrants exercisable for 3.3 million shares whereby exercisability is also subject to shareholder approval and which First patient dosing milestone RZ358 Phase 3 clinical trial is expected to result in net proceeds of $11.4 million upon closing ofoccur within the securities purchase agreement. Management expects shareholders will approve the necessary increase in authorized shares to eliminate the restrictions on the Class B and Class C pre-funded warrants. However, no assurance can be provided that such approval will be obtained.
next 12 months.
Management believes the Company’s existing cash and cash equivalents balance of $63.4 million as of March 31, 2022, combined with the unrestricted net proceeds received from the registered direct offeringand investments in May 2022marketable debt securities will be adequate to meet the Company’s contractual obligations and carry out ongoing clinical trials and other planned activities at least through May 2023.2024.
NOTE 3 — OPERATING LEASES
On March 10, 2023, Silicon Valley Bank (“SVB”) was shut down, followed on March 11, 2023 by Signature Bank and on May 1, 2023 by First Republic Bank whereby the Federal Deposit Insurance Corporation was appointed as receiver for each of those banks. Starting in January 2023, SVB Asset Management (“SAM”), a nonbank affiliate of SVB and a member of SVB Financial Group, provided investment services relating to the Company’s investment in marketable debt securities held in a segregated custodial account held by a third-party custodian, U.S. Bank. At the time of the closing of SVB, the Company had approximately $20.5 million in cash and certain cash equivalents in an Overnight Money Market Mutual Fund (“MMF”), for which SAM was the investment advisor of until April 13, 2023, when the MMF was liquidated and transferred to a similar investment under the control of a new investment advisor. The carrying valueCompany’s investment portfolio did not and currently does not contain any securities of right-of-use assetsSVB, and operating lease liabilities arethe Company did not have any deposit accounts with SVB. The Company does not believe it was or will be impacted by the closure of SVB and will continue to monitor the banking industry situation as follows (in thousands):
| | | | | | |
|
| March 31, |
| June 30, | ||
|
| 2022 |
| 2021 | ||
Right-of-use assets, net | | $ | 175 | | $ | 396 |
| | | | | | |
Operating lease liabilities: | |
|
| |
|
|
Current | | $ | 107 | | $ | 265 |
Long-term | |
| 107 | |
| 187 |
Total | | $ | 214 | | $ | 452 |
it evolves.
710
NOTE 3 —INVESTMENTS IN MARKETABLE DEBT SECURITIES
Investments in marketable debt securities, including cash and cash equivalents, are as follows (in thousands):
| | | | | |
| Estimated Fair Value at | ||||
| March 31, | | June 30, | ||
| 2023 |
| 2022 | ||
Cash and cash equivalents | $ | 33,743 | | $ | 150,410 |
Short-term investments in marketable debt securities | | 69,319 | | | — |
Long-term investments in marketable debt securities | | 26,210 | | | — |
Total cash, cash equivalents and investments in marketable debt securities | $ | 129,272 | | $ | 150,410 |
The Company only invests in liquid, high quality debt securities. Our investments in debt securities are subject to interest rate risk. To minimize the exposure due to an adverse shift in interest rates, the Company generally invests in securities with expected maturities of two years or less and maintains a weighted average maturity of one year or less. As of March 31, 2023 investments in marketable debt securities with a fair value of $69.3 million are scheduled to mature during the 12-month period ending March 31, 2024 and substantially all of the remaining investments, which have a fair value of $26.2 million, are scheduled to mature during the 12 month period ending March 31, 2025.
During the nine months ended March 31, 2023 and 2022, we sold no available-for-sale securities.
Accrued interest receivable on all marketable debt securities amounted to $0.3 million which is included in other current assets in the accompanying condensed consolidated balance sheet as of March 31, 2023. We did not have any accrued interest receivable as of June 30, 2022.
The following table summarizes the unrealized gains and losses that result in differences between the amortized cost basis and fair value of the Company’s cash, cash equivalents and marketable debt securities held as of March 31, 2023 and June 30, 2022 (in thousands):
| | | | | | | | | | | | | | | |
| | March 31, 2023 | | June 30, | |||||||||||
| | | | | Gross Unrealized | | | | | 2022 | |||||
| | Amortized Cost |
| Gains |
| Losses |
| Fair Value | | Fair Value | |||||
Corporate commercial paper | | $ | 38,416 | | $ | 2 | | $ | (37) | | $ | 38,381 | | $ | — |
Obligations of U.S. government agencies | | | 24,379 | | | 23 | | | (1) | | | 24,401 | | | — |
U.S. Treasury obligations | | | 5,941 | | | 1 | | | — | | | 5,942 | | | — |
Corporate notes and bonds | | | 22,150 | | | 4 | | | (122) | | | 22,032 | | | — |
Asset-backed securities | | | 4,775 | | | — | | | (2) | | | 4,773 | | | — |
Available-for-sale investments | | $ | 95,661 | | $ | 30 | | $ | (162) | | $ | 95,529 | | $ | — |
Money market funds | | | | | | | | | | | | 20,497 | | | — |
Cash | | | | | | | | | | | | 13,246 | | | 150,410 |
Total cash, cash equivalents and investments in marketable debt securities | | | | | | | | | | | $ | 129,272 | | $ | 150,410 |
11
NOTE 4 — OPERATING LEASES
In April 2022, the Company entered into a lease agreement for a new corporate headquarters in Redwood City, California. The space consists of approximately 9,300 square feet and provides for total base rent payments of approximately $2.9 million through the expected expiration of the lease in November 2027. The landlord was required to make improvements to the facility before the Company could occupy the space. These improvements were completed in October 2022, triggering the commencement of the lease. The lease provided for a six-month rent abatement period beginning upon commencement of the lease term. In addition, the lease provided an allowance of approximately $0.1 million that may be utilized by the Company for the purchase of furniture and equipment. The average base rent payable in cash over the 60-month lease term is approximately $48,000 per month. Upon commencement of the lease, the Company recognized a right-of-use asset for approximately $2.3 million, and a related operating lease liability for approximately $2.2 million.
The carrying values of all of the Company’s right-of-use assets and operating lease liabilities are as follows (in thousands):
| | | | | | |
| | March 31, | | June 30, | ||
|
| 2023 |
| 2022 | ||
| | | | | | |
Right-of-use assets | | $ | 2,172 | | $ | 152 |
| | | | | | |
Operating lease liabilities: | |
|
| |
|
|
Current | | $ | 319 | | $ | 108 |
Long-term | |
| 2,055 | |
| 80 |
Total | | $ | 2,374 | | $ | 188 |
For the three and nine months ended March 31, 20222023 and 2021,2022, operating lease expense was as followsis included under the following captions in the accompanying condensed consolidated statements of operations and comprehensive loss (in thousands):
| | | | | | | | | | | | | | |||||||||||||
| | | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | | ||||||||
|
| Three Months Ended | | Nine Months Ended | | | March 31, | | March 31, | | ||||||||||||||||
| | March 31, | | March 31, | |
| 2023 |
| 2022 | | 2023 |
| 2022 | | ||||||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | | | | | | | | | | | | | | | ||||
Research and development | | $ | 66 | | $ | 75 | | $ | 216 | | $ | 185 | | | $ | 139 | | $ | 66 | | $ | 331 | | $ | 216 | |
General and administrative | |
| 32 | |
| 28 | |
| 75 | |
| 83 | | |
| 34 | |
| 32 | |
| 105 | |
| 75 | |
Total | | $ | 98 | | $ | 103 | | $ | 291 | | $ | 268 | | | $ | 173 | | $ | 98 | | $ | 436 | | $ | 291 | |
As of March 31, 2022,2023, the weighted average remaining lease term under operating leases was 1.94.4 years, and the weighted average discount rate for operating lease liabilities was 6.0%6.8%. Future cash payments under all operating lease agreements as of March 31, 20222023 are as follows (in thousands):
| | | | | | |
Fiscal year ending June 30, |
|
| |
|
| |
Remainder of fiscal year 2022 | | $ | 29 | |||
2023 | | | 117 | |||
Remainder of fiscal year 2023 | | $ | 80 | |||
2024 | | | 79 | | | 689 |
2025 | | | 627 | |||
2026 | | | 646 | |||
2027 | | | 666 | |||
Thereafter | | | 224 | |||
Total lease payments | | | 225 | | | 2,932 |
Less imputed interest | |
| (11) | |
| (558) |
Present value of operating lease liabilities | | $ | 214 | | $ | 2,374 |
12
As discussed in Note 13, the Company entered into a new lease agreement in April 2022 that provides for total cash payments of approximately $2.9 million over the 60-month lease term. These payments are excluded from the table set forth above.
NOTE 45 — LICENSE AGREEMENTS
XomaXOMA License Agreement
In December 2017, the Company entered into a license agreement (the “Xoma“XOMA License Agreement”) with XOMA Corporation (“Xoma”XOMA”), through its wholly-owned subsidiary, XOMA (US) LLC, pursuant to which XomaXOMA granted an exclusive global license to the Company to develop and commercialize XomaXOMA 358 (formerly X358, now RZ358) for all indications. In January 2019, the XomaXOMA License Agreement was amended with an updated payment schedule, as well as revising the amount the Company was 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.
In January 2022, the Company was required to make a milestone payment under the XomaXOMA License Agreement of $2.0 million that became due upon the dosing of the last patient in the Company’s ongoing Phase 2b Clinical Trial for RZ358. Upon the achievement of certain clinical and regulatory events under the XOMA License Agreement, the Company will be required to make up to $32.0 million in aggregateadditional milestone payments to Xoma.XOMA up to $35.0 million. After the clinical and regulatory milestones, the Company will be required, upon the future commercialization of RZ358, to pay royalties to XOMA based on the net sales of the related products and additional milestone payments to XOMA up to $185.0 million related to annual net sales amounts. The next milestone payment of $5.0 million will be due upon dosing of the first patient in a Phase 3 clinical trial for RZ358.
ActiveSite License Agreement
On August 4, 2017, the Company entered into a Development and License Agreement (the “ActiveSite License Agreement”) with ActiveSite Pharmaceuticals, Inc. (“ActiveSite”) pursuant to which the Company acquired the rights to ActiveSite’s Plasma Kallikrein Inhibitor program (“PKI Portfolio”). The Company is initially using the PKI Portfolio to develop an oral PKI therapeutic for diabetic macular edema (RZ402) and may use the PKI Portfolio to develop other therapeutics for different indications. The ActiveSite Development and License Agreement requires various milestone payments up to $46.5 million.million, if all milestones are achieved. The first milestone payment for $1.0 million was paid in December 2020 after clearance was received for an Initial Drug Application, or IND, filed with the U.S. Food and Drug Administration (“FDA”). The nextsecond milestone payment of $3.0 million will be due uponwas paid in February 2023 after dosing of the first patient in a Phase 2 clinical trial for RZ402.
8
Table The next milestone payment of Contents
Rezolute, Inc.
Notes$5.0 million will be due upon the first dosing of a patient in a Phase 3 clinical trial. The Company is also required to Unaudited Condensed Consolidated Financial Statementspay royalties equal to 2.0% of any sales of products that use the PKI Portfolio. There have been no events that would result in any royalty payments owed under the ActiveSite License Agreement to date.
NOTE 56 — LOAN AND SECURITY AGREEMENTEMBEDDED DERIVATIVE LIABILITY
On April 14, 2021, the Company entered into a $30.0 million Loan and Security Agreement (the “Loan Agreement”) with SLR Investment Corp. and certain other lenders (the “Lenders”). The Lenders agreed to loan up to $30.0 million in 3three tranches consisting of (i) a $15.0 million term A loan that was funded on April 14, 2021, (ii) term B and term C loans for an aggregate of $15.0 million, which were subject to the Company’s ability to obtain prescribed amounts of financing and the achievement of certain clinical milestones. The Company did not achieve the initial clinical milestones by January 2022 and, accordingly, the term B and term C loans arewere no longer a source of liquidity. The term A loan hashad a maturity date of April 1, 2026 (the “Maturity Date”).
In addition, the Company’s cash and cash equivalents became subject to a blocked account control agreement (“BACA”) but was repaid in favor of the Lenders whereby a cash balance of at least $5.0 million was required beginningfull on December 31, 2021. Accordingly, the Company has classified $5.0 million as a long-term restricted cash asset in the accompanying unaudited condensed consolidated balance sheet as of March 31, 2022. In the event of a default under the Loan Agreement, the BACA would enable the Lenders to prevent the release of funds from the Company’s cash accounts.
Outstanding borrowings under the Loan Agreement bear interest at a floating rate equal to (a) 8.75% per annum plus (b) the greater of (i) the rate per annum published by the Intercontinental Exchange Benchmark Administration Ltd. (“IEBA”) for a term of one month and (ii) 0.12% per annum. For the period from April 14, 2021 through February 28, 2022, the IEBA rate for a term of one month was approximately 0.12% per annum. For the period from February 28, 2022 through March 31, 2022, the IEBA rate for a term of one month was approximately 0.23% per annum. Therefore, the contractual rate was 8.98% and 8.87% as of March 31, 2022 and June 30, 2021, respectively. The Company is permitted to make interest-only payments on the term A loan through May 1, 2023. At the Company’s request, the interest-only period can be extended until May 1, 2024, provided that no event of default shall have occurred. The Company will be required to make monthly payments of principal and interest commencing at the end of the interest-only period.
The Company is obligated to pay the Lenders (i) a non-refundable facility fee in the amount of 1.00% of the term A loan that was funded (the “Facility Fee”), and (ii) a final fee equal to 4.75% of the aggregate amount of the term A loan that was funded (the “Final Fee”). As of March 31, 2022, the Company incurred debt discounts for an aggregate of $1.7 million that consisted of $0.4 million for financial advisory and legal fees, an aggregate of $0.9 million for the Facility Fee and the Final Fee, and an aggregate of $0.4 million as an exit fee as discussed below. The Final Fee is payable upon the earliest to occur of (i) the Maturity Date, (ii) the acceleration of the term loans, and (iii) the prepayment of the term loans. The total debt discount of $1.7 million related to the term A loan is being accreted to interest expense using the effective interest method whereby the effective interest rate amounted to 12.7% and 12.6% as of March 31, 2022 and June 30, 2021, respectively.2022.
Concurrently with the execution of the Loan Agreement, the Company entered into an exit fee agreement (the “Exit Fee Agreement”) that provides for a fee of 4.00% of the funded principal balance of each term loan in the event certain transactions (defined as “Exit Events”) occur prior to April 13, 2031. Exit Events include, but are not limited to, sales of substantially all assets, certain mergers, change of control transactions, and issuances of common stock that result in new investors owning more than 35% of the Company’s
13
shares. As of April 14, 2021, the Company allocated a portion of the proceeds from the term A loan to recognize a liability for the fair value of this embedded derivative for approximately $354,000.derivatives. Fair value was determined primarily based on the Company’s strategic corporate development plans and managementplans. Management has performed a detailed evaluation of the different types of Exit Events that could occur and has determine fair value using a discounted rate equivalent to the effective rate for the term A loan.loan of 12.6%. Fair value of this embedded derivativederivatives is assessedreassessed at the end of each reporting period with changes in fair value recognized as a nonoperating gain or loss.
The Company has the option to prepay all, but not less than all, of the outstanding principal balance of the term loans. In the event of a voluntary or mandatory prepayment prior to the Maturity Date, the Company will incur a prepayment fee ranging from 1.00% to 3.00% of the outstanding principal balance.
The Company’s obligations under the Loan Agreement are secured by a first-priority security interest in substantially all the Company’s assets, including its intellectual property. This security interest will not be released until all obligations are repaid, including the requirement to pay an Exit Fee of $0.6 million for certain fundamental transactions that may occur through April 13, 2031. The Loan
9
Agreement contains customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches of covenants, and a default upon the occurrence of a material adverse change affecting the Company. Upon the occurrence of an event of default, a default interest rate of an additional 5.00% per annum may be applied to the outstanding loan balance, and the Lenders may declare all outstanding obligations immediately due and payable and exercise all of their rights and remedies as set forth in the Loan Agreement.
As of March 31, 2022, the Company had outstanding contractual obligations under the Loan Agreement consisting of the principal balance of $15.0 million and the Final Fee of $0.7 million for a total of $15.7 million. After deducting the unaccreted discount of $1.4 million, the net carrying value was $14.3 million as of March 31, 2022. Future minimum principal payments and the net carrying value of the term A loan are as follows as of March 31, 2022 (in thousands):
| | | |
Fiscal year ending June 30, |
|
| |
Remainder of fiscal year 2022 | | $ | — |
2023 | |
| 833 |
2024 | |
| 5,000 |
2025 | |
| 5,000 |
2026 | |
| 4,880 |
Total contractual payments | |
| 15,713 |
Less unaccreted debt discount | |
| (1,427) |
Net carrying value | | $ | 14,286 |
NOTE 67 — SHAREHOLDERS’ EQUITY
Quarterly Changes in Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021
The following table presents changes in shareholders’ equity for the three months ended March 31, 20222023 and 2021 (in thousands):
2022:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Additional | | | | | Total | | | | | | | | | | Accumulated | | | | | | ||||
| | Common Stock | | Paid-in | | Accumulated | | Shareholders' | | | | | | | Additional | | Other | | | | Total | ||||||||||
| | Common Stock | | Paid-in | | Comprehensive | | Accumulated | | Shareholders' | |||||||||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Loss |
| Deficit |
| Equity | |||||||||||||||||||
Three Months Ended March 31, 2023: | | | | | | | | | | | | | | | | | | ||||||||||||||
Balances, December 31, 2022 |
| 36,827 | | $ | 37 | | $ | 373,813 | | $ | — | | $ | (232,585) | | $ | 141,265 | ||||||||||||||
Share-based compensation | | — | | | — | | | 1,855 | | | — | | | — | | | 1,855 | ||||||||||||||
Net change in accumulated other comprehensive loss | | — | | | — | | | — | | | (132) | | | — | | | (132) | ||||||||||||||
Net loss |
| — | |
| — | |
| — | |
| — | |
| (15,672) | |
| (15,672) | ||||||||||||||
Balances, March 31, 2023 | | 36,827 | | $ | 37 | | $ | 375,668 | | $ | (132) | | $ | (248,257) | | $ | 127,316 | ||||||||||||||
|
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | | | | | | | | | | | | | | | | | | ||||
Three Months Ended March 31, 2022: | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Balances, December 31, 2021 |
| 15,556 | | $ | 16 | | $ | 250,816 | | $ | (188,567) | | $ | 62,265 | | 15,556 | | $ | 16 | | $ | 250,816 | | $ | — | | $ | (188,567) | | $ | 62,265 |
Share-based compensation | | — | | | — | | | 850 | | | — | | | 850 | | — | | | — | | | 850 | | | — | | | — | | | 850 |
Net loss |
| — | |
| — | |
| — | |
| (11,208) | |
| (11,208) | | — | | | — | | | — | | | — | | | (11,208) | | | (11,208) |
Balances, March 31, 2022 | | 15,556 | | $ | 16 | | $ | 251,666 | | $ | (199,775) | | $ | 51,907 |
| 15,556 | | $ | 16 | | $ | 251,666 | | $ | — | | $ | (199,775) | | $ | 51,907 |
| | | | | | | | | | | | | | | |||||||||||||||||
Three Months Ended March 31, 2021: | | | | | | | | | | | | | | | |||||||||||||||||
Balances, December 31, 2020 | | 8,352 | | $ | 8 | | $ | 193,831 | | $ | (157,953) | | $ | 35,886 | |||||||||||||||||
Share-based compensation | | — | | | — | | | 530 | | | — | | | 530 | |||||||||||||||||
Reclassification of derivative liability for authorized share deficiency | | — | | | — | | | (3,591) | | | — | | | (3,591) | |||||||||||||||||
Fair value of warrants issued to consultants for services | | — | | | — | | | 2 | | | — | | | 2 | |||||||||||||||||
Net loss | | — | | | — | | | — | | | (3,695) | | | (3,695) | |||||||||||||||||
Balances, March 31, 2021 |
| 8,352 | | $ | 8 | | $ | 190,772 | | $ | (161,648) | | $ | 29,132 |
For changesJuly 2022 Financing
In May 2022, the Company entered into securities purchase agreements (“SPAs”) with Handok, Inc. (“Handok”) and certain of its affiliates. Handok is an affiliate of a member of the Company’s Board of Directors. In July 2022, the Company entered into amended SPAs for a private placement of common stock (the “2022 Private Placement”). The 2022 Private Placement resulted in shareholders’ equitygross proceeds of $12.3 million in exchange for the nine months ended March 31, 2022issuance of approximately 3.2 million shares of common stock. The Company incurred approximately $0.8 million for underwriting commissions and 2021, please refer to the unaudited condensed consolidated statementsother offering costs, resulting in net proceeds of shareholders’ equity.$11.5 million.
Underwritten Public Offering
On October 12, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Oppenheimer & Co., Inc., as representative of the underwriters listed therein (the “2021 Underwriters”“Underwriters”) for the planned issuance and sale of equity securities in an underwritten public offering (the “2021 Underwritten“Underwritten Offering”). On October 15, 2021, closing occurred for the Underwritten Offering resulting in the issuance of (i) 6,030,847 shares of common stock at $6.50 per share for gross proceeds of $39.2 million, and (ii) 1,661,461 pre-funded warrants to purchase 1,661,461 shares of common stock at an issuance price of $6.49 per warrant (the “Pre-Funded Warrants”) for gross proceeds of $10.8 million. The aggregate gross proceeds from the Underwritten Offering amounted to $50.0 million, excluding the exercise of the Underwriters’ Option discussed below, and before deductions for underwriting discounts
1014
warrants to purchase 1,661,461 shares of common stock at an issuance price of $6.49 per warrant (the “2021 PFWs”) for gross proceeds of $10.8 million. The aggregate gross proceeds from the Underwritten Offering amounted to $50.0 million, excluding the Underwriters’ Option discussed below, and before deductions for underwriting discounts and commissions of 6.0% of the gross proceeds and other offering costs of approximately $0.3 million. After deducting total offering costs of $3.3 million, the net proceeds of the Underwritten Offering amounted to approximately $46.7 million.
The
In connection with the Underwritten Offering, the Company granted the 2021 Underwriters a 30-day option to purchase up to an additional 1,153,845 shares of its common stock in the 2021 Underwritten Offering at a public offering price of $6.50 per share, less underwriting discounts and commissions (the “Underwriters’ Option”). In November 2021, the Underwriters’ Option was partially exercised for 116,266 shares resulting in additional gross proceeds of approximately $0.8 million.
2021
Pre-Funded Warrants
The 2021 PFWsPre-Funded Warrants issued in the Underwritten Offering have an exercise price of $0.01 per share, which is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock. Each 2021 PFWPre-Funded Warrant is exercisable at any time and from time to time after issuance with no stated expiration date. In the event of certain corporate transactions, the holders of the 2021 PFWsPre-Funded Warrants will be entitled to receive, upon exercise of the 2021 PFWs,Pre-Funded Warrants, the kind and amount of securities, cash or other property that the holders would have received had they exercised the 2021 PFWsPre-Funded Warrants immediately prior to such transaction. The 2021 PFWsPre-Funded Warrants do not entitle the holders thereof to any voting rights or any of the other rights or privileges to which holders of Common Stockthe Company’s common stock are entitled.
The gross proceeds of $10.8 million received from issuance of the 2021 PFWsPre-Funded Warrants was recorded as a component of shareholders’ equity within additional paid-in capital. In accordance with the terms of the warrant agreement, holders of the outstanding warrants are not entitled to exercise any portion of the Pre-Funded Warrant if, upon exercise of such portion of the warrant, the holder’s aggregate ownership of the Company’s common stock or the combined voting power beneficially owned by such holder would exceed a designated percentage elected by the holder ranging from 4.99% to 19.99%, after giving effect to the exercise (the “Maximum Ownership Percentage”). Upon at least 61 days’ prior notice to the Company, any warrant holder may elect to increase or decrease the Maximum Ownership Percentage to any other percentage not to exceed 19.99%. As of March 31, 2022, 02023, no shares underlying the 2021 PFWsPre-Funded Warrants have been exercised.
2021
15
Registered Direct Offering
Concurrently with the Underwritten Offering, Handok, Inc.a major shareholder (the “Purchaser”), an entity that is affiliated with a member of the Company’s Board of Directors entered into a subscription agreement for a registered direct offering, (the “2021 RDO”) pursuant to which the Company agreed to sell to the Purchaser an aggregate of 769,231 shares of itsthe Company’s common stock at a purchase price of $6.50 per share. The closing for the 2021 RDOregistered direct offering occurred on October 27, 2021, whereby the Company received gross proceeds of $5.0 million.
Equity Distribution Agreement
In December 2020, the Company and Oppenheimer & Co. Inc. (the “Agent”) entered into an Equity Distribution Agreement (the “EDA”) that provides for an “at the market offering” for the sale of up to $50.0 million in shares of the Company’s common stock (the “Placement Shares”) through the Agent. The Agent was acting as sales agent and was required to use commercially reasonable efforts to sell all of the Placement Shares requested to be sold by the Company, consistent with the Agent’s normal trading and sales practices, on mutually agreed terms between the Agent and the Company. The EDA was scheduled to terminate when all of the Placement Shares had been sold, or earlier upon the election of either the Company or the Agent. As discussed in Note 13,In May 2022, the Company provideprovided the Agent with notice of termination of the EDA in May 2022 and no further shares will be issued under this agreement.
Under the terms of the EDA, the Company agreed to pay the Agent a commission equal to 3.0% of the gross sales price of the Placement Shares plus certain expenses incurred by the Agent in connection with the offering. For the nine months ended March 31, 2022, the Company sold 138,388 shares of its common stock pursuant to the EDA for net proceeds of approximately $1.5 million.
11
LPC Purchase Agreement
In August 2021, the Company entered into a purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “RRA”) with Lincoln Park Capital Fund, LLC (“LPC”), which provides that the Company may sell to LPC up to an aggregate of $20.0 million shares (the “Purchase Shares”) of its common stock. The Company concurrently filed a prospectus supplement with the SEC to register the shares issuable under the Purchase Agreement. The aggregate number of shares that the Company could sell to LPC under the Purchase Agreement was 1,669,620 shares of common stock, subject to certain exceptions set forth in the Purchase Agreement.
LPC’s initial purchase consisted of 95,708 Purchase Shares at a purchase price of approximately $10.45 per share for a total purchase price of $1.0 million. Concurrently, the Company issued 33,799 shares of common stock to LPC as an initial fee for its commitment to purchase shares of common stock under the Purchase Agreement. Subject to the terms of the Purchase Agreement, the Company had the right, in its sole discretion, to present LPC with a purchase notice (a “Regular Purchase Notice”), directing LPC to purchase up to 25,000 Purchase Shares (a “Regular Purchase”). LPC’s committed obligation under any single Regular Purchase generally could not exceed $2.0 million. The Purchase Agreement provided for a purchase price per share for each Regular Purchase (the “Purchase Price”) equal to the lesser of (i) the lowest sale price of the common stock on the Nasdaq Capital Market (“NCM”) on the purchase date of such shares; and (ii) the average of the 3three lowest closing sale prices for the common stock traded on the NCM during the ten consecutive business days ending on the business day immediately preceding the purchase date of such shares.
On September 17, 2021, the Company submitted a Regular Purchase Notice, resulting in the sale of 20,000 Purchase Shares to LPC for net proceeds of approximately $0.2 million. As discussed in Note 13,In May 2022, the Company provided LPC with notice of termination of the Purchase Agreement in May 2022 andwhereby no further shares are issuable under this agreement.
Pursuant to the RRA, the Company agreed to use its reasonable best efforts to maintain effectiveness of the registration statement and the related prospectus supplement within prescribed deadlines set forth in the RRA. In addition, the Company is required to use its reasonable best efforts to secure and maintain its listing of the Purchase Shares on the NCM. LPC has no obligation to purchase shares under the Purchase Agreement unless the Company complies with the terms of the RRA.
Derivative Liability for Authorized Share Deficiency
On February 17, 2021, the Company filed a certificate of correction (the “Charter Revision”) with the Secretary of State of Delaware. The Charter Revision changed the number of authorized shares of Common Stock from 500,000,000 shares to 10,000,000 on February 17, 2021. Upon filing the Charter Revision, the Company had approximately 8,352,000 shares of common stock issued and outstanding, plus approximately 2,428,000 shares were required to be reserved for issuance pursuant to the Company’s stock option plans and outstanding warrant agreements. Since the Charter Revision reduced authorized shares to 10,000,000 shares, a deficiency of approximately 780,000 shares existed as of February 17, 2021. As a result of this deficiency, it was not possible to issue up to an aggregate of 780,000 shares of common stock under outstanding stock options and warrants as of February 17, 2021. Therefore, the Company could have been required to settle in cash for the fair value of the 780,000 shares subject to this deficiency, which required liability classification for these instruments beginning on February 17, 2021.
The Company made an accounting policy election to select the stock options and warrant agreements with the earliest issuance dates to compute the estimated fair value of the financial instruments associated with the authorized share deficiency. These stock options and warrants were generally those with the highest exercise prices that were least likely to be exercised. The fair value of such stock options and warrants was accounted for as a derivative liability that amounted to $3.6 million as of February 17, 2021. As a result of the expiration of stock options for approximately 40,000 shares in March 2021, the authorized share deficiency was reduced to approximately 740,000 as of March 31, 2021. Primarily due to the reduction in the market price of the Company’s common stock, the fair value of stock options and warrants for an aggregate of 740,000 shares amounted to $1.8 million as of March 31, 2021. Presented
1216
below is a summary of the derivative liability associated with stock options and warrants as of February 17, 2021 and March 31, 2021 (in thousands, except per share amounts):
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | February 17, 2021 | | | March 31, 2021 | ||||||||||||
| | Stock | | | | | | | | | Stock | | | | | | |
| | Options | | | Warrants | | | Total | | | Options | | | Warrants | | | Total |
Number of shares | | 253 | | | 527 | | | 780 | | | 213 | | | 527 | | | 740 |
Weighted average fair value per share | $ | 6.46 | | $ | 3.71 | | $ | 4.60 | | $ | 4.03 | | $ | 1.80 | | $ | 2.44 |
Fair value of derivative liability | $ | 1,638 | | $ | 1,953 | | $ | 3,591 | | $ | 858 | | $ | 949 | | $ | 1,807 |
Due to the reduction in fair value of the derivative liability from February 17, 2021 to March 31, 2021, the Company recognized a non-cash gain of approximately $1.8 million in the accompanying unaudited condensed consolidated statements of operations for the three and nine months ended March 31, 2021. In order to determine the fair value of the stock options and warrants set forth above, the Company used the BSM option-pricing model with the following weighted-average assumptions for the valuations performed as of February 17, 2021 and March 31, 2021:
| | | | | | | | | | | | | | | | | | | |
| | | February 17, 2021 | | | March 31, 2021 | | ||||||||||||
| | | Stock | | | | | | | | | Stock | | | | | | | |
| | | Options | | | Warrants | | | Total | | | Options | | | Warrants | | | Total | |
Market price of Common Stock | | $ | 11.99 | | $ | 11.99 | | $ | 11.99 | | $ | 7.06 | | $ | 7.06 | | $ | 7.06 | |
Exercise price | | $ | 84.19 | | $ | 63.88 | | $ | 70.48 | | $ | 70.48 | | $ | 63.84 | | $ | 65.75 | |
Risk-free interest rate | | | 0.6 | % | | 0.1 | % | | 0.3 | % | | 1.0 | % | | 0.2 | % | | 0.4 | % |
Dividend rate | | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % | | 0.0 | % |
Remaining contractual term (years) | | | 4.6 | | | 1.5 | | | 2.5 | | | 5.3 | | | 1.4 | | | 2.5 | |
Historical volatility | | | 112.6 | % | | 123.5 | % | | 119.9 | % | | 118.4 | % | | 112.0 | % | | 113.9 | % |
On May 26, 2021, the Company’s shareholders approved an increase in authorized shares of common stock from 10.0 million shares to 40.0 million shares. As a result, the authorized share deficiency was eliminated, and the related stock options and warrants were no longer accounted for a derivative liability after May 26, 2021 and were reclassified to equity.
NOTE 78 — SHARE-BASED COMPENSATION AND WARRANTS
Stock Option Plans
Presented below is a summary of the number of shares authorized, outstanding, and available for future grants under each of the Company’s stock option plans as of March 31, 20222023 (in thousands):
| | | | | | | | | | | | | | | | |
|
| Plan Termination |
| Number of Shares |
| Plan Termination |
| Number of Shares | ||||||||
Description |
| Date |
| Authorized |
| Outstanding |
| Available |
| Date |
| Authorized |
| Outstanding |
| Available |
| | | | | | | | | ||||||||
2015 Plan |
| February 2020 |
| 45 |
| 45 |
| — |
| February 2020 |
| 17 |
| 17 |
| — |
2016 Plan |
| October 2021 |
| 260 |
| 260 |
| — |
| October 2021 |
| 140 |
| 140 |
| — |
2019 Plan |
| July 2029 |
| 200 |
| 200 |
| — |
| July 2029 |
| 200 |
| 200 |
| — |
2021 Plan | | March 2030 | | 1,200 | | 1,082 | | 118 | | March 2031 | | 10,700 | | 8,422 | | 2,278 |
Total |
|
|
| 1,705 |
| 1,587 |
| 118 |
|
|
| 11,057 |
| 8,779 |
| 2,278 |
13
Table2022 Employee Stock Purchase Plan
On June 16, 2022, the Company’s shareholders approved the adoption of Contentsthe 2022 Employee Stock Purchase Plan (the “2022 ESPP”). The 2022 ESPP provides an opportunity for employees to purchase the Company’s common stock through accumulated payroll deductions.
Rezolute, Inc.The 2022 ESPP has consecutive offering periods that begin approximately every 6 months commencing on the first trading day on or after July 1 and terminating on the last trading day of the offering period ending on December 31 and commencing on the first trading day on or after January 1 and terminating on the last trading day of the offering period ending on June 30. The 2022 ESPP reserves 0.5 million shares for purchases. The first offering period concluded on December 31, 2022, and no purchases were made under the 2022 ESPP. As of March 31, 2023, no shares have been purchased under the 2022 ESPP.
Notes to Unaudited Condensed Consolidated Financial Statements
Stock Options Outstanding
The following table sets forth a summary of the activity under all of the Company’s stock option plans for the nine months ended March 31, 20222023 (shares in thousands):
| | | | | | | | | | | | | | |
|
| Shares |
| Price (1) |
| Term (2) |
| Shares |
| Price (1) |
| Term (2) | ||
Outstanding, June 30, 2021 |
| 1,285 | | $ | 16.35 |
| 8.7 | |||||||
Granted | | 421 | | | 5.37 | | | |||||||
| | | | | | | | |||||||
Outstanding, June 30, 2022 |
| 8,506 | | $ | 5.24 | | 9.7 | |||||||
Grants to employees | | 668 | | | 1.98 | | | |||||||
Expired | | (61) | | | 20.19 | | | | (116) | | | 40.73 | | |
Forfeited | | (58) | | | 10.28 | | | | (279) | | | 3.78 | | |
Outstanding, March 31, 2022 |
| 1,587 | |
| 13.41 |
| 8.6 | |||||||
Vested, March 31, 2022 |
| 620 | |
| 19.23 |
| 7.5 | |||||||
Outstanding, March 31, 2023 |
| 8,779 | |
| 4.57 |
| 9.1 | |||||||
Vested, March 31, 2023 |
| 966 | |
| 11.65 |
| 7.73 |
(1) | Represents the weighted average exercise price. |
(2) | Represents the weighted average remaining contractual term for the number of years until the stock options expire. |
17
For the nine months ended March 31, 2022,2023, the aggregate fair value of stock options granted for approximately 0.40.7 million shares of common stock that provide solely for time-based vesting, amounted to $1.7$1.0 million or approximately $4.09$1.51 per share as of the grant dates. Fair value was computed using the BSMBlack-Scholes-Merton (“BSM”) option-pricing model and will result in the recognition of compensation cost ratably over the expected vesting period of the stock options.
For the nine months ended March 31, 2022,2023, the fair value of stock options was estimated on the daterespective dates of grant, with the following weighted-average assumptions:
| | | | | | | | |
Market price of common stock on grant date | | $ | 4.09 | | | $ | 1.98 | |
Expected volatility |
| | 94 | % |
| | 91 | % |
Risk free interest rate |
| | 1.8 | % |
| | 3.7 | % |
Expected term (years) |
| | 6.1 | |
| | 6.0 | |
Dividend yield |
| | 0 | % |
| | 0 | % |
Share-based compensation expense for the three and nine months ended March 31, 20222023 and 20212022 is included under the following captions in the unaudited condensed consolidated statements of operations and comprehensive loss (in thousands):
| | | | | | | | | | | | | |||||||||||||
| | | | | | | | | | | | | | | Three Months Ended | | | Nine Months Ended | |||||||
|
| Three Months Ended | | Nine Months Ended | | | March 31, | | | March 31, | |||||||||||||||
| | March 31, | | March 31, | | | 2023 |
| 2022 | | 2023 |
| 2022 | ||||||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | | | | | | | | | | | | | | ||||
Research and development | | $ | 327 | | $ | 284 | | $ | 1,014 | | $ | 1,098 | | | $ | 849 | | $ | 327 | | $ | 2,449 | | $ | 1,014 |
General and administrative | |
| 523 | |
| 246 | |
| 1,687 | |
| 1,207 | | |
| 1,006 | |
| 523 | |
| 3,016 | |
| 1,687 |
Total | | $ | 850 | | $ | 530 | | $ | 2,701 | | $ | 2,305 | | | $ | 1,855 | | $ | 850 | | $ | 5,465 | | $ | 2,701 |
Unrecognized share-based compensation expense is approximately $6.8$18.8 million as of March 31, 2022.2023. This amount is expected to be recognized over a weighted average period of 3.03.1 years.
Warrants
In connection with thean underwritten offering in October 2021, Underwritten Offering discussed in Note 6, the Company issued 1,661,461 2021 PFWspre-funded warrants (“PFWs”) to purchase 1,661,461 shares of common stock at an issuance price of $6.49 per warrant for gross proceeds of $10.8 million.million (the “2021 PFWs”). The 2021 PFWs may be exercised at any time by paying the exercise price of $0.01 per share, subject to certain ownership restrictions.
In connection with a registered direct offering in May 2022, the terms discussedCompany issued 1,973,684 Class A PFWs and 10,947,371 Class B PFWs to purchase an aggregate of 12,921,055 shares of common stock at an issuance price of $3.799 per warrant (collectively, the “2022 PFWs”). As of March 31, 2023, all of the 2022 PFWs may be exercised at any time by paying the exercise price of $0.001 per share, subject to certain ownership restrictions.
In addition, the Company has issued warrants in Note 6.conjunction with various debt and equity financings and for services. As of March 31, 2023, all of the warrants were vested.
1418
In addition,For the Company has issuednine months ended March 31, 2023, no warrants in conjunction with various debtwere granted or exercised. Excluding the 2021 PFWs and equity financings and for services. Thethe 2022 PFWs discussed above, the following table sets forth a summary of the warrant activity (excluding the 2021 PFWs)all other warrants for the nine months ended March 31, 20222023 (shares in thousands):
| | | | | | | | | | | | | | |
|
| Shares |
| Price (1) |
| Term (2) |
| Shares |
| Price (1) |
| Term (2) | ||
Outstanding, beginning of period |
| 1,252 |
| $ | 28.91 |
| 4.8 | |||||||
| | | | | | | | |||||||
Outstanding, June 30, 2022 |
| 1,150 |
| $ | 22.83 |
| 4.2 | |||||||
Warrants granted |
| — | |
| — |
|
| |||||||
Warrant expirations |
| (94) |
|
| 95.79 |
|
|
| (28) |
|
| 20.36 |
|
|
Outstanding, end of period |
| 1,158 |
|
| 23.45 |
| 4.4 | |||||||
Outstanding, March 31, 2023 |
| 1,122 |
|
| 22.90 |
| 3.5 |
(1) | Represents the weighted average exercise price. |
(2) | Represents the weighted average remaining contractual term for the number of years until the warrants expire. |
NOTE 89 — COMMITMENTS AND CONTINGENCIES
Licensing Commitments
Please refer to Note 45 for further discussion of commitments to make milestone payments and to pay royalties under license agreements with XomaXOMA and ActiveSite.
COVID-19
The COVID-19 pandemic, which is impacting worldwide economic activity, poses risks that the Company or its employees, contractors, suppliers, and other partners may be prevented from conducting business activities for an indefinite period of time, including due to shutdowns that may be requested or mandated by governmental authorities. The extent to which COVID-19 impacts the Company’s business, including its clinical trials and financial condition, will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the disease. As COVID-19 continues to spread around the globe, including the spread of more contagious and virulent variants, the Company could experience disruptions, including delays or difficulties in enrolling patients in clinical trials, delays or difficulties in clinical site initiation, interruption of key clinical trial activities, delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials, and delays in necessary interactions with local regulatory authorities. The economic and business disruptions caused by COVID-19 may also impact the Company’s ability to raise additional capital on a timely basis or at all, which could negatively impact long-term liquidity.
Registration Rights Agreement
In connection with the LPC Purchase Agreement discussed in Note 6, the Company entered into a Registration Rights Agreement that requires all the shares issuable under the Purchase Agreement to be registered. The Company filed a prospectus supplement to meet this obligation in August 2021 and is required to maintain the effectiveness of the prospectus supplement on a reasonable best-efforts basis.
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 March 31, 2022,2023, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the Company’s results of operations. At each reporting period, the Company evaluates known claims to determine whether a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies. Legal fees are expensed as incurred.
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NOTE 910 — RELATED PARTY TRANSACTIONS
Related Party Licensing Agreement
On September 15, 2020, the Company and Handok entered into an exclusive license agreement (the “Handok License”) for the territory of the Republic of Korea. The Handok License relates to pharmaceutical products in final dosage form containing the pharmaceutical compounds developed or to be developed by the Company, including those related to RZ358 and RZ402. The Handok License is in effect for a period of 20 years after the first commercial sale of each product and requires (i) milestone payments to the Company of $0.5 million upon approval of a New Drug Application (“NDA”) for each product in the territory, and (ii) the Company will sell products ordered by Handok at a transfer price equal to 70% of the net selling price of the products. To date, 0no milestone payments have been earned by the Company.
In addition,
Investors in 2022 Private Placement
Handok and certain of its affiliates were the sole investors in the 2021 RDO2022 Private Placement and the Registered Direct Offering discussed in Note 6 and the private placement discussed in Note 13.7.
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NOTE 1011 — INCOME TAXES
Income tax expense during interim periods is based on applying an estimated annualized effective income tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. The computation of the annualized estimated effective tax rate for each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating results 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.
For the three and nine months ended March 31, 20222023 and 2021,2022, the Company did not recordrecognize any income tax benefit due to a 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 nine months ended March 31, 20222023 and 2021.2022.
NOTE 1112 — NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares, 2021 PFWs and 20212022 PFWs outstanding during the period, without consideration for other potentially dilutive securities. The 2021 PFWs are included in the computation of basic and diluted net loss per share since the exercise price is negligible and all of the 2021 PFWs are fully vested and exercisable. Accordingly, the weighted average number of shares outstanding is computed as follows for the three and nine months ended March 31, 20222023 and 20212022 (in thousands):
| | | | | | | | | | | | | ||||||||||||
| | | | | | | | | | | | | | Three Months Ended | | Nine Months Ended | ||||||||
|
| Three Months Ended | | Nine Months Ended | | March 31, | | March 31, | ||||||||||||||||
| | March 31, | | March 31, |
| 2023 |
| 2022 | | 2023 |
| 2022 | ||||||||||||
|
| 2022 |
| 2021 | | 2022 |
| 2021 | | | | | | | | | | | | | ||||
Common Stock | | | 15,557 | | | 8,352 | | | 12,735 | | | 7,445 | | | 36,827 | | | 15,557 | | | 36,531 | | | 12,735 |
2021 PFWs | | | 1,661 | | | — | | | 1,013 | | | — | | | 1,661 | | | 1,661 | | | 1,661 | | | 1,013 |
2022 PFWs: | | | | | | | | | | | | | ||||||||||||
Class A PFWs | | | 1,974 | | | — | | | 1,974 | | | — | ||||||||||||
Class B PFWs | | | 10,947 | | | — | | | 10,947 | | | — | ||||||||||||
Total | | | 17,218 | | | 8,352 | | | 13,748 | | | 7,445 | | | 51,409 | | | 17,218 | | | 51,113 | | | 13,748 |
For the three and nine months ended March 31, 20222023 and 2021,2022, basic and diluted net loss per share were the same since all other common stock equivalents were anti-dilutive.
As of March 31, 20222023 and 2021,2022, the following outstanding potential common stock equivalents were excluded from the computation of diluted net loss per share since the impact of inclusion was anti-dilutive (in thousands):
| | | | | ||||
| | | | | | 2023 | | 2022 |
|
| 2022 |
| 2021 | | | | |
Stock options |
| 1,590 |
| 874 | | 8,779 | | 1,590 |
Warrants |
| 1,158 |
| 1,437 | | 1,122 | | 1,158 |
Total |
| 2,748 |
| 2,311 | | 9,901 | | 2,748 |
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NOTE 1213 — FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS
Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2—Other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any market activity for the asset or liability at the measurement date.
The following table presents information about the Company’s financial assets measured at fair value on a recurring basis and indicates the fair value hierarchy classification of such fair values as of March 31, 2023 (in thousands):
| | | | | | | | | | | | |
| | | ||||||||||
| | Fair Value Measurement as of March 31, 2023 | ||||||||||
| | Total | | Level 1 | | Level 2 | | Level 3 | ||||
Cash and cash equivalents: | | | | | | | | | | | | |
Money market funds | | $ | 20,497 | | $ | 20,497 | | $ | — | | $ | — |
Marketable debt securities: | | | | | | | | | | | | |
Corporate commercial paper | | | 38,381 | | | — | | | 38,381 | | | — |
U.S. Government agencies | | | 24,401 | | | — | | | 24,401 | | | — |
U.S. Government treasuries | | | 5,942 | | | 5,942 | | | — | | | — |
Corporate notes and bonds | | | 22,032 | | | — | | | 22,032 | | | — |
Asset-backed securities | | | 4,773 | | | — | | | 4,773 | | | — |
Total | | $ | 116,026 | | $ | 26,439 | | $ | 89,587 | | $ | — |
Marketable debt securities classified as Level 2 within the valuation hierarchy generally consist of U.S. government agency securities, corporate bonds, and commercial paper. The Company determines the fair value of marketable debt securities based upon valuations obtained from third-party pricing sources. Except for the amounts shown in the table above, the Company did not have any other assets measured at fair value on a recurring basis as of March 31, 2023. As of June 30, 2022, the Company did not have any assets required to be measured at fair value on a recurring basis.
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The Company’s embedded derivative liabilities are classified under Level 3 of the hierarchy and are required to be measured and recorded at fair value on a recurring basis. Fair value is determined based on management’s assessment of the probability and timing of occurrence for the Exit Events discussed in Note 56 using a discount rate equal to the effective interest rate for the term A loan.Theloan. The following table sets forth changes in the fair value of the embedded derivative liabilities for the nine months ended March 31, 2023 and 2022 (in thousands):
| | | |
Fair value as of June 30, 2021 | | $ | 387 |
Gain from change in fair value | | | 8 |
Fair value as of March 31, 2022 | | $ | 395 |
| | | | | | |
| | | | | | |
| | 2023 |
| 2022 | ||
| | | | | | |
Fair value, beginning of period | | $ | 407 | | $ | 387 |
Loss from change in fair value | | | 40 | | | 8 |
Fair value, end of period | | $ | 447 | | $ | 395 |
Except for the embedded derivative liabilities, the Company did not have any other assets or liabilities measured at fair value on a recurring basis as of March 31, 20222023 and June 30, 2021.2022.
Due to the relatively short maturity of the respective instruments, the fair value of cash, and cash equivalents, restricted cash, accounts payable, and accrued liabilities approximated their carrying values as of March 31, 20222023 and June 30, 2021. Due to the unique terms of the Loan Agreement discussed in Note 5, it was measured on a non-recurring basis at fair value using Level 3 inputs when it was entered into in April 2021. Due to the lack of observable inputs, the Company was unable to determine fair value of the Loan Agreement as of March 31, 2022.
The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the nine months ended March 31, 20222023 and 2021,2022, the Company did not have any transfers of its assets or liabilities between levels of the fair value hierarchy.
Significant Concentrations
Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents and restricted cash.investments in marketable debt securities. The Company maintains its cash cash equivalents and restricted cashin demand accounts at a high-quality financial institutions. Forinstitution. As of and for the nine months ended March 31, 2023 and 2022, cash deposits have exceeded the amount of federal insurance provided on such deposits. deposits by the Federal Deposit Insurance Corporation.
As of March 31, 20222023, the Company has an aggregate of $53.1 million invested in the debt securities of issuers in the banking and June 30, 2021,financial services industries, and an aggregate of $24.4 million invested in the debt securities of a single agency of the U.S. government. While the Company’s investment policy requires investments in highly rated securities, a wide variety of broad economic factors and issuer-specific factors could result in credit agency downgrades below the Company’s minimum credit rating requirements that could result in losses regardless of whether the Company elects to sell the securities or hold them until maturity.
As of March 31, 2023, the Company had cash equivalents consisting of $20.5 million in the MMF discussed in Note 2 and an aggregate of $13.2 million in checking and savings accounts at another large financial institution. As of June 30, 2022 the Company had cash and cash equivalents of $150.4 million in checking and restricted cashsavings accounts with a single financial institution with an aggregate balance of $68.4 million and $41.0 million, respectively.institution. The Company has never experienced any losses related to its investments in cash and cash equivalents and restricted cash.equivalents.
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NOTE 13 — SUBSEQUENT EVENTS
Headquarters Lease
In April 2022, the Company entered into a lease agreement for a new corporate headquarters in Redwood City, California. The space consists of approximately 9,300 square feet and provides for total base rent payments of approximately $2.9 million through the expected expiration of the lease in July 2027. The landlord is required to make improvements to the facility before it is suitable for occupancy by the Company. The lease provides for a six-month rent abatement period beginning upon commencement of the lease term which is expected to occur in August 2022. In addition, the lease provides an allowance of approximately $0.1 million that may be utilized by the Company for the purchase of furniture and equipment. The average base rent payable in cash over the 60-month lease term is approximately $48,000 per month. During the fourth quarter of the fiscal year ending June 30, 2022, the Company expects to recognize a right-of-use asset and a related operating lease liability for approximately $2.3 million.
Future payments under this operating lease agreement are as follows (in thousands):
| | | |
Fiscal year ending June 30, |
|
| |
Remainder of fiscal year 2022 | | $ | 50 |
2023 | | | 199 |
2024 | | | 614 |
2025 | | | 632 |
Thereafter | | | 1,377 |
Total lease payments | | $ | 2,872 |
Financing Activities
On May 1, 2022, the Company entered into (i) an underwriting agreement with Jefferies LLC, as representative of the underwriters listed therein, relating to the issuance and sale of equity securities in an underwritten registered direct offering (the “2022 RDO”), and (ii) a placement agency agreement with Jefferies LLC, that provides for a private placement of equity securities (the “Private Placement”). The 2022 RDO resulted in the issuance of (i) approximately 18.0 million shares of the Company’s common stock, at a public offering price of $3.80 per share, (ii) Class A pre-funded warrants (the “Class A PFWs”) to purchase up to approximately 2.0 million shares of Common Stock at a public offering price of $3.799 per Class A PFW and (iii) Class B pre-funded warrants (the “Class B PFWs”) to purchase up to 10.9 million shares of Common Stock at a public offering price of $3.799 per Class B PFW. The 2022 RDO closed on May 4, 2022 and resulted in net proceeds of approximately $110.5 million. The gross proceeds of the 2022 RDO amounted to $117.6 million, before deducting an aggregate of $7.1 million incurred for underwriting discounts and commissions and other offering expenses payable by the Company. In connection with the 2022 RDO, certain of the Company’s officers and directors agreed not to sell or otherwise dispose of any common stock held by them through July 30, 2022.
Pursuant to the Private Placement, the Company entered into a securities purchase agreement (“SPA”) on May 4, 2022 with Handok and certain of its affiliates (the “Purchasers”) whereby the Company agreed to sell to the Purchasers 3.3 million Class C Warrants (the “Class C PFWs”) to purchase shares of common stock, at a purchase price of $3.799 per Class C PFW. The closing of the Private Placement will take place upon satisfaction of the closing conditions set forth in the placement agency agreement and the SPA. The net proceeds of the Private Placement, after deducting the placement agent fees and estimated offering expenses payable by the Company, are expected to be approximately $11.4 million. Closing of the Private Placement is expected to occur in May 2022.
Terms of Pre-Funded Warrants
The offering price of $3.799 per share for the Class A PFWs, the Class B PFWs and the Class C PFWs (collectively, the “2022 PFWs”) represents the public offering price for the shares of common stock issued in the 2022 RDO less the $0.001 per share price that is required to be paid upon exercise of the 2022 PFWs. The exercise price of the 2022 PFWs is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock and
18
also upon any distributions for no consideration of assets to the Company's shareholders. In the event of certain corporate transactions, the holders of the 2022 PFWs will be entitled to receive, upon exercise of the 2022 PFWs, the kind and amount of securities, cash or other property that the holders would have received had they exercised the 2022 PFWs immediately prior to such transaction. The 2022 PFWs do not entitle the holders thereof to any voting rights or any of the other rights or privileges to which holders of common stock are entitled.
Each Class A PFW is exercisable upon issuance. The Class B PFWs and the Class C PFWs will only be exercisable for shares of common stock upon receipt of shareholder approval for an increase in the number of authorized shares of common stock as discussed below under the caption Required Shareholder Approval.
Required Shareholder Approval
The closing of the 2022 RDO resulted in the issuance of the approximately 18.0 million shares of common stock and Class A PFWs for approximately 2.0 million shares. After these issuances, the Company had utilized the entire 40.0 million of authorized shares of common stock available under its corporate charter, consisting of issued shares and shares of common stock reserved for issuance under stock option plans and outstanding warrants discussed in Note 7. Accordingly, the Company did not have a sufficient number of shares of common stock available to permit exercise of any of the Class B PFWs and the Class C PFWs. Therefore, the Class B PFWs and the Class C PFWs will only be exercisable for shares of common stock to the extent that shareholders subsequently approve an increase in the number of authorized shares (the “Shareholder Approval”), which the Company is required to use its best efforts to obtain at an annual meeting of shareholders to be held by June 30, 2022. If the Company does not obtain Shareholder Approval by June 30, 2022, it will be required to (i) pay liquidated damages of 2.0% of the aggregate purchase price paid by each holder of Class B PFWs and Class C PFWs, and (ii) hold additional shareholder meetings every three months thereafter until approval is obtained. For each subsequent failure to obtain Shareholder Approval, the Company will be required to pay an additional 2.0% of the purchase price as liquidated damages. The aggregate purchase price of the Class B PFWs and the Class C PFWs amounts to $54.2 million whereby the initial liquidated damages payment would be approximately $1.1 million if the Company fails to obtain Shareholder Approval by June 30, 2022.
The Company expects to account for the gross proceeds of $41.6 million received from the issuance of the Class B PFWs and $12.6 million expected to be received from the issuance of the Class C PFWs as derivative liabilities whereby future changes in the fair value of the derivative liabilities will result in gains or losses until such time that Shareholder Approval is obtained.
Registration Rights Agreement
In connection with the offer of the Class B PFWs and the Class C PFWs, the Company entered into registration rights agreements with the purchasers. Pursuant to the registration rights agreements, the Company will be required to file a registration statement with the SEC to register for resale the shares issuable upon exercise of the Class B PFWs and the Class C PFWs, within two days of receipt of Shareholder Approval, and to have such registration statement declared effective by June 30, 2022 in the event the registration statement is not reviewed by the SEC, or by July 30, 2022 in the event the registration statement is reviewed by the SEC. The Company will be obligated to pay certain liquidated damages to the purchasers if the Company (i) fails to file the registration statement when required, (ii) fails to cause the registration statement to be declared effective by the SEC when required, or (iii) fails to maintain the effectiveness of the registration statement. If the Company fails to comply with the registration rights agreement, it will be obligated to pay 2.0% of the purchase price of the Class B PFWs and the Class C PFWs for an aggregate of approximately $1.1 million as liquidated damages. If liquidated damage payments are required in the future, they will be charged to expense in the period incurred.
EDA and Purchase Agreement Termination
In May 2022, the Company provided notice of termination to the Agent in accordance with the EDA entered in December 2020. Additionally, the Company provided notice of termination to LPC for the Purchas Agreement entered in August 2021. As a result of these termination notices, no further equity securities are issuable under either agreement.
1922
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Certain figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our unaudited condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding. As used in the discussion below, “we,” “our,” “us,” and the “Company” refers to Rezolute, Inc.
Special Note About COVID-19
WeAs a Company, we are focused on advancing our compounds through clinical studies. Our lead clinical asset, RZ358, is a potential antibody treatment for congenital hyperinsulinism, an ultra-rare pediatric genetic disorder characterized by excessive production of insulin by the pancreas. Our second clinical asset, RZ402, is a selective and potent plasma kallikrein inhibitor (“PKI”) being developed as a potential oral therapy for the chronic treatment of diabetic macular edema (“DME”).
RZ358
In May 2022, we announced positive topline results from the RZ358-606 Phase 2b study (“RIZE”) and through the first quarter of 2023, we finalized tables, figures and listings (“TFL”) for the study as well as clinical study reports (“CSRs”). In addition, we have been actively monitoringengaged in discussions with both European regulatory authorities as well as the COVID-19 pandemicU.S. Food and its impactDrug Administration (“FDA”) regarding plans for a Phase 3 study (together the European regulatory authorities and the FDA may be hereinafter referred to as the “Regulatory Authorities”). We expect to commence the Phase 3 study during the Summer of 2023, but there can be no guarantee that we will be able to commence the study on this timeline. Based on our business activities. Our primary objectivescurrent enrollment estimates, we expect to have remainedtop line results available from this study in the same throughout the pandemic:first quarter of 2025.
RZ402
In December 2022, we initiated a Phase 2 multi-center, randomized, double-masked, placebo-controlled, parallel-arm study to supportevaluate the safety, efficacy, and pharmacokinetics of our team membersRZ402 administered as a monotherapy over a 12-week treatment period in participants with DME who are naïve to, or have received limited anti-VEGF injections. The study population will include DME patients with mild to moderate non-proliferative diabetic retinopathy. Eligible participants will be randomized equally, to one of three RZ402 active treatment arms at doses of 50, 200, and their families400 mg, or a placebo control arm, and continuewill receive study drug once daily for 12 weeks, before completing a four-week follow-up. The study is expected to support our preclinical studies and clinical trials. Currently, with respectenroll up to approximately 100 patients overall, across approximately 25 investigational sites in the operation of our facilities, we are closely adhering to applicable guidelines and orders. Essential operations in research and maintenance that occur within our facilities are continuing in accordance with the permissions granted under government ordinances. Across all of our locations, we have instituted a temporary work from home policy for all office personnel who do not need to work on site to maintain productivity. We have recently allowed these employees to voluntarily return to work on site with appropriate health and safety measures.
While our financial results for the three and nine months ended March 31, 2022 and the fiscal year ended June 30, 2021 were not significantly impacted by COVID-19, we cannot predict the impactUnited States. The principal endpoints of the progressiontrial include (i) changes in central subfield thickness of the COVID-19 pandemic on futuremacula, as measured by Spectral Domain Ocular Coherence Tomography, (ii) changes in visual acuity as measured by the early treatment diabetic retinopathy scale, (iii) the repeat dose pharmacokinetics of RZ402 in patients with DME, and (iv) the safety and tolerability of RZ402. We expect to complete enrollment in 2023 and to announce results due to a variety of factors, includingfrom the ongoing challenges associated with the pandemic, including the emergence of new variants of the coronavirus, such as the Delta and Omicron variants, resurgencesstudy in the number and ratesfirst quarter of infection, the continued good health of our employees, the ability of us to maintain operations, access to healthcare facilities and patient willingness to participate in our clinical trials, any further government and/or public actions taken in response to the pandemic, and ultimately the length of the pandemic. The ultimate impact of the COVID-19 pandemic on our business operations, our ability to raise capital, our preclinical studies and clinical trial timeliness remain uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. Any prolonged material disruption of our employees, suppliers, or manufacturing may negatively impact our financial position, results of operations, and cash flows. We will continue to monitor the situation closely.2024.
Recent Developments
Investment in Marketable Debt Securities
In January 2023, our Board of Directors determined that it was in the best interest of the Company and its shareholders to diversify its cash position and use a portion of the Company’s cash to invest an aggregate of $115.0 million of cash held in demand deposit accounts in marketable debt securities and an overnight money market mutual fund with the objective of achieving higher returns on investment.
Headquarters Lease
In April 2022, we entered into a lease agreement for a new corporate headquarters facility in Redwood City, California. The space consists of approximately 9,300 square feet and provides for total base rent payments of approximately $2.9 million through the expected
23
expiration of the lease in JulyNovember 2027. The lease provides for a six-month rent abatement period beginningthat began upon commencement of the lease term which is expected to occuroccurred in AugustOctober 2022.
Financing Activities
On May 1,In July 2022, we entered into (i) an underwriting agreement with Jefferies LLC, as representative of the underwriters listed therein, relating to the issuance and sale of equity securities in an underwritten registered direct offering (the “2022 RDO”), and (ii) a placement agency agreement with Jefferies LLC, that provides for a private placement of equity securities (the “Private Placement”). The 2022 RDO resulted in the issuance of approximately (i) 18.0 million shares of our common stock at a public offering price of $3.80 per share, (ii) Class A pre-funded warrants (the “Class A PFWs”) to purchase up to 2.0 million shares of Common Stock at a public offering price of $3.799 per Class A PFW, and (iii) Class B pre-funded warrants (the “Class B PFWs”) to purchase up to 10.9 million shares of Common Stock at a public offering price of $3.799 per Class B PFW. The 2022 RDO closed on May 4, 2022 and resulted in net proceeds of approximately $110.5 million. The gross proceeds of the 2022 RDO amounted to $117.6 million, before deducting an aggregate of $7.1 million incurred for underwriting discounts and commissions and other offering expenses payable by us. In connection with the 2022 RDO, certain of our officers and directors agreed not to sell or otherwise dispose of any common stock held by them through July 30, 2022.
20
Pursuant to the Private Placement, we entered into aamended securities purchase agreement (“SPA”) on May 4, 2022agreements with Handok, Inc. (“Handok”) and certain of its affiliates (the “Purchasers”) whereby we agreed to sell to the Purchasers 3.3 million Class C Warrants (the “Class C PFWs”) to purchase shares of common stock, at a purchase price of $3.799 per Class C PFW. The closing of the“2022 Private Placement will take place upon satisfaction of the closing conditions set forthPlacement”), resulting in the placement agency agreement and the SPA. The netgross proceeds of the Private Placement, after deducting the placement agent fees and estimated offering expenses payable by us, are expected to be approximately $11.4 million. We expect the closing of the Private Placement will occur$12.3 million in May 2022.
Terms of Pre-Funded Warrants
The offering price of $3.799 per shareexchange for the Class A PFWs, the Class B PFWs and the Class C PFWs (collectively, the “2022 PFWs”) represents the public offering price for the shares of common stock issued in the 2022 RDO less the $0.001 per share price that is required to be paid upon exercise of the 2022 PFWs. The exercise price of the 2022 PFWs is subject to adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the common stock and also upon any distributions for no consideration of assets to our shareholders. In the event of certain corporate transactions, the holders of the 2022 PFWs will be entitled to receive, upon exercise of the 2022 PFWs, the kind and amount of securities, cash or other property that the holders would have received had they exercised the 2022 PFWs immediately prior to such transaction. The 2022 PFWs do not entitle the holders thereof to any voting rights or any of the other rights or privileges to which holders of common stock are entitled.
Each Class A PFW is exercisable upon issuance. The Class B PFWs and the Class C PFWs will only be exercisable for shares of common stock upon receipt of shareholder approval for an increase in the number of authorized shares of common stock as discussed below under the caption Required Shareholder Approval.
Required Shareholder Approval
The closing of the 2022 RDO resulted in the issuance of the approximately 18.03.2 million shares of common stockstock. We incurred approximately $0.8 million for underwriting commissions and Class A PFWs for approximately 2.0other offering costs, resulting in net proceeds of $11.5 million.
Termination of Loan Agreement
On April 14, 2021, we entered into a $30.0 million shares. After these issuances, we had utilized our entire 40.0 million of authorized shares of common stock available under our corporate charter, consisting of issued sharesLoan and shares of our common stock reserved for issuance under our stock option plansSecurity Agreement (the “Loan Agreement”) with Solar Investment Corp. (“SLR”) as collateral agent, and outstanding warrants. Accordingly, we did not havethe parties executing the Loan Agreement as lenders, including SLR in its capacity as a sufficient number of shares of common stock available to permit exercise of anylender. The scheduled maturity date of the Class B PFWs andLoan Agreement was on April 1, 2026. In April 2021, we borrowed $15.0 million under the Class C PFWs. Therefore, the Class B PFWs and the Class C PFWs will only be exercisable for shares of common stock to the extent that our shareholders subsequently approve an increase in the number of authorized shares (the “Shareholder Approval”), which we are required to use our best efforts to obtain at an annual meeting of shareholders to be held by June 30, 2022. If we do not obtain Shareholder Approval byLoan Agreement. On June 30, 2022, we will be required to (i) pay liquidated damagespaid off the outstanding loan amount of 2.0% of$15.0 million in full and terminated the aggregate purchase price paid by each holder of Class B PFWs and Class C PFWs, and (ii) hold additional shareholder meetings every three months thereafter until approval is obtained. For each subsequent failure to obtain Shareholder Approval, we will be required to pay an additional 2.0% of the purchase price as liquidated damages. The aggregate purchase price of the Class B PFWs and the Class C PFWs amounts to $54.2 million whereby the initial liquidated damages payment would be approximately $1.1 million if we fail to obtain Shareholder Approval by June 30, 2022.
Registration RightsLoan Agreement
In connection in accordance with the offer of the Class B PFWs and the Class C PFWs, we entered into registration rights agreements with the purchasers. Pursuant to the registration rights agreements, we will be required to file a registration statement with the SEC to register for resale the shares issuable upon exercise of the Class B PFWs and the Class C PFWs, within two days of receipt of Shareholder Approval, and to have such registration statement declared effective by June 30, 2022 in the event the registration statement is not reviewed by the SEC, or by July 30, 2022 in the event the registration statement is reviewed by the SEC. We will be obligated to pay certain liquidated damages to the purchasers if we (i) fail to file the registration statement when required, (ii) fail to cause the registration statement to be declared effective by the SEC when required, or (iii) fail to maintain the effectiveness of the registration statement. Based on our planned timing for the first shareholder meeting, it is unlikely that we will be able to avoid incurring a liquidated damages fee of approximately $1.1 million due to the failure to meet the requirements for an effective registration statement.
EDA and Purchase Agreement Terminationits terms.
As discussed below under the caption Liquidity and Capital Resources,we entered the EDA with Oppenheimer & Co. Inc. in December 2020 and a Purchase Agreement with LPC in August 2021. In May 2022, we provided notices to Oppenheimer and Co. Inc. and LPC
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whereby the EDA and Purchase Agreement were terminated. As a result of these termination notices, no further equity securities are issuable under either agreement.
Please refer to our discussion under the caption Liquidity and Capital Resources for further discussion of our recent financing activities.
RZ358
On March 23, 2022, we reported positive topline results from the Phase 2b (“RIZE”) study. These results were presented at the Pediatric Endocrine Society Meeting on May 1, 2022. Refer to Summary of Clinical Assets below for further discussion of the RZ358 program.
RZ402
On February 22, 2022, we reported positive topline results from the Phase 1b multiple-ascending dose (“MAD”) study. Refer to Summary of Clinical Assets below for further discussion of the RZ402 program.
Summary of Clinical Assets
Our lead clinical asset, RZ358, is an antibody therapy in Phase 2b development as a potential treatment for congenital hyperinsulinism (“HI”), an ultra-rare pediatric genetic disorder. In February 2020, we announced the initiation of the RZ358-606 Phase 2b study (“RIZE”) globally at multiple study centers. Prior to COVID-19, we had planned to complete the RIZE study by the middle of calendar year 2021. In March 2020, we paused the RIZE study as a result of the COVID-19 pandemic. As the COVID-19 pandemic began to abate in different regions, we resumed clinical activities including trial site initiations and patient enrollment. We reported positive topline results from the RIZE study in March 2022. These results were presented at the Pediatric Endocrine Society Meeting on May 1, 2022.
The RIZE study enrolled 23 patients across diverse ages, gender, and genetic types. RZ358 (pooled doses) resulted in a > 50% improvement in hypoglycemic events and approximately 75% improvement at the mid (6 mg/kg) and top (9 mg/kg) doses. Time-in-range (“TIR”) by continuous glucose monitoring (“CGM”) improved by 7% across all doses and 16% at the top dose. There were no adverse drug reactions, dose-limiting toxicities, or drug-related serious adverse events. We believe that these positive results from the RIZE study will be Phase-3 enabling and we plan to interact with the regulatory authorities in the second half of calendar year 2022. If we obtain clearance, we plan to initiate our Phase 3 study in the first half of calendar year 2023.
In addition, during the first half of calendar year 2020, we had positive interactions with the United States Food and Drug Administration (“FDA”) whereby we were granted Rare Pediatric Disease (“RPD”) designation for RZ358, which qualified us to receive a priority review voucher (“PRV”) upon marketing approval of the drug in congenital HI. Such a voucher could be redeemed to receive a priority review of a subsequent marketing application for any drug candidate in any disease indication.
Our second clinical asset, RZ402, is a selective and potent plasma kallikrein inhibitor (“PKI”) being developed as a potential oral therapy for the chronic treatment of diabetic macular edema (“DME”). RZ402 recently completed the Phase 1 development program. In January 2021, we dosed the first subject in the Phase 1a study, and in May 2021 we announced positive topline results whereby single dose oral administration of RZ402 resulted in plasma concentrations that substantially exceeded target pharmacologically-active drug levels, demonstrating the potential for once daily dosing. RZ402 was generally safe and well-tolerated at all doses tested, without dose-limiting toxicities. In August 2021, we announced the initiation in the Phase 1b multiple-ascending dose (“MAD”) study and reported positive results in February 2022. The results further validated and supported the potential for once daily oral dosing and showed dose-dependent increases in systemic exposures, with repeat-dosing to steady-state resulting in the highest concentrations of RZ402 explored to date, exceeding 200 ng/mL and 50 ng/mL at peak and 24-hour trough, respectively. Given that the in-vivo EC90 for RZ402 in animal models of DME is ~6 ng/mL, the results at both peak and 24-hour trough substantially exceeded target concentrations based on a combination of in-vitro and in-vivo profiling. The MAD study results showed that RZ402 was generally safe and well-tolerated, including at higher doses than previously tested in the Phase 1 single-ascending dose (“SAD”) study. There were no serious adverse events, adverse drug reactions or identified risks. We are now advancing developmental activities toward a Phase 2a proof-of-concept study, which we plan to initiate during the second half of calendar year 2022.
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RZ358
Congenital HI is an ultra-rare pediatric genetic disorder characterized by excessive production of insulin by the pancreas. If untreated, the elevated insulin levels in these patients can induce extreme hypoglycemia (low blood sugar) events, increasing the risk of neurological and developmental complications, including persistent feeding problems, learning disabilities, recurrent seizures, brain damage or even death. There are no FDA approved therapies for congenital HI, and the current standard of care treatments are suboptimal. In some cases, pancreatic surgery is a treatment option, but this approach is invasive and may require repeat surgeries.
Our lead candidate, RZ358, is an intravenously administered human monoclonal antibody that binds to a unique site (allosteric) on the insulin receptor throughout the body, such as in the liver, fat, and muscle. The antibody modifies insulin’s binding and signaling to maintain glucose levels in a normal range, which counteracts the effects of elevated insulin in the body. Therefore, we believe that RZ358 is ideally suited as a potential therapy for conditions characterized by excessive insulin levels, and it is being developed to treat the hyperinsulinism and low blood sugar characteristic of diseases such as congenital HI. As RZ358 acts downstream from the beta cells, it has the potential to be universally effective at treating congenital HI caused by any of the underlying genetic defects.
RZ358 received RPD designation in the United States as well as Orphan Drug Designation in both the United States and the European Union. RZ358 recently completed its Phase 2b study (“RIZE study”), RZ358-606. The RIZE study was a multi-center, open-label, repeat-dose Phase 2b study of RZ358 in four sequential dosing cohorts of patients with congenital HI, who are at least two years old, and have residual low blood sugar (<70 mg/dL) that is inadequately controlled on existing therapies. In addition to safety and pharmacokinetic evaluations, continuous glucose monitoring (“CGM”) and self-monitored blood glucose were utilized to evaluate several glycemic efficacy endpoints. The primary endpoint was the time within a glucose target range of 70-180 mg/dL by CGM after week 8 of treatment compared to baseline.
RZ402
DME is a vascular complication of diabetes and a leading cause of blindness in the United States and elsewhere. Chronic exposure to high blood sugar levels can lead to inflammation, cell damage, and the breakdown of blood vessel walls. Specifically, in DME, blood vessels behind the back of the eye become porous and permeable leading to the unwanted infiltration of fluid into the macula. This fluid leakage creates distorted vision, and if left untreated could result in blindness.
Currently available treatments for DME involve frequent burdensome anti-vascular growth factor (anti-VEGF) injections into the eye or invasive laser surgery. RZ402 is designed to be a once daily oral therapy for the treatment of DME. Unlike the anti-VEGF therapies, RZ402 targets the Kallikrein–Kinin System in order to address inflammation and vascular leakage. We believe that systemic exposure through oral delivery is critical to target the microvasculature behind the back of the eye. Further, as an oral therapy, RZ402 has the potential to substantially change the therapeutic paradigm for patients suffering with DME by providing a convenient, self-administered treatment option to encourage patients to initiate therapy sooner, adhere to prescribed treatment guidelines, and improve overall outcomes.
Factors Impacting our Results of Operations
We have not generated any meaningful revenues since our inception in March 2010. Since inception,Over the last several years, we have engaged in organizational activities, obtained debt financing, and conducted private placements and public offerings to raise additional capital. During 2019 we changed our strategy tocapital, adopted a licensing model to focus onpursue development of product candidates, conducted pre-clinical and clinical trials, and conducted other research and development activities foron our pipeline of product candidates.
Due to the time required to conduct clinical trials and obtain regulatory approval for all of our product candidates, we anticipate it will be several years before we generate substantial revenues, if ever. We expect to generateincur operating losses for the foreseeable future; therefore, we expect to continue efforts to raise additional capital to maintain our current operating plans beyondover the next year.several years. We cannot provide assuranceassure you that we will continue to be successful in securing adequatesecure such financing or that it will be adequate for the long-term execution of our business strategy. Even if we obtain additional financing, it may be costly and may require us to agree to covenants or other provisions that will favor new investors over our existing shareholders.
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Key Components of Consolidated Statements of Operations and Comprehensive Loss
Research and development expenses. Research and development (“R&D”&D”) expenses consist primarily of compensation and benefits for our personnel engaged in R&D activities, clinical trial costs, licensing costs, and consulting and outside services. Our R&D compensation costs include an allocable portion of our cash and share-based compensation, employee benefits, and consulting costs related to personnel engaged in the design and development of product candidates and other scientific research projects. We also allocate a portion of our facilities and overhead costs based on the personnel and other resources devoted to R&D activities.
General and administrative expenses. General and administrative (“G&A”&A”) expenses consist primarily of (i) an allocable portion of our cash and share-based compensation and employee benefits related to personnel engaged in our administrative, finance, accounting, and executive functions, and (ii) an allocable portion of our facilities and overhead costs related to such personnel. G&A expenses also include travel, legal, auditing, consulting, investor relations and other costs primarily related to our status as a public company.
Interest expense.and other income. The componentsInterest and other income consist primarily of interest expense include the amount of interest payable inincome earned on investments and temporary cash at the stated interest rate, and accretion of debt discounts and issuance costs (“DDIC”) using the effective interest method. DDIC arises from the issuance of debt instruments and other related contracts or agreements which possess certain terms and conditions resulting in additional financing costs arising from origination, exit and final fees, and other incremental and direct costs incurred to consummate the financing.investments.
Gain (loss) onLoss from change in fair value of derivative liabilities. We recognizedrecognize liabilities for financial instruments that are required to be accounted for as derivatives, as well as embedded derivatives in our debt agreements. Derivative liabilities are adjusted to fair value at the end of each reporting period until the contracts are settled, expire, or otherwise meet the conditions for equity classification. Changes in fair value are reflected as a gain or loss in our unaudited condensed consolidated statements of operations.operations and of comprehensive loss.
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Employee retention credit. In response to the COVID-19 pandemic, the United States government has designed programs to assist businesses in dealing with the financial hardships caused by the pandemic. We recognize the right to receive governmental assistance payments in the period in which the related conditions on which they depend are substantially met.
Interest expense. The components of interest expense include the amount of interest payable in cash at the stated interest rate, and accretion of debt discounts and issuance costs (“DDIC”) using the effective interest method. DDIC arises from the issuance of debt instruments and other related contracts or agreements which possess certain terms and conditions resulting in additional financing costs arising from origination, exit and final fees, and other incremental and direct costs incurred to consummate the financing.
Critical Accounting Policies and Significant Judgments and Estimates
Overview
The discussion herein is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
With respect to our significant accounting policies that are described in Note 1 to our consolidated financial statements included in Item 8 of our 20212022 Form 10-K, we believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Accounting for Complex Financings
In order to account for complex financing transactions, we are required to make judgments, assumptions, and estimates to determine the appropriate amounts reported in our consolidated financial statements. These financing transactions typically involve entering into several distinct legal agreements, whereby we are required to identify and account for each freestanding financial instrument separately. The freestanding financial instruments may be classified as debt, temporary equity or permanent equity instruments depending on the results of our evaluation. In addition, we evaluate if any of the financial instruments contain embedded features that are required to be accounted for as derivatives at fair value. Each freestanding financial instrument is required to be recognized at fair value on the closing
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date of the financing. The fair value of warrants is generally determined using the Black-Scholes-Merton (“BSM”BSM”) valuation model and the fair value of Common Stockcommon stock is based on the trading price of our shares on the closing date.
For financial instruments classified as debt, a discount is recognized if the stated principal balance exceeds the initial allocation of fair value as of the closing date. This discount is accreted to interest expense using the interest method that results in recognition of interest expense at a fixed rate through the expected maturity date.
Share-Based Compensation Expense
We measure the fair value of services received in exchange for all stock options granted based on the fair value of the award as of the grant date. We compute the fair value of stock options with time-based vesting using the BSM option-pricing model and recognize the cost of the equity awards over the period that services are provided to earn the award. For awards that contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite service period as if the award was, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for share-based compensation. For stock options that are voluntarily surrendered by employees, all unrecognized compensation is immediately recognized in the period the options are cancelled.
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Research and Development
R&D costs are expensed as incurred. Intangible assets related to in-licensing costs under license agreements with third parties are charged to expense unless we are able to determine that the licensing rights have an alternative future use in other R&D projects or otherwise.
Clinical Trial Accruals
Clinical trial costs are a component of R&D expenses. We accrue and recognize expenses for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. We determine the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. Nonrefundable advance payments for goods and services that will be used or rendered in future R&D activities, are deferred and recognized as expense in the period that the related goods are delivered, or services are performed.
Results of Operations
Three months ended March 31, 20222023 and 20212022
Revenue. As a clinical stage company, we did not generate any revenue for the three months ended March 31, 20222023 and 2021.2022. 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 marketgenerate revenue from any of our product candidates for several years.
Research and development expenses. R&D expenses for the three months ended March 31, 20222023 and 20212022 were as follows (in thousands, except percentages):
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Total R&D expenses | | $ | 8,686 | | $ | 3,758 | | $ | 4,928 |
| 131 | % | | $ | 14,231 | | $ | 8,686 | | $ | 5,545 |
| 64 | % |
The increase in R&D expenses of $4.9$5.5 million for the three months ended March 31, 20222023 was primarily attributable to an increase in licensingof RZ358 related program costs of $2.0approximately $2.8 million. We did not incur any licensing costs for the three months ended March 31, 2021, whereas for the three months ended March 31, 2022, we incurred $2.0 million under our licensing agreement with Xoma, Inc. (“XOMA”). This payment to XOMA was triggered by the last patient dosing in the Phase 2b clinical study pursuant to the License Agreement entered into by us and
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XOMA on December 6, 2017. As discussed below under the caption Liquidity and Capital Resources, additional expenses will be incurred under our license agreements as we achieve certain clinical milestone events in future periods. In addition to the license cost increase, an increase in manufacturing and preclinical costs of $2.1$1.8 million, wasclinical trial expense of $0.4 million, and other RZ358 program costs of $0.6 million. RZ358 costs increased due to higher spending for drug substance and drug product manufacturing and related activities to support ongoingPhase 3 clinical trials, consisting of increases of $1.5 million for RZ358 and increase of $0.6 million for RZ402.
readiness activities. Compensation and benefits for our R&D workforce increased by approximately $0.7$1.1 million. Cash-based compensation and benefits increased by approximately $0.6 million that was primarily attributable to an increase in the average number of R&D employees from 18 for the three months ended March 31, 2021 to 26 for the three months ended March 31, 2022. Various consulting2022 to 36 for the three months ended March 31, 2023. Share-based compensation and outside service costs alsobenefits increased by approximately $0.1$0.5 million attributable to an increase in share-based compensation related to stock options granted in June 2022 where expense is recognized over the respective vesting periods. RZ402 program costs increased by approximately $0.4 million, primarily due to Phase 2 clinical trial costs which dosed its first patients in February 2023. Milestone related costs increased by $1.0 million for the three months ended March 31, 2023 due to the $3.0 million milestone due to ActiveSite upon dosing of the first patient in a Phase 2 study. Milestone costs for the quarter ended March 31, 2022 for ongoing developmental supportrelated to the payment of RZ358 and RZ402.$2.0 million to XOMA upon last patient dosing in the Phase 2b study.
General and administrative expenses. G&A expenses for the three months ended March 31, 20222023 and 20212022 were as follows (in thousands, except percentages):
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Total G&A expenses | | $ | 2,068 | | $ | 1,725 | | $ | 343 |
| 20 | % | | $ | 2,911 | | $ | 2,068 | | $ | 843 |
| 41 | % |
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The increase in G&A expenses of $0.3$0.8 million for the three months ended March 31, 2023 was attributable to increases in (i) share-based compensation expense of $0.5 million due to stock options granted in June 2022 was primarily attributablewhere expense is recognized over the respective vesting periods, and (ii) cash-based compensation expense of $0.2 million due to an increase in share-based compensation expensethe average number of $0.3 million dueemployees from 9 for the three months ended March 31, 2022 to options granted to12 employees infor the quarter.three months ended March 31, 2023.
Interest Expense.and Other Income. Interest expense was approximately $0.4and other income amounted to $1.5 million for the three months ended March 31, 2023, compared to none for the three months ended March 31, 2022. This increase was primarily due to our decision in January 2023 to invest an aggregate of approximately $115.0 million in marketable debt securities and an overnight money market mutual fund that bear interest at a weighted average effective rate of approximately 5.0%, whereas our temporary cash investments for the three months ended March 31, 2022 whereas weprovided for earnings that were less than 1.0%. The large increase in funds available for investment was attributable to the completion of equity financings between May 2022 and July 2022.
Interest Expense. We did not incur any interest expense for the same period in 2021.three months ended March 31, 2023, whereas we incurred $0.4 million of interest expense for the three months ended March 31, 2022. Interest expense for the three months ended March 31, 2022 was solely attributable to the Loan Agreement (as defined below) entered into in April 2021 and consisted of (i) interest expense of $0.3 million based on the weighted average contractual rate of 9.0%, and (ii) accretion of discount of $0.1 million.
Gain (loss) on changes in fair value of derivative liabilities. On February 17, 2021, we recognized a derivative liability of $3.6 million related to a deficiency in our authorized shares of common stock, since there was a possibility that we could have been required to settle a portion of our outstanding stock options and warrants in cash. This derivative liability was adjusted to fair value at the end of each reporting period and amounted to $1.8 million as of March 31, 2021. The change in fair value of $1.8 million is reflected as a non-cash gain for the three months ended March 31, 2021. For the period from February 17, 2021 through March 31, 2021, a decrease in the market price of our Common Stock was the primary driver that resulted in the reduction in fair value and the resulting non-cash gain. On May 26, 2021, our shareholders approved an increase in authorized shares of common stock that eliminated the authorized share deficiency. Accordingly, the related stock options and warrants were no longer accounted for a derivative liability after May 26, 2021.
For the three months ended March 31, 2022, we recognized a loss of $12,000 due to changes in fair value of embedded derivative liabilities related to the Loan Agreement entered into in April 2021, as discussed below under the caption Liquidity and Capital Resources. For the three months ended March 31, 2021, we did not have any gains or losseswas repaid on changes in fair value of embedded derivative liabilities.June 30, 2022.
Income Taxes. For the three months ended March 31, 20222023 and 2021,2022, we did not recognize any income tax benefit due to our net losses, and our determination that a valuation allowance was required for all of our deferred tax assets.
Nine months ended March 31, 20222023 and 20212022
Revenue.As a clinical stage company, we did not generate any revenue for the nine months ended March 31, 20222023 and 2021.2022. 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 marketgenerate revenue from any of our product candidates for several years.
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Research and development expenses.R&D expenses for the nine months ended March 31, 20222023 and 20212022 were as follows (in thousands, except percentages):
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Total R&D expenses | | $ | 23,912 | | $ | 10,598 | | $ | 13,314 |
| 126 | % | | $ | 32,880 | | $ | 23,912 | | $ | 8,968 |
| 38 | % |
The increase in R&D expenses of $13.3$9.0 million for the nine months ended March 31, 20222023 was primarilypartially attributable to an increase of $6.0 million due to higher spending for drug substance and drug product manufacturing related activities for RZ358 of $4.5 million and for RZ402 of $1.5 million. Additional increases in clinical trial costs were incurred of approximately $1.7 million for RZ358 due to our RZ358 Phase 2b study and $1.4 million for RZ402 Phase 1 studies. An additional $0.9 million was due to an increase in patent maintenance activities and development related consulting not included above to support the RZ402 and RZ358 programs. In addition to the increases in clinical trial costs, an increase of approximately $1.0 million was incurred related to licensing costs. Licensing costs of $2.0 million were incurred in the nine months ended March 31, 2022 due to the last patient dosed in our RZ358 Phase 2b study, under our licensing agreement with XOMA. In comparison, license costs of $1.0 million were incurred for the nine months ended March 31, 2021 under our license agreement with ActiveSite, upon acceptance of our IND by the FDA in December 2020.
Compensationcompensation and benefits for our R&D workforce that increased by approximately $3.7 million. Cash-based compensation and benefits increased by approximately $2.3 million which was primarily attributable to an increase in the average number of R&D employees from 16 for the nine months ended March 31, 2021 to 24 for the nine months ended March 31, 2022.2022 to 35 for the nine months ended March 31, 2023. In addition, approximately $1.4 million of this increase was attributable to an increase in share-based compensation related to stock options granted in June 2022 where expense is recognized over the respective vesting periods. In addition to the increases in compensation and benefits, an increase of $1.5 million was due to higher spending for RZ358 Phase 3 readiness manufacturing costs and $1.0 million for RZ402 Phase 2 clinical trial costs.
Milestone related costs under licensing agreements increased by $1.0 million for the nine months ended March 31, 2023 as a result of the $3.0 million milestone payment due to ActiveSite upon dosing of the first patient in a Phase 2 study. Milestone costs for the nine months ended March 31, 2022 related to the payment of $2.0 million to XOMA (as defined below) upon last patient dosing in the Phase 2b study.
Other R&D related costs increased by approximately $1.8 million for the nine months ended March 31, 2023 due an increase of $0.9 million related to R&D facilities costs driven by increased travel, rent and other facilities costs. Other pipeline development costs increased by $0.6 million.
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General and administrative expenses.G&A expenses for the nine months ended March 31, 20222023 and 20212022 were as follows (in thousands, except percentages):
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Total G&A expenses | | $ | 6,632 | | $ | 5,660 | | $ | 972 |
| 17 | % | | $ | 8,872 | | $ | 6,632 | | $ | 2,240 |
| 34 | % |
The increase in G&A expenses of $1.0$2.2 million for the nine months ended March 31, 2023 was primarily attributable to increases in (i) share-based compensation expense of $1.3 million due to stock options granted in June 2022 where expense is recognized over the respective vesting periods and (ii) cash-based compensation expense of $0.9 million that was primarily attributable to an increase in professional fees associated with pipeline candidate market research assessments, consulting services, and strategic financial advisory services related to ongoing financing efforts, totaling approximately $0.7 million. In addition to the professional fee increases, there was an increaseaverage number of approximately $0.2 million in employee compensation, mainly related to increase in stock-based compensation due to options granted inG&A employees from 8 for the nine months ended March 31, 2022.2022 to 12 for the nine months ended March 31, 2023.
Interest Expense.and Other Income. Interest expense was approximately $1.3and other income amounted to $2.7 million for the nine months ended March 31, 2023, compared to $13,000 of interest income for the nine months ended March 31, 2022. The increase in interest income for the nine months ended March 31, 2023 was primarily due to our decision in January 2023 to invest an aggregate of approximately $115.0 million in marketable debt securities and overnight money market mutual fund that bear interest at a weighted average effective rate of approximately 5.0%, whereas our temporary cash investments for the nine months ended March 31, 2022 whereas weprovided for earnings that were less than 1.0%. The large increase in funds available for investment was attributable to the completion of equity financings between May 2022 and July 2022.
Employee Retention Credit. We did not generate any employee retention credit income for the nine months ended March 31, 2023, compared to $0.2 million for the nine months ended March 31, 2022. The income in the prior year was a result of CARES Act benefits. For the nine months ended March 31, 2023, governmental assistance was not available under the CARES Act.
Interest Expense. We did not incur any interest expense for the same period in 2021.nine months ended March 31, 2023 due to the repayment of the Loan Agreement on June 30, 2022, whereas we incurred $1.3 million of interest expense for the nine months ended March 31, 2022. Interest expense for the nine months ended March 31, 2022 was solely attributable to the Loan Agreement (as defined below) entered into in April 2021 and consisted of (i) interest expense of $1.0 million based on the weighted average contractual rate of 9.0%, and (ii) accretion of discount of $0.3 million.
Gain (loss) on changes in fair value of derivative liabilities.Income Taxes. On February 17, 2021, we recognized a derivative liability of $3.6 million related to a deficiency in our authorized shares of common stock, since there was a possibility that we could have been required to settle a portion of our outstanding stock options and warrants in cash. This derivative liability was adjusted to fair value at the end of each reporting period and amounted to $1.8 million as of March 31, 2021. The change in fair value of $1.8 million is reflected as a non-cash gain for the nine months ended March 31, 2021. For the period from February 17, 2021 through March 31, 2021, a decrease in the market price of our Common Stock was the primary driver that resulted in the reduction in fair value and the resulting non-cash gain. On May 26, 2021, our shareholders approved an increase in authorized shares of common stock that eliminated the authorized share deficiency. Accordingly, the related stock options and warrants were no longer accounted for a derivative liability after May 26, 2021.
For the nine months ended March 31, 2022, we recognized a loss of $8,000 due to changes in fair value of embedded derivative liabilities related to the Loan Agreement entered into in April 2021, as discussed below under the caption Liquidity2023 and Capital Resources. For the nine months ended March 31, 2021, we did not have any gains or losses on changes in fair value of embedded derivative liabilities.
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Employee Retention Credit. Employee retention credit income was $0.2 million for the nine months ended March 31, 2022. This amount is a result of the benefits we qualified for under the Coronavirus Aid, Relief, and Economic Security Act during the nine months ended March 31, 2022. We did not recognize any income for employee retention credits for the nine months ended March 31, 2021.
Income Taxes. For the nine months ended March 31, 2022, and 2021 we did not recognize any income tax benefit due to our net losses, and our determination that a valuation allowance was required for all of our deferred tax assets.
Liquidity and Capital Resources
Short-term Liquidity Requirements
As of March 31, 2023, we had cash and cash equivalents of $33.7 million, short-term marketable debt securities of $69.3 million and working capital was approximately $101.1 million. We have incurred cumulative net losses of $199.8$248.3 million since our inception and as a clinical stage company we have not generated any meaningful revenue to date.
Our primary source of liquidity has historically been from the completion of private placements and public offerings of our equity securities, as well as proceeds from the issuance of debt securities. For the nine months ended March 31, 2023, as discussed above under the caption Recent Developments, we issued common stock in the 2022 we incurred a net loss of $31.6 million and we used $27.5 million of cash in our operating activities. As of March 31, 2022, our unrestricted cash and cash equivalents balance was $63.4 million and working capital was approximately $61.5 million. Presented below is a summary of the key events affecting our liquidity and capital resources for the nine months ended March 31, 2022, and the expected impact of financing activities completed in April and May 2022.
In October and November 2021, we completed an underwritten offeringPrivate Placement that resulted in net proceeds of $47.3$11.6 million. For the fiscal year ended June 30, 2022, we received net proceeds from the issuance of equity securities of $165.2 million. The completion of these equity financings is the primary factor that resulted in our cash and cash equivalents balance of $33.7 million and marketable debt securities investment balance of $95.5 million as of March 31, 2023. For further information about the key terms and results of our debt and equity financing activities, please refer to the discussion below under the captions 2022 Registered Direct Offering, 2021 Underwritten Public Offering and 2021 Registered Direct Offering.
Our most significant contractual obligations consist of milestone payments pursuant to licensing agreements with XOMA Corporation (“XOMA”) and ActiveSite Pharmaceuticals, Inc. (“ActiveSite”) discussed below. Based on our expectations for the dates when certain
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clinical and regulatory milestones will be achieved, we anticipate that $5.0 million will be payable to XOMA within the next twelve months.
Based on our cash and cash equivalents balance of $33.7 million and short-term investment balance of $69.3 million as of March 31, 2023, we believe we have adequate capital resources to meet all of our contractual obligations and conduct all planned activities to advance our clinical trials through the fiscal quarter ending March 31, 2024.
Long-term Liquidity Requirements
Our most significant long-term contractual obligations consist of remaining clinical and regulatory milestone payments up to $35.0 million payable to XOMA and $32.5 million in remaining clinical and regulatory milestones payments to ActiveSite, for a total of $67.5 million. As discussed above, we expect that $5.0 million will be payable to XOMA within the next twelve months. Accordingly, the remainder of $62.5 million is considered a long-term liquidity requirement. Due to uncertainties in the timing associated with clinical trial activities and regulatory approvals, there is even greater uncertainty in forecasting the additional milestone payments to XOMA and ActiveSite during the fiscal year ending June 30, 2024 and thereafter.
Our long-term contractual obligations also include (i) operating lease payments up to approximately $0.7 million per year through calendar year 2027, and (ii) an exit fee of $0.6 million if we enter into certain transactions (defined as “Exit Events”) prior to April 13, 2031. Exit Events include, but are not limited to, sales of substantially all assets, certain mergers, change of control transactions, and issuances of common stock that result in new investors owning more than 35% of our common stock. As discussed above under the caption Recent Developments, on June 30, 2022 we terminated the Loan Agreement with SLR. However, we remain contingently obligated to pay the $0.6 million exit fee.
The following discussion provides additional information about the ongoing requirements pursuant to our license agreements with XOMA and ActiveSite, along with additional information about our recent financing activities that impacted our liquidity and capital resources through March 31, 2023.
XOMA License Agreement
In December 2017, we entered into a license agreement (the ““XOMA License Agreement”) with XOMA through its wholly-owned subsidiary, XOMA (US) LLC, pursuant to which XOMA granted an exclusive global license to develop and commercialize XOMA 358 (formerly X358, now RZ358) for all indications. In January 2019, the XOMA License Agreement was amended with an updated payment schedule, as well as revised the amount we were required to expend on development of RZ358 and related licensed products, and revised provisions with respect to our diligence efforts in conducting clinical studies.
The XOMA License Agreement requires various clinical and regulatory milestone payments up to $37.0 million in aggregate. The first such milestone payment of $2.0 million was triggered upon dosing of the last patient in our Phase 2 clinical study in January 2022. The next milestone payment of $5.0 million will be due upon the dosing of the first patient in a Phase 3 study, which we believe will occur in the next twelve months. Additionally, upon the future commercialization of RZ358, we will be required to pay royalties to XOMA based on the net sales of the related products, and milestone payments up to an additional $185.0 million if future annual sales related to RZ358 exceed targets ranging from $100.0 million to $1.0 billion. Through March 31, 2023, no events have occurred that would result in the requirement to make additional milestone payments and no royalties have been incurred.
ActiveSite License Agreement
In August 2017, we entered into a Development and License Agreement with ActiveSite (“ActiveSite License Agreement”) pursuant to which we acquired the rights to ActiveSite’s plasma kallikrein inhibitor portfolio (the “PKI Program”). We are planning to use the PKI Program to develop, file, manufacture, market and sell products for diabetic macular edema and other therapeutic indications. The ActiveSite License Agreement requires various milestone payments ranging from $1.0 million to $10.0 million when milestone events occur, up to $46.5 million of aggregate milestone payments. The first milestone payment for $1.0 million paid in December 2020 after completion of the preclinical work and submission of an IND to the FDA for RZ402. The second milestone payment for $3.0 million became due upon dosing of the first patient in a Phase 2 study in February 2023. We will also be required to pay royalties equal to 2.0% of any sales of products that use the PKI Program. Through March 31, 2023, no events have occurred that would result in the requirement to make additional milestone payments and no royalties have been incurred.
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2022 Registered Direct Offering
On May 1, 2022, we entered into an underwriting agreement with Jefferies LLC, as representative of the underwriters listed therein, relating to the issuance and sale of equity securities in an underwritten registered direct offering (the “2022 RDO”). The 2022 RDO resulted in the issuance of (i) approximately 18.0 million shares of our common stock at a public offering price of $3.80 per share, (ii) Class A pre-funded warrants (the “Class A PFWs”) to purchase up to 2.0 million shares of common stock at a public offering price of $3.799 per Class A PFW, and (iii) Class B pre-funded warrants (the “Class B PFWs”) to purchase up to 10.9 million shares of common stock at a public offering price of $3.799 per Class B PFW. On May 4, 2022, the 2022 RDO closed resulting in net proceeds of approximately $110.1 million. The gross amount of the 2022 RDO was $117.6 million, before deduction of an aggregate of $7.1 million for underwriting discounts and approximately $0.4 million for professional fees and other offering expenses payable by us. We believe the additional funding from the 2022 RDO along with the funding received in July 2022 from the 2022 Private Placement provides us with sufficient cash to fund a Phase 3 clinical program for RZ358, as well as a Phase 2 proof of concept study for RZ402.
2021 Underwritten Public Offering and Registered Direct Offering
In October 2021, we entered into an underwriting agreement with Oppenheimer & Co., Inc., as representative of the underwriters listed therein (the “2021 Underwriters”) for the planned issuance and sale of equity securities in an underwritten public offering (the “2021 Underwritten Offering”). On October 15, 2021, closing occurred for the 2021 Underwritten Offering” resulting in the issuance of (i) 6,030,847 shares of common stock at $6.50 per share for gross proceeds of $39.2 million, and (ii) 1,661,461 pre-funded warrants to purchase 1,661,461 shares of common stock at an issuance price of $6.49 per warrant (the “2021 PFWs”) for gross proceeds of $10.8 million. We granted the Underwriters a 30-day option to purchase up to an additional 1,153,845 shares of its common stock in the 2021 Underwritten Offering at a public offering price of $6.50 per share, less underwriting discounts and commissions (the “Underwriters’ Option”). In November 2021, the Underwriters’ Option was partially exercised for 116,266 shares resulting in gross proceeds of approximately $0.8 million. The aggregate gross proceeds from the 2021 Underwritten Offering amounted to $50.7 million, excluding the Underwriters’ Option, and before deductions for underwriting commissions of 6.0% of the gross proceeds and other offering costs of approximately $0.3 million. After deducting total offering costs of $3.3 million, the net proceeds of the 2021 Underwritten Offering amounted to approximately $47.2 million.
Concurrently with the 2021 Underwritten Offering, Handok, an entity affiliated with a member of the Board of Directors, entered into a subscription agreement for a registered direct offering that resulted in net(the “2021 RDO”) pursuant to which we agreed to sell to the Handok an aggregate of 769,231 shares of our common stock at a purchase price of $6.50 per share. The closing for the 2021 RDO occurred on October 27, 2021, whereby we received gross proceeds of $5.0 million (the “2021 RDO”), for total net proceeds of approximately $52.3 million.
EDA and LPC Financings
In December 2020, we entered into an Equity Distribution Agreement (the “EDA”“EDA”) with Oppenheimer & Co. Inc. as sales agent that provided for an “at the market offering” for the sale of up to $50.0 million in shares of our common stock (the “Placement Shares”“Placement Shares”). For the nine months ended March 31, 2022, we sold 138,388 Placement Shares for which aggregate net proceeds of approximately $1.5 million were received. We provided notice of termination of the EDA to Oppenheimer & Co. Inc. in May 2022 and no further equity securities are issuable under the agreement. Accordingly, the EDA is no longer a potential source of liquidity.For additional information about the EDA, please refer to Note 6 to the financial statements included in Part I, Item 1 of this Report.
In August 2021, we entered into a purchase agreement (the ““LPC Purchase Agreement”Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”LPC”), which provides that we may sell to LPCprovided for issuances up to an aggregate of $20.0 million of shares of our common stock (the “Purchase Shares”“Purchase Shares”). The aggregate number of shares that we can sell to LPC under the Purchase Agreement was 1,669,620 shares of common stock. For the ninethree months ended March 31, 2022, LPC purchased 115,708 Purchase Sharesdid not purchase any shares of our common stock. In May 2022, we terminated the EDA and we received net proceeds of $1.2 million. We provided notice of termination of the LPC Purchase Agreement to LPC in May 2022 andwhereby no further equity securities are issuable under the agreement.Accordingly, the Purchasethese agreements.
Loan Agreement is no longer a potential source of liquidity. For additional information about the Purchase Agreement, please refer to Note 6 to the financial statements included in Part I, Item 1 of this Report.
In April 2021, we entered into a $30.0 million Loan and Security Agreement (the “Loan Agreement”) with SLR Investment Corp. and certain other lenders (the “Lenders”). The Lenders agreed to loan up to $30.0 million in three tranches consisting of (i) aborrowed $15.0 million term A loan that was funded on April 14, 2021, (ii) term B and term C loans for an aggregate of $15.0 million that were subject to our ability to obtain prescribed amounts of financing andunder the achievement of certain clinical. We did not achieveLoan Agreement discussed above under the initial clinical milestones by January 2022 and accordingly, term B and term C loans are no longer a potential source of liquidity.
The term A loan has a maturity date of April 1, 2026.caption Recent Developments. Outstanding borrowings under the term A loan bearLoan Agreement provided for interest at a floating rate equal to (a) 8.75% per annum plus (b) the greater of (i) the rate per annum published by the Intercontinental Exchange Benchmark Administration Ltd. (“IEBA”) for a term of one month and (ii) 0.12% per annum. For the period from April 14, 2021 through December 31, 2021, the IEBA rate for a term of one month was approximately 0.12% per annum. As of March 31, 2022, the IEBA rate for a term of one month was approximately 0.23% per annum. Therefore, the contractual rate was 8.98% as of March 31, 2022 and 8.87% as ofOn June 30, 2021. We are permitted to make interest-only payments on2022, we paid off the term Aoutstanding loan at least through May 1, 2023.
As a conditionamount of $15.0 million and terminated the Loan Agreement our cashin accordance with its terms. In addition to the repayment of principal and cash equivalents became subjectaccrued interest, we paid (i) a prepayment fee equal to a blocked account control agreement (“BACA”) in favor2.00% of the Lenders wherebyoutstanding principal balance for a cash balancetotal of at least $5.0 million was required beginning on December 31, 2021. In$300,000, and (ii) a final fee equal to 4.75% of the eventaggregate amount of the term loans funded for a default under thetotal of $712,500. The terminated Loan Agreement was secured by substantially all of our assets. The security interests and liens granted in connection with the BACA would enable the Lenders to prevent the release of funds from our cash accounts until the default is cured or waived. For additional information about theterminated Loan Agreement please refer to Note 5 to the financial statements included in Part I, Item 1 of this Report.were released on June 30, 2022.
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As discussed in Note 4 to the financial statements included in Part I, Item 1 of this Report, we are subject to license agreements that require future contractual payments upon achievement of various milestone events. Pursuant to the ActiveSite Agreement, the next milestone will consist of a $3.0 million payment upon dosing of the first patient in a Phase 2 clinical trial for RZ402. Additionally, pursuant to the Xoma Agreement, the next milestone payment is a $5.0 million payment that will be due upon dosing of the first patient in a Phase 3 clinical trial for RZ358.
As discussed above under the caption Recent Developments, in April 2022 we entered into a lease agreement for a new corporate headquarters facility in Redwood City, California. This lease provides for total base rent payments of approximately $2.9 million through the expected expiration of the lease in July 2027.
As discussed above under the caption Recent Developments, we received net proceeds of approximately $110.5 million upon closing of the 2022 RDO on May 4, 2022. This amount consists of $41.6 million related to the issuance of 10.9 million Class B PFWs that are subject to Shareholder Approval, and the remainder relates to unrestricted issuances of equity securities. In addition, we entered into the SPA on May 4, 2022, whereby we agreed to sell 3.3 million Class C PFWs that are also subject to Shareholder Approval and are expected to result in net proceeds of $11.4 million upon closing of the Private Placement in May 2022. No assurance can be provided that Shareholder Approval will ultimately be obtained and that we will be able to avoid incurring substantial liquidated damages payments.
We believe our unrestricted cash and cash equivalents balance of $63.4 million as of March 31, 2022, combined with the unrestricted net proceeds received from the 2022 RDO, will be adequate to meet our contractual obligations, and carry out clinical trials and other planned activities at least through May 2023.
Cash Flows Summary
Presented below is a summary of our operating, investing, and financing cash flows for the nine months ended March 31, 20222023 and 20212022 (in thousands):
| | | | | | | | | | | | | | | | | | |
|
| 2022 |
| 2021 |
| Change |
| 2023 |
| 2022 |
| Change | ||||||
Net cash provided by (used in): | |
| | |
| | |
| | |
| | |
| | |
| |
Operating activities | | $ | (27,506) | | $ | (15,211) | | $ | (12,295) | | $ | (33,131) | | $ | (27,506) | | $ | (5,625) |
Investing activities | |
| — | |
| — | |
| — | |
| (95,107) | |
| — | |
| (95,107) |
Financing activities | |
| 54,875 | |
| 37,245 | |
| 17,630 | |
| 11,571 | |
| 54,875 | |
| (43,304) |
Cash Used in Operating Activities
For the nine months ended March 31, 20222023 and 2021,2022, cash used in operating activities amounted to $27.5$33.1 million and $15.2$27.5 million, respectively. The key components in the calculation of our cash used in operating activities are as follows (in thousands):
| | | | | | | | | | |||||||||
| | | | | | | | | |
| 2023 |
| 2022 |
| Change | |||
|
| 2022 |
| 2021 |
| Change | | | | | | | | | | |||
Net loss | | $ | (31,637) | | $ | (14,412) | | $ | (17,225) | | $ | (39,059) | | $ | (31,637) | | $ | (7,422) |
Non-cash expenses |
| | 3,259 |
| | 2,544 |
| | 715 |
| | 5,759 |
| | 3,259 |
| | 2,500 |
Non-cash gains, net |
| | — |
| | (1,784) |
| | 1,784 |
| | (708) |
| | — |
| | (708) |
Changes in operating assets and liabilities, net |
| | 872 |
| | (1,559) |
| | 2,431 |
| | 877 |
| | 872 |
| | 5 |
Total | | $ | (27,506) | | $ | (15,211) | | $ | (12,295) | | $ | (33,131) | | $ | (27,506) | | $ | (5,625) |
For the nine months ended March 31, 2022,2023, our net loss was $31.6$39.1 million compared to $14.4$31.6 million for the nine months ended March 31, 2021.2022. For further discussion about changes in our operating results for the nine months ended March 31, 20222023 and 2021,2022, please refer to Results of Operations above.
For the nine months ended March 31, 20222023 and 2021,2022, our non-cash expenses of $3.3$5.8 million and $2.5$3.3 million, respectively, were primarily attributable to share-based compensation expense, non-cash lease expense, and accretion of debt discount and issuance costs,costs. For the nine months ended March 31, 2023, net non-cash gains of $0.7 million were attributable to accretion of discounts, net of amortization of premiums, related to our investments in marketable debt securities. For the nine months ended March 31, 2023, net changes in operating assets and non-cash lease expense.liabilities increased operating cash flow by $0.9 million, primarily driven by an increase of $1.7 million in accounts payable and other accrued liabilities primarily. This amount was partially offset by reduced cash flows resulting from an increase in prepaid expenses and other assets of $0.8 million. For the nine months ended March 31, 2022, net changes in operating assets and liabilities increased operating cash flow by $0.9 million, primarily driven by an increase in accounts payable of $0.5 million and an increase in other accrued liabilities of $0.3 million. liabilities.
Cash Provided by Investing Activities
For the nine months ended March 31, 2021,2023, our net changescash utilized in operating assetsinvesting activities amounted to $95.1 million, primarily related to the purchase of $95.0 million of marketable debt securities. Additionally, $0.1 million of cash utilized in investing activities related to the purchase of furniture and liabilities decreased operating cash flow by $1.6 million,
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equipment primarily driven by a $1.8 million decreasefor use in payables to Xoma under the amended License Agreement, partially offset by a decrease of $0.4 millionour new office location in prepaid expenses and other assets.
Cash Provided by Investing Activities
Redwood City, California. We did not have any cash flows from investing activities for the nine months ended March 31, 2022 and 2021.2022.
Cash Provided by Financing Activities
Net cash provided by financing activities for the nine months ended March 31, 2023 amounted to $11.6 million. This amount consisted of proceeds of $12.3 million from the 2022 Private Placement. The total proceeds from the 2022 Private Placement of $12.3 million were partially offset by payments of $0.8 million for underwriting commissions and other costs related to this offering.
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Net cash provided by financing activities for the nine months ended March 31, 2022 amounted to $54.9 million. This amount consisted of proceeds of (i) $50.7 million from the Underwritten Offering, (ii) $5.0 million from the 2021 RDO,Registered Direct Offering, (iii) $1.5 million from the EDA, and (iv) $1.2 million from the Purchase Agreement. The total proceeds from equity financing activities of $58.4 million were partially offset by payments of $3.4 million for underwriting discounts and other costs related to equity offerings, and $0.1 million of payments for debt issuance costs.
Net cash provided by financing activities for the nine months ended March 31, 2021 was $37.2 million. This amount consisted of $41.0 million received from a private placement of Units in October 2020 for the purchase of approximately 2.5 million shares of common stock at a purchase price of $16.50 per share and (ii) warrants entitling the holders to purchase approximately 0.8 million shares of common stock. The gross proceeds of $41.0 million were partially offset by financial advisory fees and offering costs of approximately $3.7 million related to the issuance of Units, and prepaid debt discount and issuance costs related to the Loan Agreement entered into in April 2021.
Recent Accounting Pronouncements
Please refer to Note 1 to our unaudited condensed consolidated financial statements in Part I, Item 1 of this Report regarding the impact of recent accounting pronouncements.
Off-Balance Sheet Arrangements
We did not have any off-balance sheet transactions for the periods covered by this Report.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
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 and financial 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”Act”). Based on that assessment under those criteria, our management has determined that our internal control over financial reporting was not effective due to twoa material weaknessesweakness in the system of internal control. A material weakness is a deficiency, or combination of deficiencies, that creates a reasonable possibility that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely manner.
The firstAs previously reported on our Annual Report on Form 10-K for the year ended June 30, 2022 in connection with the our assessment of the effectiveness of its internal control over financial reporting at the end of its last fiscal year, the material weakness identified by management is primarily that due to our limited number of employees, we have not adequately segregated certain duties to prevent employees from overriding the internal control system. During ourthe fiscal year ended June 30, 2021,2022, we implemented a more robust accounting software that is expected to result in stronger controls. In October 2022, we hired a Vice President of Finance and we implemented additional procedures to improve our segregation of duties. However, without hiring additional personnel, which will enable us to better segregate many functions. While we have been unable to fully remediate this material weakness. Webelieve these are important steps in our ongoing remediation efforts, we cannot provide assurance that these or other measures will eventually result in the elimination of the material weakness described above.
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In March 2021, we identified a second material weakness that resulted from ineffective treasury controls over review of outstanding authorized shares and requirements for all securities and contracts to issue common shares to ensure adequate authorized shares exist. This material weakness occurred in February 2021 when we decided to file a certificate of correction with the Secretary of State of Delaware (“Charter Revision”) that changed our authorized shares of capital stock in the same 50 shares for one share ratio that applied to our issued shares of common stock, stock options and warrants pursuant to a reverse stock split that was effected in October 2020. The impact of this adjustment caused an immediate reduction in our authorized shares of common stock from 500,000,000 shares to 10,000,000 shares. Accordingly, after the Charter Revision we did not have a sufficient number of authorized shares of common stock in the event that all of our outstanding stock options and warrants are subsequently exercised.
On May 26, 2021, our shareholders voted to approve motions to reincorporate from the state of Delaware to the state of Nevada and to increase our authorized shares of common stock from 10,000,000 shares to 40,000,000 shares. Accordingly, the authorized share deficiency that occurred in February 2021 was cured on May 26, 2021, such that we have an adequate number of shares of common stock whereby all outstanding stock options and warrants may be exercised in exchange for shares of common stock. In addition to the shareholder approvals to reincorporate and increase our authorized shares, we are implementing procedures to ensure that our Board of Directors provides explicit approval for all future charter amendments, and all future issuances of shares of our common stock and any warrants and stock options that are not subject to a plan approved by our shareholders. We cannot provide assurance that these or other measures will eventually result in the elimination of this material weakness.
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 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
Item 1. Legal Proceedings.
None
Item 1A. Risk Factors.
TheOur risk factor set forth below should be read in conjunction with the risk factors are set forth under “Item 1A. Risk Factors” in our 20212022 Form 10-K (referred to as our “Legacy Risk Factor Disclosures”). The developments described in the additional risk factor below have heightened, or in some cases manifested, certainAs of the Legacy Risk Factor Disclosures. Except as described herein,date of this Report, there have been no material changes with respect to Legacy Risk Factor Disclosures.Disclosures except for the risk factors set forth below.
You should carefully considerWe could recognize losses on securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.
As of March 31, 2023, the Legacy Risk Factor Disclosuresfair value of the investments in additionour marketable debt securities portfolio was approximately $95.5 million. Factors beyond our control can significantly influence the fair value of securities in our portfolio and can cause potential adverse changes to the other information set forthfair value of these securities. For example, fixed-rate securities acquired by us are generally subject to decreases in this Reportmarket value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities or our own analysis of the value of the security, defaults by the issuer with respect to the underlying securities, and continued instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.
As of March 31, 2023, we had $132,000 in net unrealized losses in our 2021 Form 10-K, including the Management’s Discussionmarketable securities available-for-sale portfolio, and Analysis of Financial Condition and Results of Operations sections and the consolidated financial statements and related notes. These risks, some of which have occurred and any of whichunrealized losses in our securities portfolio may occurincrease in the future candue to the aforementioned economic factors. While our goal is to hold each security until maturity, that may not be possible in light of our policy to preserve capital and liquidity and because investment in securities with unrealized losses has a diminished utility as a source of liquidity prior to maturity. Selling securities with an unrealized loss would result in the realization of such losses, which could have a materialan adverse effect on our business, financial condition and results of operations.
The collapse of certain banks and potentially other financial institutions may adversely impact us.
On March 10, 2023, Silicon Valley Bank (“SVB”) was shut down, followed on March 11, 2023 by Signature Bank and on May 1, 2023 by First Republic Bank whereby, the Federal Deposit Insurance Corporation was appointed as receiver for each of those banks. As a result, there have been reports of instability at other banks across the globe. Despite the steps taken to date by U.S. agencies to protect depositors, the follow-on effects of the events surrounding the failures of SVB, Signature Bank, and First Republic Bank and the pressure on other banks are unknown. Such effects could include failures of other financial institutions to which we face direct or more significant exposure, and the extent of the impacts relating to financial institution instability or failure is uncertain. Our investment portfolio did not and currently does not contain any securities of SVB, and we did not have any deposit accounts with SVB. We are monitoring the situation and intend to minimize any disruptions to our operations should they arise. However, there may be risks that we have not yet identified, and we cannot guarantee that we will be able to avoid negative consequences directly or indirectly from the pricesforegoing events or other impacts on financial institutions.
Any delays in the commencement or completion, or termination or suspension, of our publicly traded securities. The risk factor described below and the Legacy Risk Factor Disclosures are not the only risks we face. Additional risks and uncertainties not currently knownfuture clinical trials, if any, could result in increased costs to us, delay or that we currently deemlimit our ability to be immaterial, may occur or become material in the futuregenerate revenue and adversely affect our business, reputation, financial condition, results of operations or the prices of our publicly traded securities. Therefore, historical operating results, financial and business performance, events and trends are often not a reliable indicator of future operating results, financial and business performance, events or trends.commercial prospects.
IfBefore obtaining approval from the Regulatory Authorities for our drug candidates, we must conduct extensive clinical studies to demonstrate safety and efficacy. Clinical testing is expensive, time consuming and uncertain as to outcome. Any delays in the commencement or completion of our ongoing, planned or future clinical trials could significantly increase our costs, slow down our development and approval process and jeopardize our ability to commence product sales and generate revenues. We do not know whether our planned trials will begin on time or at all, or be completed on schedule, if at all. The commencement and completion of clinical trials can be delayed for a number of reasons, including delays related to:
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● | Regulatory Authorities disagreeing as to the design or implementation of our clinical trials or with our recommended dose for any of our pipeline programs; |
● | obtaining Regulatory Authority authorization to commence a trial or reaching a consensus with such Regulatory Authorities on trial design; |
● | obtaining approval from one or more independent institutional review board (“IRB”) or Ethics Committee (“EC”) at each clinical trial site before each trial may be initiated; |
● | IRBs/ECs refusing to approve, suspending or terminating the trial at an investigational site, precluding enrollment of additional subjects, or withdrawing their approval of the trial; |
● | changes to clinical trial protocol; |
● | clinical sites deviating from trial protocol or dropping out of a trial; |
● | failing to manufacture or obtain sufficient quantities of drug candidate, or, if applicable, combination therapies for use in clinical trials; |
● | patients failing to enroll or remain in our trial at the rate we expect, or failing to return for post-treatment follow-up; |
● | patients choosing an alternative treatment, or participating in competing clinical trials; |
● | lack of adequate funding to continue the clinical trial; |
● | patients experiencing severe or unexpected drug-related adverse effects; |
● | occurrence of serious adverse events in trials of the same class of agents conducted by other companies; |
● | selecting or being required to use clinical end points that require prolonged periods of clinical observation or analysis of the resulting data; |
● | a facility manufacturing our drug candidates, or any of their components, including without limitation, our own facilities being ordered by Regulatory Authorities to temporarily or permanently shut down due to violations of current good manufacture practices, regulations or other applicable requirements, or infections or cross-contaminations in the manufacturing process; |
● | lack of stability of our clinical trial material or any quality issues that arise with the clinical trial material; |
● | any changes to our manufacturing process that may be necessary or desired; |
● | our, or our third-party contractors, not performing data collection or analysis in a timely or accurate manner or improperly disclosing data prematurely or otherwise in violation of a clinical trial protocol; or |
● | any third-party contractors becoming debarred or suspended or otherwise penalized by Regulatory Authorities or other government or regulatory bodies for violations of regulatory requirements, in which case we may need to find a substitute contractor, and we may not be able to use some or all of the data produced by such contractors in support of our marketing applications. |
We could also encounter delays if a clinical trial is suspended or terminated by us, by the IRBs/ECs of the institutions in which such trials are unablebeing conducted, by a Data Safety Monitoring Board for such trial or by Regulatory Authorities. Such authorities may impose such a suspension or termination due to obtain shareholdera number of factors, including failure to conduct the clinical trial in accordance with regulatory requirements or our clinical protocols, inspection of the clinical trial operations or trial site by Regulatory Authorities resulting in the imposition of a clinical hold, unforeseen safety issues or adverse side effects, failure to demonstrate a benefit from using the product under investigation, changes in governmental regulations or administrative actions or lack of adequate funding to continue the clinical trial. In addition, changes in regulatory requirements and policies may occur, and we may need to amend clinical trial protocols to comply with these changes. Amendments may require us to resubmit our clinical trial protocols to IRBs/ECs for reexamination, which may impact the costs, timing or successful completion of a clinical trial.
Any delay in, or failure to receive or maintain, approval for the Class B PFWs and, if then issued, the Class C PFWs, will be required to pay liquidated damages.
As soon as practicable following the closingany of our May 4, 2022 equity offering, we are required to hold an annual meeting of shareholders for the purpose of obtaining stockholder approval of an increase in authorized shares. We are required to use our best efforts to hold the shareholder meeting no later than June 30, 2022, obtain shareholder approval and cause the Board of Directors to recommend to the shareholders that they approve such matter. If shareholder approval is not obtained onproduct candidates could prevent us from ever generating meaningful revenues or prior to June 30, 2022, we are required to hold an additional shareholder meeting every three months thereafter until such shareholder approval is obtained.achieving profitability.
If we do not obtain shareholder approval by June 30, 2022, we are required to pay liquidated damages of 2.0% of the aggregate purchase price paid by each holder of Class B PFWs, and if then issued, the Class C PFWs. For any subsequent failure to obtain shareholder approval, we are required to pay an additional 2.0% as liquidated damages.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
There were no reportable issuances of unregistered shares of the Company’s equity securities for the period covered by this Report.None.
Item 3. Defaults Upon Senior Securities.
None.
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Item 6. Exhibits.
The following exhibits are incorporated by reference or filed as part of this Quarterly Report on Form 10-Q:
Exhibit Number |
| Description of Exhibits |
10.1* | | Amended and Restated Employment Agreement of Nevan Elam, dated January 8, 2023 |
10.2* | | Amended and Restated Employment Agreement of Brian Roberts, dated January 8, 2023 |
31.1* | | |
32.1* | | |
101.INS* | | Inline XBRL Instance Document |
101.SC* | | Inline XBRL Taxonomy Extension Schema |
101.CA* | | Inline XBRL Taxonomy Extension Calculation Linkbase |
101.DEF* | | Inline XBRL Taxonomy Extension Definition Linkbase |
101.LA* | | Inline XBRL Taxonomy Extension Label Linkbase |
101.PRE* | | Inline XBRL Taxonomy Extension Presentation Linkbase |
104 | | Cover Page Interactive Data File, formatted in Inline XBRL (included as Exhibit 101) |
* Filed herewith.
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SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| | |
| | REZOLUTE, INC. |
| | |
Date: May | By: | /s/ Nevan Charles Elam |
| | Nevan Charles Elam |
| | Chief Executive Officer |
| | (Principal Executive and Financial Officer) |
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