UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
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| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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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 Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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As of December 31, 2021, the last business day of the second fiscal quarter, the aggregate market value of the Registrant’s voting stock held by non-affiliates, was approximately $
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DOCUMENTS INCORPORATED BY REFERENCE
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TABLE OF CONTENTS
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (“Annual 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 Annual Report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including, but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements represent our reasonable judgment of the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project” and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:
● | projected operating or financial results, including anticipated cash flows used in operating activities; |
● | expectations regarding future milestone payments under licensing agreements, capital expenditures, research and development expense and other payments; |
● | our expectation that the disruptive impact of the COVID-19 pandemic (“COVID-19”) on our business will be temporary; |
● | our beliefs and assumptions relating to our liquidity position, including our ability to obtain additional financing; |
● | our ability to obtain regulatory approvals for our pharmaceutical drugs and diagnostics; and |
● | our future dependence on third party manufacturers or strategic partners to manufacture any of our pharmaceutical drugs and diagnostics that receive regulatory approval, and our ability to identify strategic partners and enter into license, co-development, collaboration or similar arrangements. |
Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors including, but not limited to, the risks described in “Risk Factors” in Part I, Item 1A of this Annual Report.
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 Annual 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 Annual 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 Annual Report, except as otherwise required by applicable law.
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PART I
Item 1. Business.
Rezolute, Inc. (“Rezolute”, the “Company”, “we” or “us”) is a clinical-stage biopharmaceutical company developing therapies for metabolic diseases related to chronic glucose imbalance.
Summary of Clinical Assets
RZ358
Our lead clinical asset, RZ358, is a potential treatment for congenital hyperinsulinism (“HI”), an ultra-rare pediatric genetic disorder characterized by excessive production of insulin by the pancreas. If untreated, the elevated insulin levels in patients suffering with congenital HI 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 all forms of congenital HI and the current standard of care treatments are suboptimal. The current treatments used by physicians include glucagon, diazoxide, somatostatin analogues and pancreatectomy.
RZ358, is an intravenously administered human monoclonal antibody that binds to a unique site (allosteric) on the insulin receptor in insulin target tissues, 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. RZ358 shows dose dependent pharmacokinetics with a half- life greater than two weeks which has the potential for semi-monthly dosing. 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 hyperinsulinism and low blood sugar. 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.
A summary of the completed clinical studies for RZ358 is as follows.
A Phase 1 pharmacokinetic (“PK”) study of single intravenous doses of RZ358 at 0.1 to 9 mg/kg in healthy volunteers revealed dose-dependent pharmacokinetics with a half-life of 15 days, supporting the biweekly dosing approach. In healthy volunteers, RZ358 prevented hypoglycemia induced by insulin administration, without producing hyperglycemia. This effect showed a PK-pharmacodynamic (dose—response) correlation, with the hypoglycemia blunting effects of RZ358 lasting for two weeks.
The clinical proof-of-concept of RZ358 in congenital HI was evaluated in a Phase 2a study in a total of 14 patients with congenital HI. The study investigated the PK, pharmacodynamics (“PD”), safety and preliminary efficacy of RZ358. RZ358 was well-tolerated in adult and pediatric patients with congenital HI who received single intravenous doses in the Phase 2a study and the PK results from the Phase 2a studies were consistent with those in healthy volunteers. There was a durable normalization of blood sugar in patients with hypoglycemia, with an approximate 50% improvement and near normalization of glucose control, which was sustained for more than two weeks after dosing. RZ358 did not increase blood sugar levels in patients with normal blood sugar levels at baseline.
In calendar year 2022 we completed the RZ358-606 Phase 2b global clinical study for RZ358 (“RIZE”). The RIZE study was conducted in a repeat-dose fashion to evaluate the safety, pharmacokinetics, dose-exposure response relationship and to assess the glycemic efficacy across a range of continuous glucose monitoring (“CGM”) and blood glucose monitoring-based principle glycemic endpoints to inform Phase 3. In the study, eligible patients received RZ358 in open-label fashion in one of 4, sequentially conducted dosing cohorts of up to 8 participants per cohort. RZ358 was administered as a 30 minute intravenous infusion every other week for eight weeks. The first three cohorts were fixed dosing levels of RZ358 and the fourth cohort was designed to explore whether there were any advantages of a fixed titration approach.
The RIZE study enrolled 23 patients and was primarily in a young pediatric population, average ~6.5 years of age, and in a diverse group of patients across gender and genetic cause of congenital HIs. A key entry criterion was for patients to
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have continued hypoglycemia despite available therapies, to be eligible for enrollment. We observed that patients enrolled on stable background therapies had clinically significant, and in many cases, substantial residual hypoglycemia as well as some hyperglycemia (> 180 mg/dL) at baseline.
Results from the RIZE study showed that target and expected RZ358 concentrations were achieved and dose-exposure dependent responses were also observed. RZ358 was generally safe and well-tolerated and there were no adverse drug reactions, adverse events leading to study discontinuations, or dose-limiting toxicities. Importantly, RZ358 demonstrated a ~50% improvement in hypoglycemia across all doses and cohorts and a ~75% improvement in hypoglycemia at the 6 mg/kg and 9 mg/kg cohorts. Time in range by CGM improved 8% across all doses, 16% at the top dose, and more significantly (>25%) in patients without baseline hyperglycemia on SOC.
In calendar year 2022, we reported positive topline results from the RIZE study which were presented at the Pediatric Endocrine Society Meeting on May 1, 2022. We believe that the positive results from the RIZE study will be Phase 3 enabling and accordingly we have initiated interactions with regulatory authorities in the US and Europe. Our objective is to complete the regulatory dialogue prior to the end of the first quarter of calendar year 2023, which would facilitate initiation of a Phase 3 study in the first half of calendar year 2023.
RZ402
Our second clinical asset, RZ402, is an oral plasma kallikrein inhibitor (“PKI”) being developed as a potential therapy for the chronic treatment of diabetic macular edema (“DME”). DME is a vascular complication of diabetes and a leading cause of blindness in the US 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, blindness.
Currently available treatments for DME include anti-vascular growth factor (anti-VEGF) injections into the eye or laser surgery. RZ402 is designed to be a once daily oral therapy for the treatment of DME and unlike the anti-VEGF therapies, RZ402 targets the Kallikrein-Kinin System 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 earlier initiation of therapy, adherence to prescribed treatment guidelines, and improved overall outcomes.
Results from our single ascending dose (“SAD”) Phase 1a Study (“RZ402-101”) were reported in May 2021. RZ402-101 was a first-in-human single-center, randomized, double-blind, placebo-controlled SAD study in healthy adult volunteers. The study objectives were to characterize the safety profile and pharmacokinetics of RZ402 administered as single oral doses. The study enrolled 30 individuals in three planned sequential dose- level cohorts of 25 mg, 100 mg, and 250 mg. Within each ten-subject dose cohort, volunteers were randomized 8:2 to receive either RZ402 oral solution or matched placebo. After receiving single doses, participants remained in the clinic for seven days for serial PK and safety assessments, before completing two outpatient follow-up visits at study days 14 and 30. Dose advancement proceeded following blinded reviews of safety and PK data from the preceding cohort(s).
Single doses of RZ402 resulted in dose-dependent increases in systemic exposure. Plasma concentrations of RZ402 significantly exceeded the 3.5 ng/mL target concentration that was pharmacologically active in animal models of DME for a 24-hour period after receipt of RZ402. Across the dose and exposure range, there were no serious adverse events, adverse drug reactions, or discontinuations due to adverse events, and no imbalance of adverse events between the treatment and placebo control groups. Similarly, regular laboratory, hemodynamic, cardiac, and ophthalmologic safety examinations were unremarkable.
Following the success of the SAD study, we undertook a follow-on multiple ascending dose (“MAD”) study (“RZ402-102”). Results from the MAD Study were reported in February 2022. RZ402-102 was a single center, randomized, double-blind, placebo-controlled, in healthy adult volunteers. The objectives of the study were to characterize the repeat dose safety profile (including maximum tolerated dose) and PK of RZ402 administered as daily oral doses for two weeks. The
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study was conducted in 40 volunteers in sequential ascending dose cohorts with 10 individuals per cohort. Within each cohort, participants were randomized in an 8:2 ratio to receive either RZ402 as an oral solution or a placebo. Participants remained in the clinic throughout the two week dosing period for serial PK and safety assessments, before completing an outpatient follow-up visit at study day 28. Blood biomarkers of target engagement (kallikrein activity) were explored as a systemic surrogate for DME, using a precedent from studies of kallikrein inhibitors in a systemic vascular leakage syndrome (hereditary angioedema). Dose advancement proceeded in staggered fashion every three weeks as appropriate, following blinded reviews of data from the preceding cohort(s).
The MAD study 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. Following the precedent established in hereditary angioedema, steady-state plasma kallikrein activity in human plasma was measured on Day 14 as a biomarker of RZ402 target engagement. Daily dosing with RZ402 inhibited plasma kallikrein in a dose and concentration-dependent manner (r=0.74; p < 0.001). 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. RZ402 was generally safe and well-tolerated, including at higher doses than previously tested in the SAD study. There were no serious adverse events, adverse drug reactions or identified risks.
We are advancing developmental activities toward a Phase 2a proof-of-concept study, which we plan to initiate during the fourth quarter of calendar year 2022.
Competition
We face competition from pharmaceutical and biotechnology companies, academic institutions, governmental agencies, and private research organizations in recruiting and retaining highly qualified scientific personnel and consultants and in the development and acquisition of technologies.
There are other companies developing therapies for HI that are potential competitors to RZ358, including Crinetics Pharmaceuticals, Eiger Biopharmaceuticals, Hanmi Pharmaceuticals, and Zealand Pharma.
There are also companies developing therapies for DME that are potential competitors to our PKI including Curacle, KalVista, Ocuphire Pharma, Oxurion and Verseon.
Government Regulation
Regulation by governmental authorities in the US and other countries is a significant factor in the development, manufacture and marketing of pharmaceutical products. All of our potential products will require regulatory approval by governmental agencies prior to commercialization. In particular, pharmaceutical therapies are subject to rigorous preclinical testing and clinical trials and other pre-market approval requirements by FDA and regulatory authorities in foreign countries. Various federal, state and foreign statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of such products.
We are also subject to various federal, state, and local laws, regulations and recommendations relating to safe working conditions; laboratory and manufacturing practices; the experimental use of animals; and the use and disposal of hazardous or potentially hazardous substances, including radioactive compounds and infectious disease agents, used in connection with our research, development and manufacturing.
Research and Development
We incurred approximately $32.5 million and $15.0 million in research and development expenses for the fiscal years ended June 30, 2022 and 2021, respectively. For further discussion of activities related to our RZ358 and RZ402 product candidates, please refer to the discussion above. For further discussion of our research and development expenses, please refer to the discussion under the caption Results of Operations under Item 7 of this Annual Report.
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Human Capital Management
Employees
As of June 30, 2022, we had 42 full time employees, of which 31 employees were engaged in research and development, manufacturing, clinical operations and quality activities and 11 employees in administrative functions. Of the 42 employees, all were located in the United States. We have a number of employees who hold Ph.D. degrees and other advanced degrees. None of our employees are covered by a collective bargaining agreement, and we have experienced no work stoppages nor are we aware of any employment circumstances that are likely to disrupt work at any of our facilities. As part of our measures to attract and retain personnel, we provide a number of benefits to our full-time employees, including health insurance, life insurance, retirement plans, paid holiday and vacation time. We believe that we maintain good relations with our employees.
Diversity and Inclusion
Diversity and inclusion are priorities for us. We believe that a rich culture of inclusion and diversity enables us to create, develop and fully leverage the strengths of our workforce.
Human Resources, Hiring and Professional Development
The development, attraction and retention of employees is critical to our success. We work diligently to attract the best talent from a diverse range of sources in order to meet the current and future demands of our business. We leverage both formal and informal programs to identify, foster and retain top talent.
Business Ethics
Our Code of Business Conduct and Ethics is designed to ensure that the conduct of our business is consistent with the highest standards of business ethics. Our Code of Business Conduct and Ethics serves as a critical tool to help employees recognize and report unethical conduct, while preserving our culture of excellence. Our Board of Directors, management and staff are provided with training regarding our Code of Business Conduct and Ethics.
Corporate Information
We were incorporated in Delaware in 2010 and we re-incorporated in Nevada in June 2021. We maintain an executive office located at 201 Redwood Shores Parkway, Suite 315, Redwood City, CA 94065 and our phone number is (650) 206-4507. Our website is located at www.rezolutebio.com. We file annual, quarterly, current reports, proxy statements and other information with the Securities and Exchange Commission (“SEC”). The SEC maintains a website that contains our public filings and other information regarding the Company, at www.sec.gov. The information contained in, or that can be accessed through, our website is not part of, and is not incorporated into this document.
Item 1A. Risk Factors.
Investors should consider carefully the following risks before deciding to purchase any of our securities. If any of the events or developments described below actually occur, our business, results of operations and financial condition would likely suffer and investors may lose all or part of their investment. In addition, it is also possible that other risks and uncertainties that affect our business may arise or become material in the future.
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Risks Related to Our Business
Results of preclinical testing or earlier clinical studies are not necessarily predictive of future results, therefore none of the product candidates we advance into clinical studies may have favorable results in later clinical studies or receive regulatory approval.
Success in preclinical testing does not ensure that clinical studies will generate adequate data to demonstrate the efficacy and safety of an investigational drug or biologic. Even if our clinical studies produce promising results, there is no assurance that such results will be replicated or exceeded in later clinical studies. A number of companies in the biotechnology industry, including those with greater resources and experience, have suffered significant setbacks in clinical studies, even after seeing promising results in earlier preclinical and clinical studies. We do not know whether our clinical studies will demonstrate adequate efficacy and safety to justify the continuing advancement of a program. If later stage clinical studies do not produce favorable results, our ability to achieve regulatory approval for our product candidates may be adversely impacted.
Even if we believe that our product candidates have performed satisfactorily in preclinical testing and clinical studies, we may still fail to obtain FDA approval for our product candidates.
After the completion of our clinical studies, we cannot predict whether or when we will obtain regulatory approval to commercialize our product candidates and we cannot, therefore, predict the timing of any future revenue from these product candidates.
Even if we achieve positive clinical results and file for regulatory approval, we cannot commercialize any of our product candidates until the appropriate regulatory agencies have reviewed and approved the applications for such product candidates. We cannot assure that the regulatory agencies will complete their review processes in a timely manner or that we will obtain regulatory approval for any product candidate we develop. Satisfaction of regulatory requirements typically takes many years, is dependent upon the type, complexity and novelty of the product and requires the expenditure of substantial resources. In addition, we may experience delays or rejections based upon additional government regulation from future legislation or administrative action or changes in FDA policy during the period of product development, clinical studies and FDA regulatory review.
Even if our product candidates receive regulatory approval, they may still face future development and regulatory hurdles.
Even if US regulatory approval is obtained for a particular drug candidate, the FDA may still impose significant restrictions on marketing, indicated uses and/or require potentially costly post-approval studies or post-approval surveillance. For example, the label ultimately approved, if any, may include restrictions on use. Further, the FDA may require that long-term safety data may need to be obtained as a post-approval requirement. Even if the FDA or a foreign regulatory agency approves a product candidate, the approval may impose significant restrictions on the indicated uses, conditions for use, labeling, advertising, promotion, marketing and/or production of such product and may impose requirements for post-approval studies, including additional research and development and clinical trials. The FDA and other agencies also may impose various civil or criminal sanctions for failure to comply with regulatory requirements, including substantial monetary penalties and withdrawal of product approval.
In addition, manufacturers of drug products and their facilities are subject to continual review and periodic inspections by the FDA and other regulatory authorities for compliance with current good manufacturing practices and regulations. If we or a regulatory agency discovers previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements, a regulatory agency may: issue warning letters or untitled letters; seek an injunction or impose civil or criminal penalties or monetary fines; suspend or withdraw regulatory approval; suspend any ongoing clinical studies; refuse to approve pending applications or supplements to applications filed
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by us; suspend or impose restrictions on operations, including costly new manufacturing requirements; or seize or detain products, refuse to permit the import or export of products, or require us to initiate a product recall.
The occurrence of any event or penalty described above may inhibit our ability to commercialize our products and generate revenue.
If our product candidates do not meet safety or efficacy requirements, they will not receive regulatory approval and we will be unable to market them.
The process of drug development, regulatory review and approval typically is expensive, takes many years and the timing of any approval cannot be accurately predicted. If we fail to obtain regulatory approval for our current or future product candidates, we will be unable to market and sell such products and therefore may never be profitable.
As part of the regulatory approval process, we must conduct preclinical studies and clinical trials for each product candidate to demonstrate safety and efficacy. The number of preclinical studies and clinical trials that will be required varies depending on the product candidate, the indication being evaluated, the trial results and regulations applicable to any particular product candidate.
The results of preclinical studies and initial clinical trials of our product candidates do not necessarily predict the results of later-stage clinical trials. Product candidates in later stages of clinical trials may fail to show the desired safety and efficacy despite having progressed through initial clinical trials. We cannot assure you that the data collected from the preclinical studies and clinical trials of our product candidates will be sufficient to support approval by the FDA or a foreign regulatory authority. In addition, the continuation of a particular study after review by an independent data safety monitoring board does not necessarily indicate that our product candidate will achieve the clinical endpoint.
The FDA and other regulatory agencies can delay, limit or deny approval for many reasons, including: a product candidate may not be safe or effective; our manufacturing processes or facility may not meet the applicable requirements; and changes in regulatory agency approval policies or adoption of new regulations may require additional clinical trials or work on our end.
Any delay in, or failure to receive or maintain, approval for any of our products could prevent us from ever generating meaningful revenues or achieving profitability.
Our product candidates are prone to the risks of failure inherent in drug development. Before obtaining regulatory approvals for the commercial sale of any product candidate for a target indication, we must demonstrate safety in preclinical studies and effectiveness with substantial evidence gathered in well-controlled clinical studies. With respect to approval in the US, to the satisfaction of the FDA and, with respect to approval in other countries, to the satisfaction of regulatory authorities in those countries, we must demonstrate that the product candidate is safe and effective for use for that target indication and that the manufacturing facilities, processes and controls are adequate.
Despite our efforts, our product candidates may not: offer therapeutic benefit or other improvements over existing, comparable therapeutics; be proven safe and effective in clinical studies; meet applicable regulatory standards; be capable of being produced in sufficient quantities at acceptable costs; be successfully commercialized; or obtain favorable reimbursement.
We are not permitted to market any of our other product candidates in the US until we receive approval of a new drug application, or approval of a biologics license application, from the FDA, or in any foreign countries until we receive the requisite approval from such countries. We have not submitted a new drug application or biologics license application or received marketing approval for any of our product candidates.
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Preclinical testing and clinical studies are long, expensive and uncertain processes. We may spend several years completing our testing for any particular product candidate, and failure can occur at any stage. Negative or inconclusive results or adverse medical events during a clinical study could also cause us or the FDA to terminate a clinical study or require that we repeat it or conduct additional studies. Additionally, data obtained from a clinical study is susceptible to varying interpretations and the FDA or other regulatory authorities may interpret the results of our clinical studies less favorably than we do. The FDA and equivalent foreign regulatory agencies have substantial discretion in the approval process and may decide that our data is insufficient to support a marketing application and require additional preclinical, clinical or other studies.
We may experience delays in our clinical trials that could adversely affect our financial position.
Many factors could affect the timing of our clinical studies, if any, that we may conduct, including lack of Current Good Manufacturing Practice (“cGMP”) drug product, slow patient recruitment, the proximity of patients to clinical sites, the eligibility criteria for the trial, competing clinical trials and new drugs approved for the conditions we are investigating. Other companies may be conducting clinical trials or may announce plans for future trials that will be seeking patients with the same indications as those we are studying. As a result of all of these factors, our trials may take longer to enroll patients than we anticipate. Delays in patient enrollment in the trials may increase our costs and slow down our product development and approval process. Our product development costs will also increase if we need to perform more or larger clinical trials than planned. Any delays in completing our clinical trials could adversely impact our cash position and ability to support ongoing operations.
Due to our reliance on contract research organizations or other third parties to conduct clinical trials, we may not have complete control over the timing, conduct and expense of our clinical trials.
We rely primarily on third parties to conduct our clinical trials. As a result, we will have less control over the conduct of the clinical trials, the timing and completion of the trials, the required reporting of adverse events and the management of data developed through the trial than would be the case if our own staff conducted all aspects of our clinical trials. Communicating with outside parties can also be challenging, potentially leading to mistakes and difficulties in coordinating activities. Outside parties may have staffing difficulties, may undergo changes in priorities or may become financially distressed, adversely affecting their willingness or ability to conduct our trials. We may experience unexpected increased costs that are beyond our control. Problems with the timeliness or quality of the work of a contract research organization may lead us to seek to terminate the relationship and use an alternative service provider. However, making this change may be costly and may delay our trials, and contractual restrictions may make such a change difficult or impossible. Additionally, it may be impossible to find a replacement organization that can conduct our trials in an acceptable manner and at an acceptable cost.
Adverse events in our clinical trials may force us to stop development of our product candidates or prevent regulatory approval of our product candidates.
Our product candidates may produce serious adverse events in patients during clinical trials. These adverse events could interrupt, delay or halt clinical trials of our product candidates and could result in the FDA, or other regulatory authorities requesting additional preclinical data or denying approval of our product candidates for any or all targeted indications. An institutional review board, independent data safety monitoring board, the FDA, other regulatory authorities or the Company itself may suspend or terminate clinical trials at any time. We cannot assure you that any of our product candidates will prove safe for human use.
Our competitors may develop and market drugs that are less expensive, more effective or safer than our product candidates.
The pharmaceutical market is highly competitive. It is possible that our competitors will develop and market products that are less expensive, more effective or safer than our future products or that will render our products obsolete. Other pharmaceutical and biotechnology companies may develop improved formulations of the same drugs that compete with drug products we are developing. We expect that competition from pharmaceutical and biotechnology companies, universities and public and private research institutions will increase. Many of these competitors have substantially greater
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financial, technical, research and other resources than we do. We may not have the financial resources, technical and research expertise or marketing, distribution or support capabilities to successfully compete with these competitors.
COVID-19 could continue to adversely impact our business, including our clinical trials.
The extent to which COVID-19 may continue to impact our business and clinical trials 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 outbreak, 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. COVID-19 may continue to lead to business disruptions that could severely impact our clinical trials, including: delays or difficulties in enrolling patients or maintaining scheduled study visits in our clinical trials; delays or difficulties in clinical site initiation, including difficulties in recruiting clinical site investigators and clinical site staff; diversion of healthcare resources away from the conduct of clinical trials, including the diversion of hospitals serving as our clinical trial sites and hospital staff supporting the conduct of our clinical trials; interruption of key clinical trial activities, such as clinical trial site monitoring, due to limitations on travel imposed or recommended by federal or state governments, employers and others; limitations in employee resources that would otherwise be focused on the conduct of our business or our clinical trials, including because of sickness of employees or their families, the desire of employees to avoid contact with large groups of people or as a result of the governmental imposition of “shelter in place” or similar working restrictions; delays in receiving approval from local regulatory authorities to initiate our planned clinical trials; delays in clinical sites receiving the supplies and materials needed to conduct our clinical trials; interruption in global shipping that may affect the transport of clinical trial materials, such as investigational drug product used in our clinical trials; changes in local regulations as part of a response to the COVID-19 outbreak which may require us to change the ways in which our clinical trials are conducted, which may result in unexpected costs, or to discontinue the clinical trials altogether; delays in necessary interactions with local regulators, ethics committees and other important agencies and contractors due to limitations in employee resources or forced furlough of government employees; and refusal of the FDA to accept data from clinical trials in affected geographies outside the United States.
We have a history of losses and may not achieve profitability in the future. We will need substantial additional capital to fund our operations. If we fail to obtain additional capital, we may be unable to sustain operations.
We incurred net losses of $41.1 million and $20.9 million for the fiscal years ended June 30, 2022 and 2021, respectively. As of June 30, 2022, we had cash and cash equivalents of $150.4 million and an accumulated deficit of $209.2 million. Cash used in our operating activities amounted to $39.6 million and $20.4 million for the fiscal years ended June 30, 2022 and 2021, respectively. We expect that the amount of cash used in our operating activities will continue to increase for the next several years.
We expect to continue to incur operating losses for the foreseeable future as we develop and commercialize our product candidate pipeline, and we expect to need additional capital from external sources before we will be able to begin generating revenue, if ever. If we are unable to raise additional capital, we may have to significantly delay, scale back or discontinue one or more of our research and development programs. We may be required to cease operations or seek partners for our product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available. In the absence of additional capital we may also be required to relinquish, license or otherwise dispose of rights to technologies, product candidates or products that we would otherwise seek to develop or commercialize on terms that are less favorable than might otherwise be available. If we are unable to secure additional capital, we may be required to take additional measures to reduce costs in order to conserve our cash in amounts sufficient to sustain operations and meet our obligations. These measures could cause significant delays in the development of our product candidates.
We have never generated any revenues and may never become profitable.
Since inception, we have not generated any meaningful revenue. We expect to continue to incur substantial operating losses for the next several years as we move our product candidates into clinical trials and continue our research and development efforts. To become profitable, we must successfully develop, manufacture and market our product candidates, either alone or in conjunction with possible collaborators. We may never have any revenue or become profitable.
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If any of our product candidates for which we receive regulatory approval does not achieve broad market acceptance, the revenue that we generate from its sales, if any, will be limited.
The commercial success of our product candidates for which we obtain marketing approval from the FDA or other regulatory agencies will depend upon the acceptance of these products by the medical community, including physicians, patients and payors. The degree of market acceptance of any of our approved products will depend on a number of factors, including: demonstration of clinical safety and efficacy compared to other products; prevalence and severity of any adverse effects; limitations or warnings contained in a product’s FDA-approved labeling; availability of alternative treatments; pricing and cost-effectiveness; the effectiveness of our or any future collaborators’ sales and marketing strategies; our ability to obtain and maintain sufficient third-party coverage or reimbursement from government health care programs, including Medicare and Medicaid; and the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
If our product candidates are approved, but do not achieve an adequate level of acceptance by physicians, health care payors and patients, we may not generate sufficient revenue from these products, and we may not become or remain profitable. In addition, our efforts to educate the medical community and third-party payors on the benefits of our product candidates may require significant resources and may never be successful.
Our manufacturing experience is limited.
The manufacture of drugs for clinical trials and for commercial sale is subject to regulation by the FDA under cGMP regulations and by other regulators under other laws and regulations. We cannot assure you that we can successfully manufacture our products under cGMP regulations or other laws and regulations in sufficient quantities for clinical trials or for commercial sale, or in a timely or economical manner.
Any failure or delay by our third-party suppliers on which we rely or intend to rely to provide materials necessary to develop and manufacture our drug products may delay or impair our ability to commercialize our product candidates.
We rely upon a small number of third-party suppliers for the manufacture of certain raw materials that are necessary to formulate our drug products for preclinical and clinical testing purposes. We intend to continue to rely on them in the future. We also expect to rely upon third parties to produce materials required for the commercial production of our product candidates if we succeed in obtaining necessary regulatory approvals. If we are unable to arrange for third-party sources, or do so on commercially unreasonable terms, we may not be able to complete development of or market our product candidates. In addition, third-party suppliers that we engage may be adversely impacted by COVID-19 as discussed above under “COVID-19 could continue to adversely impact our business, including our clinical trials.”
There are a small number of suppliers for raw materials that we use to manufacture our drugs. Such suppliers may not sell these raw materials at the times we need them or on commercially reasonable terms. We do not have any control over the process or timing of the acquisition of these raw materials by our manufacturers. Moreover, we currently do not have any agreements for the commercial production of these raw materials. Although we generally do not begin a clinical study unless we believe we have a sufficient supply of a product candidate to complete the clinical study, any significant delay in the supply of raw material components needed to produce a product candidate for a clinical study due to the need to replace a third-party manufacturer could considerably delay completion of our clinical studies, product testing and potential regulatory approval of our product candidates. If we or our manufacturers are unable to purchase these raw materials after regulatory approval has been obtained for our product candidates, the commercial launch of our product candidates would be delayed or there would be a shortage in supply of such product candidates, which would impair our ability to generate revenues from the sale of our product candidates.
If we successfully commercialize any of our product candidates, we may be required to establish commercial manufacturing capabilities of larger scale. In addition, as our drug development pipeline increases and matures, we will have a greater need for clinical study and commercial manufacturing capacity. We have no experience manufacturing pharmaceutical products on a commercial scale and we may need to rely on third-party manufacturers with capacity for increased production scale to meet our projected needs for commercial manufacturing, the satisfaction of which on a timely basis may not be met.
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We face potential product liability exposure, and, if successful claims are brought against us, we may incur substantial liability.
The use of our product candidates in clinical studies and the sale of any products for which we obtain marketing approval expose us to the risk of product liability claims. Product liability claims might be brought against us by consumers, health care providers, pharmaceutical companies or others selling or otherwise coming into contact with our products. If we cannot successfully defend ourselves against product liability claims, we could incur substantial liabilities. In addition, regardless of merit or eventual outcome, product liability claims may result in: impairment of our business reputation; withdrawal of clinical study participants; costs of related litigation; distraction of management’s attention from our primary business; substantial monetary awards to patients or other claimants; the inability to commercialize our product candidates; and decreased demand for our product candidates, if approved for commercial sale.
We currently have clinical trial insurance for our active clinical programs. This product liability insurance coverage for our clinical studies may not be sufficient to reimburse us for all expenses or losses we may suffer. Moreover, insurance coverage is becoming increasingly expensive, and, in the future, we may not be able to maintain insurance coverage at a reasonable cost or in sufficient amounts to protect us against losses due to liability. If and when we obtain marketing approval for any of our product candidates, we intend to expand our insurance coverage to include the sale of commercial products; however, we may be unable to obtain this product liability insurance on commercially reasonable terms. On occasion, large judgments have been awarded in class action lawsuits based on drugs that had unanticipated adverse effects. A successful product liability claim, or series of claims, brought against us could cause our stock price to decline and, if judgments exceed our insurance coverage, could decrease our cash and adversely affect our business
If we use hazardous and biological materials in a manner that causes injury or violates applicable law, we may be liable for damages.
Our research and development activities involve the controlled use of potentially hazardous substances, including toxic chemical and biological materials. We could be held liable for any contamination, injury or other damages resulting from these hazardous substances. In addition, our operations produce hazardous waste products. While third parties are responsible for disposal of our hazardous waste, we could be liable under environmental laws for any required cleanup of sites at which our waste is disposed. Federal, state, foreign and local laws and regulations govern the use, manufacture, storage, handling and disposal of these hazardous materials. If we fail to comply with these laws and regulations at any time, or if they change, we may be subject to criminal sanctions and substantial civil liabilities, which may harm our business. Even if we continue to comply with all applicable laws and regulations regarding hazardous materials, we cannot eliminate the risk of accidental contamination or discharge and our resultant liability for any injuries or other damages caused by these accidents.
If we are unable to establish sales and marketing capabilities or enter into agreements with third parties to market and sell our product candidates, we may be unable to generate any revenue.
We currently do not have dedicated staff for the sale, marketing and distribution of drug products. The cost of establishing and maintaining such a staff may exceed the cost-effectiveness of doing so. In order to market any products that may be approved by the FDA, we must build our sales, marketing, managerial and other non-technical capabilities or make arrangements with third parties to perform these services. If we are unable to establish adequate sales, marketing and distribution capabilities, whether independently or with third parties, we may not be able to generate product revenue and may not become profitable. We will be competing with many companies that currently have extensive and well-funded marketing and sales operations. Without an internal team or the support of a third party to perform marketing and sales functions, we may be unable to compete successfully against these more established companies.
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Guidelines and recommendations published by various organizations may adversely affect the use of any products for which we may receive regulatory approval.
Government agencies issue regulations and guidelines directly applicable to us and to our product candidates. In addition, professional societies, practice management groups, private health or science foundations and organizations involved in various diseases from time to time publish guidelines or recommendations to the medical and patient communities. These various sorts of recommendations may relate to such matters as product usage and use of related or competing therapies. For example, organizations like the American Diabetes Association have made recommendations about therapies in the diabetes therapeutics market. Changes to these recommendations or other guidelines advocating alternative therapies could result in decreased use of any products for which we may receive regulatory approval, which may adversely affect our results of operations.
We are at an early stage of development as a company and we do not have, and may never have, any products that generate revenues.
We are at an early stage of development as a proprietary pharmaceutical company and we do not 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. Our efforts may not lead to commercially successful products, for a number of reasons, including: our product candidates may not prove to be safe and effective in clinical trials; we may not be able to obtain regulatory approvals for our product candidates or approved uses may be narrower than we seek; we may not have adequate financial or other resources to complete the development and commercialization of our product candidates; or any products that are approved may not be accepted or reimbursed in the marketplace.
We do not expect to be able to market any of our product candidates for a number of years. If we are unable to develop, receive approval for, or successfully commercialize any of our product candidates, we will be unable to generate significant revenues. If our development programs are delayed, we may have to raise additional capital or reduce or cease our operations.
Initially, we expect to derive all of our revenues, if any, from current product candidates. As we cannot currently enter the market nor guarantee out-licensing partnerships, it is uncertain whether these candidates will achieve and sustain high levels of demand and market acceptance. Our success will depend to a substantial extent on our ability to successfully commercialize, market and / or partner our products. Failure of consumers or potential partners to accept would significantly adversely affect our revenues and profitability.
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We may not be able to use a significant portion of our net operating loss carryforwards, which could adversely affect our profitability.
Federal and state laws impose substantial restrictions on the utilization of net operating loss (“NOL”) carryforwards in the event that certain ownership changes occur as defined in Section 382 of the Internal Revenue Code (“IRC”). Due to our recent financing activities, we experienced ownership changes that have resulted in significant limitations on the future use of our NOL carryforwards. As of June 30, 2022, we have US federal NOL carryforwards of approximately $145.1 million, of which $33.4 million is expected to expire without any opportunity for utilization due to the limitations set forth in IRC Section 382. Assuming that further IRC Section 382 ownership changes do not occur, the remaining $111.7 million of NOL carryforwards consist of approximately (i) $12.8 million that is not currently subject to any limitations or expiration dates, and (ii) $98.9 million that will become available for utilization in amounts ranging from $1.2 million to $4.1 million annually. It is possible that any future ownership changes, could result in further limitations on the use of our NOL carryforwards or other tax attributes, which could adversely affect our future profitability.
If we are unable to successfully remediate the material weakness in our internal control over financial reporting, the accuracy and timing of our financial reporting may be adversely affected, which may adversely affect investor confidence in us and, as a result, the value of our common stock.
In connection with the audit of our fiscal 2022 consolidated financial statements, we noted a material weakness in our internal controls, as a result of our inability to segregate duties to prevent employees from overriding the internal control system. While we have hired additional personnel and implemented more robust accounting software, we have been unable to fully remediate this material weakness. We cannot provide assurance that these or other measures will eventually result in the elimination of the material weakness described above. We also cannot assure you that in the future we will not have additional significant deficiencies or material weaknesses.
Any failure to remediate the material weakness discussed above and to implement required new or improved controls, could harm our operating results or cause us to fail to meet our reporting obligations. Failure to achieve and maintain an effective internal control environment could cause investors to lose confidence in our reported financial information, which could have a material adverse effect on our stock price.
Operations outside the United States may be affected by different local politics, business and cultural factors, different regulatory requirements and prohibitions between jurisdictions.
We intend to seek regulatory approval in foreign countries for all of our potential products prior to commercialization. Pharmaceutical therapies are subject to rigorous preclinical testing and clinical trials and other pre-market approval requirements by regulatory authorities in foreign countries. Operations outside the United States may be affected by different local business and cultural factors, different regulatory requirements and prohibitions between jurisdictions, including the Foreign Corrupt Practices Act and local laws prohibiting corrupt payments, and changes in regulatory requirements for financing activities.
Certain Provisions of Nevada law may have anti-takeover effects.
Certain provisions of Nevada law applicable to us could also delay or make more difficult a merger, tender offer or proxy contest involving us, including Sections 78.411 through 78.444 of the Nevada Revised Statutes, which prohibit a Nevada corporation from engaging in any business combination with any "interested shareholder" (as defined in the statute) for a period of two years unless certain conditions are met. In addition, our senior management is entitled to certain payments upon a change in control.
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Risks Related to Our Intellectual Property
Our current patent positions and license portfolio may not include all patent rights needed for the full development and commercialization of our product candidates. We cannot be sure that patent rights we may need in the future will be available to license on commercially reasonable terms, or at all.
We typically develop our product candidates using compounds that we have acquired or in-licensed, including the original composition of matter patents and patents that claim the activities and methods for such compounds’ production and use. For example, in 2017 we in-licensed (i) a fully human monoclonal antibody from XOMA Corporation (“XOMA”) as well as (ii) a plasma kallikrein inhibitor portfolio from ActiveSite Pharmaceuticals (“ActiveSite”) and in consideration for such licenses, we will owe milestone payments and royalties as we progress product candidates through development.
As we learn more about the mechanisms of action and new methods of manufacture and use of these product candidates, we may file additional patent applications for these new inventions, or we may need to ask our licensors to file them. We may also need to license additional patent rights or other rights on compounds, treatment methods or manufacturing processes because we learn that we need such rights during the continuing development of our product candidates.
Although our patents may prevent others from making, using or selling similar products, they do not ensure that we will not infringe the patent rights of third parties. We may not be aware of all patents or patent applications that may impact our ability to make, use or sell any of our product candidates or proposed product candidates. For example, because we sometimes identify the mechanism of action or molecular target of a given product candidate after identifying its composition of matter and therapeutic use, we may not be aware until the mechanism or target is further elucidated that a third party has an issued or pending patent claiming biological activities or targets that may cover our product candidate. US patent applications filed after November 29, 2000 are confidential in the US Patent and Trademark Office for the first 18 months after such applications’ earliest priority date, and patent offices in other countries often publish patent applications for the first time six months or more after filing. Furthermore, we may not be aware of published or granted conflicting patent rights. Any conflicts resulting from patent applications and patents of others could significantly reduce the coverage of our patents and limit our ability to obtain meaningful patent protection. If others obtain patents with conflicting claims, we may need to obtain licenses to these patents or to develop or obtain alternative technology.
We may not be able to obtain any licenses or other rights to patents, technology or know-how from third parties necessary to conduct our business as described in this Annual Report and such licenses, if available at all, may not be available on commercially reasonable terms. Any failure to obtain such licenses could delay or prevent us from developing or commercializing our drug candidates or proposed product candidates, which would harm our business. Litigation, patent office administrative proceedings or patent interference proceedings may be necessarily brought against us or third parties, as discussed below, to enforce any of our patents or other proprietary rights or to determine the scope and validity or enforceability of the proprietary rights of such third parties.
In addition, we may face claims by third parties that our agreements with employees, contractors, or consultants obligating them to assign intellectual property to us are ineffective, or in conflict with prior or competing contractual obligations of assignment, which could result in ownership disputes. In some instances, there may not be adequate written provisions to address clearly the resolution of intellectual property rights that may arise under our agreements, and we may be limited in our ability to use, make or sell these inventions. Litigation may be necessary to resolve these disputes, and if we are not successful, we may be precluded from using certain intellectual property, or may lose our exclusive rights in that intellectual property. Either outcome could have an adverse impact on our business.
If our or our licensors’ patent positions do not adequately protect our product candidates or any future products, others could compete with us more directly, which would harm our business.
Our commercial success will depend in part on our and our licensors’ ability to obtain additional patents and protect our existing patent positions, particularly those patents for which we have secured exclusive rights, as well as our ability to maintain adequate protection of other intellectual property for our technologies, product candidates and any future products in the US and other countries. If we or our licensors do not adequately protect our intellectual property, competitors may be able to use our technologies and erode or negate any competitive advantage we may have, which could materially harm
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our business, negatively affect our position in the marketplace, limit our ability to commercialize our product candidates and delay or render impossible our achievement of profitability. The laws of some foreign countries do not protect our proprietary rights to the same extent as the laws of the US, and we may encounter significant problems in protecting our proprietary rights in these countries.
The patent positions of biotechnology and pharmaceutical companies, including our own patent position, involve complex legal and factual questions, and, therefore, validity and enforceability cannot be predicted with certainty. Patents may be challenged, deemed unenforceable, invalidated or circumvented. In addition, the coverage claimed in a patent application can be significantly reduced before the patent is issued, and patent scope can be reinterpreted by the courts after issuance. Moreover, many jurisdictions permit third parties to challenge issued patents in administrative proceedings, which may result in further narrowing or even cancellation of patent claims. We cannot predict whether the patent applications we are currently pursuing will issue as patents in any particular jurisdiction or whether the claims of any patents, if issued, will provide sufficient protection from competitors. We and our licensors will be able to protect our proprietary rights from unauthorized use by third parties only to the extent that our proprietary technologies, product candidates and any future products are covered by valid and enforceable patents or are effectively maintained as trade secrets.
The degree of future protection for our proprietary rights is uncertain, and we cannot ensure that:
We may be unable to adequately prevent disclosure of trade secrets and other proprietary information.
We rely on trade secrets to protect our proprietary know-how and technological advances, especially where we do not believe patent protection is appropriate or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our employees, consultants, outside scientific collaborators, sponsored researchers and other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information. In addition, others may independently discover our trade secrets and proprietary information. Costly and time-consuming litigation could be necessary to enforce and determine the scope of our proprietary rights. Failure to obtain or maintain trade secret protection could enable competitors to use our proprietary information to develop products that compete with our products or cause additional, material adverse effects upon our competitive business position.
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Litigation regarding patents, patent applications and other proprietary rights may be expensive and time consuming. If we are involved in such litigation, it could cause delays in bringing product candidates to market and harm our ability to operate.
Our commercial success will depend in part on our ability to manufacture, use, sell and offer to sell our product candidates and proposed product candidates without infringing patents or other proprietary rights of third parties. Although we are not currently aware of any litigation or other proceedings or third-party claims of intellectual property infringement related to our product candidates, the pharmaceutical industry is characterized by extensive litigation regarding patents and other intellectual property rights. Other parties may obtain patents in the future and allege that the use of our technologies infringes these patent claims or that we are employing their proprietary technology without authorization. Likewise, third parties may challenge or infringe upon our or our licensors’ existing or future patents. Proceedings involving our patents or patent applications or those of others could result in adverse decisions regarding the patentability of our inventions relating to our product candidates or the enforceability, validity or scope of protection offered by our patents relating to our product candidates.
Even if we are successful in these proceedings, we may incur substantial costs and divert management’s time and attention in pursuing these proceedings. If we are unable to avoid infringing the patent rights of others, we may be required to seek a license, defend an infringement action or challenge the validity of the patents in court. Patent litigation is costly and time-consuming. We may not have sufficient resources to bring these actions to a successful conclusion. In addition, if we do not obtain a license, develop or obtain non-infringing technology, fail to defend an infringement action successfully or have our patents declared invalid, we may incur substantial monetary damages; encounter significant delays in bringing our product candidates to market; or be precluded from participating in the manufacture, use or sale of our product candidates or methods of treatment requiring licenses.
If our patent and other intellectual property protection is inadequate, future sales and profits may never materialize or competitors could force our products completely out of the market.
Patents which prevent the manufacture or sale of our products may be issued to others. We may have to license those patents and pay significant fees or royalties to the owners of the patents in order to keep marketing our products. This would cause profits on sales to suffer.
We have been granted patents or licensed patents in the United States, but patent applications that have been, or may in the future be, filed by us may not result in the issuance of additional patents. The scope of any patent issued may not be sufficient to protect our technology. The laws of foreign jurisdictions in which we intend to sell our products may not protect our rights to the same extent as the laws of the United States.
In addition to patent protection, we also rely on trade secrets, proprietary know-how and technology advances. We enter into confidentiality agreements with our employees and others, but these agreements may not be effective in protecting our proprietary information. Others may independently develop substantially equivalent proprietary information or obtain access to our know-how. Litigation, which is expensive, may be necessary to enforce or defend our patents or proprietary rights and may not end favorably for us. We may also choose to initiate litigation against other parties who we come to believe are infringing these patents. If such litigation is unsuccessful or if the patents are invalidated or canceled, we may have to write off the related intangible assets and such an event could significantly reduce our earnings. Any of our licenses, patents or other intellectual property may be challenged, invalidated, canceled, infringed or circumvented and may not provide any competitive advantage to us.
Risks Related to Our Common Stock
Exercise or conversion of stock options and other convertible securities will dilute shareholder’s percentage of ownership.
In addition to the PFWs, we have issued stock options and other warrants to purchase shares of our common stock. In the future, we may grant additional stock options, warrants and convertible securities. The exercise, conversion or exchange of stock options, warrants and convertible securities will dilute the percentage ownership of our shareholders. The dilutive
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effect of the exercise or conversion of these securities may adversely affect our ability to obtain additional capital. The holders of these securities may be expected to exercise or convert such stock options, warrants and convertible securities at a time when we would be able to obtain additional equity capital on terms more favorable than such securities or when our common stock is trading at a price higher than the exercise or conversion price of the securities.
Our common stock may be delisted from the Nasdaq Capital Market (“Nasdaq”) if we fail to comply with continued listing standards.
Our common stock is currently traded on Nasdaq under the symbol “RZLT”. If we fail to meet any of the continued listing standards of Nasdaq, our common stock could be delisted from Nasdaq. The continued listing standards include specifically enumerated criteria, such as: $1.00 minimum closing bid price; shareholders’ equity of at least $2.5 million; 500,000 shares of publicly-held common stock with a market value of at least $1 million; 300 round-lot shareholders; and compliance with Nasdaq’s corporate governance requirements, as well as additional or more stringent criteria that may be applied in the exercise of Nasdaq’s discretionary authority.
Our stock price may be volatile.
The market price of our common stock is likely to be highly volatile and could fluctuate widely in price in response to various factors, many of which are beyond our control, including the following: our ability to obtain financing; additions or departures of key personnel; sales of our common stock; our ability to execute our business plan; operating results that fall below expectations; loss of any strategic relationship; regulatory developments; and economic and other external factors.
In addition, the securities markets have from time-to-time experienced significant price and volume fluctuations that are unrelated to the operating performance of particular companies. These market fluctuations may also materially and adversely affect the market price of our common stock.
Offers or availability for sale of a substantial number of shares of our common stock may cause the price of our common stock to decline.
If our shareholders sell substantial amounts of our common stock in the public market upon the expiration of any statutory holding period or lockup agreements, under Rule 144, or issued upon the exercise of outstanding PFWs, stock options, warrants or other convertible securities, it could create a circumstance commonly referred to as an “overhang” and in anticipation of which the market price of our common stock could fall. The existence of an overhang, whether or not sales have occurred or are occurring, also could make more difficult our ability to raise additional financing through the sale of equity or equity-related securities in the future at a time and price that we deem reasonable or appropriate. The shares of our restricted common stock will be freely tradable upon the earlier of: (i) effectiveness of a registration statement covering such shares and (ii) the date on which such shares may be sold without registration pursuant to Rule 144 (or other applicable exemption) under the Securities Act of 1933, as amended (“Securities Act”).
Investor relations activities and supply and demand factors may affect the price of our common stock.
We expect to utilize various techniques such as non-deal road shows and investor relations campaigns in order to generate investor awareness. These campaigns may include personal, video and telephone conferences with investors and prospective investors in which our business practices are described. We may provide compensation to investor relations firms and pay for newsletters, websites, mailings and email campaigns that are produced by third parties based upon publicly-available information concerning us. We do not intend to review or approve the content of such analysts’ reports or other materials based upon analysts’ own research or methods. Investor relations firms should generally disclose when they are compensated for their efforts, but whether such disclosure is made or complete is not under our control. In addition, investors may, from time to time, also take steps to encourage investor awareness through similar activities that may be undertaken at the expense of the investors. Investor awareness activities may also be suspended or discontinued which may impact the trading market of our common stock.
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We have no current plan to pay dividends on our common stock and investors may lose the entire amount of their investment.
We have never paid cash dividends on our common stock and do not anticipate paying any cash dividends on our common stock for the foreseeable future. Accordingly, any income derived from our common stock would only come from a rise in the market price of our common stock, which is uncertain and unpredictable. We cannot assure investors of a positive return on their investment.
Changes in U.S. tax law could adversely affect our business.
Changes to tax laws (which changes may have retroactive application) could adversely affect us or holders of our common stock. It cannot be predicted whether, when, in what form, or with what effective dates, new tax laws or regulations may be enacted under existing or new tax laws. This could result in an increase in our tax liability or require changes in our business in order to mitigate any adverse effects of changes in tax laws.
Item 1B. Unresolved Staff Comments.
Not required for smaller reporting companies.
Item 2. Properties.
In January 2019, we entered into a lease for our headquarters location at 201 Redwood Shores Parkway, Suite 315, Redwood City, CA 94065. The leased space consists of approximately 3,500 square feet of office space and provides for monthly rent of approximately $21,000 through the expiration date in March 2022. We have extended this lease on a month-to-month basis until the commencement of the lease for our new headquarters location.
In April 2022, we entered into a lease for a new headquarters location at 275 Shoreline Drive, Suite 500, Redwood City CA 94065. The leased space contains approximately 9,300 square feet of office space. We expect to occupy the property upon completion of tenant improvements by the landlord, which will indicate the commencement date of the lease. The lease provides for monthly rent of approximately $53,000 for 60 months following the commencement date.
In November 2020, we entered into a new lease in Bend, Oregon where the leased space consists of approximately 5,000 square feet of office space and provides for monthly rent of approximately $8,400 through the expiration date in February 2024.
We believe our current physical properties are sufficient and adequate to meet our current and projected requirements.
Item 3. Legal Proceedings.
Not Applicable.
Item 4. Mine Safety Disclosures.
Not applicable.
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PART II
Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Market Information
Since November 9, 2020, our common stock has traded on Nasdaq under the symbol “RZLT”.
Holders
As of September 8, 2022, there were 274 holders of record of our common stock. We believe the number of beneficial owners of our common stock is substantially greater than the number of record holders because a large portion of our outstanding common stock is held of record in broker “street names” for the benefit of individual investors.
Dividends
We have never paid cash dividends and intend to employ all available funds in the development of our business. We have no plans to pay cash dividends in the foreseeable future.
Recent Sales of Unregistered Securities
None.
Securities Authorized for Issuance Under Equity Compensation Plans
Information regarding our equity compensation plans as of June 30, 2022 is disclosed in Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters” of this Annual Report on Form 10-K.
Item 6. [Reserved]
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements which involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under the Cautionary Statement Regarding Forward-Looking Statements on page ii, the “Risk Factors” set forth in Item 1A, and elsewhere in this Annual Report. We assume no obligation to update forward-looking statements or the risk factors. You should read the following discussion in conjunction with our consolidated financial statements and related notes included in Item 8 of this Annual Report.
Certain figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.
Executive Summary
Clinical Development
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Our lead clinical asset, RZ358, is an antibody therapy that we are preparing for Phase 3 clinical development as a potential treatment for congenital HI, an ultra-rare pediatric genetic disorder. 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 and recently announced that results will also be presented at the European Society of Pediatric Endocrinology Meeting on September 16, 2022. In the study it was demonstrated that administration of RZ358 resulted in a > 50% improvement in hypoglycemic events across all doses and approximately 75% improvement at the mid (6 mg/kg) and top (9 mg/kg) doses. 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 are Phase 3 enabling and accordingly we have now initiated interactions with regulatory authorities in the US and Europe. As the next critical step in the program, we are substantially dependent upon achieving successful interaction with regulatory authorities to enable Phase 3. Among other matters, we need to obtain alignment with regulators on a number of critical criteria (the “Factors”) including but not limited to the following: (i) overall study design parameters including the potential inclusion of a placebo control arm; (ii) the total number of subjects in the study; (iii) the doses we intend to study in Phase 3 and the permissible ages of children that we will be permitted to enroll in the study; (iv) the total duration of dosing in the study; and (v) the primary and secondary endpoints to be evaluated in the study.
Our objective is to complete the regulatory interactions prior to the end of the first quarter of calendar year 2023 which would facilitate initiation of a Phase 3 study in the first half of calendar year 2023. To the extent that we are unable to achieve satisfactory alignment with regulators with regard to the Factors and other matters pertaining to a Phase 3 study, the success of the RZ358 development program could be significantly impaired and this would have a material and adverse impact on our prospects and results of operations.
Our second clinical asset, RZ402, is an oral PKI being developed as a potential therapy for DME. In calendar year 2022 we completed Phase 1 clinical development for RZ402 including an MAD study that validated and supported the potential for once daily oral dosing. The MAD study 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. The MAD study results showed that RZ402 was generally safe and well-tolerated, including at higher doses than previously tested in the SAD study. There were no serious adverse events, adverse drug reactions or identified risks.
We are advancing developmental activities toward a Phase 2a proof-of-concept study, which we plan to initiate during the fourth quarter of calendar year 2022.
Financing Activities
Immediately following our announcement of the success of the RIZE study, we initiated financing activities which resulted in the receipt of gross proceeds of approximately $130.0 million between May and July of 2022. Specifically, On May 1, 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 (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. 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.
Upon closing of the 2022 RDO, we did not have a sufficient number of shares of common stock available to permit exercise of any of the Class B PFWs. Therefore, the Class B PFWs were contingently exercisable upon the approval by our shareholders of an increase in the number of authorized shares of common stock (the “Shareholder Approval”). On June
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16, 2022, the Shareholder Approval occurred which resulted in an increase in our authorized shares of common stock from 40.0 million shares to 100.0 million shares. As a result of this contingency, the Class B PFWs were accounted for as a derivative liability in our consolidated financial statements until the Shareholder Approval was obtained.
The closing for the Private Placement occurred in July 2022 whereby we received gross proceeds of approximately $12.3 million in exchange for the issuance of approximately 3.2 million shares of common stock at a purchase price of $3.80 per share. The net proceeds from the Private Placement amounted to approximately $11.6 million after deduction of $0.7 million for underwriting commissions.
The additional funding provides us with the wherewithal to fund a Phase 3 clinical program for RZ358 as well as a Phase 2 proof of concept study for RZ402.
Termination of EDA and Purchase Agreement
We entered an Equity Distribution Agreement (“EDA”) with Oppenheimer & Co. Inc. (“Oppenheimer”) in December 2020 and a purchase agreement (“Purchase Agreement”) with Lincoln Park Capital Fund, LLC (“LPC”) in August 2021. In May 2022, we provided notices to Oppenheimer and LPC whereby the EDA and the Purchase Agreement were terminated. As a result of these termination notices, no further equity securities are issuable under either agreement.
Termination of Loan Agreement
On April 14, 2021, we entered into a $30.0 million Loan and Security Agreement (the “Loan Agreement”) with Solar Investment Corp. (“SLR”) as collateral agent, and the parties signing the Loan Agreement from time to time as lenders, including SLR in its capacity as a lender.
On June 30, 2022, we paid off the outstanding loan amount of $15.0 million in full and terminated the Loan Agreement in accordance with its terms. In addition to the repayment of principal and accrued interest, we paid (i) a prepayment fee equal to 2.00% of the outstanding principal balance for a total of $300,000, and (ii) a final fee equal to 4.75% of the aggregate amount of the term loans funded for a total 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 terminated Loan Agreement were released on June 30, 2022.
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 expiration of the lease in July 2027. The lease provides for a six-month rent abatement period beginning upon commencement of the lease term which is expected to occur in September 2022
Factors Impacting our Results of Operations
We have not generated any meaningful revenues since our inception in March 2010. Over the last several years, we have conducted private placements and public offerings to raise additional capital, adopted a licensing model to pursue development of product candidates, conducted pre-clinical and clinical trials, and conducted other research and development activities on our pipeline of product candidates.
Due to the time required to conduct clinical trials and obtain regulatory approval for our product candidates, we anticipate it will be some time before we generate substantial revenues, if ever. We expect to generate operating losses for the foreseeable future; therefore, we expect to continue efforts to raise additional capital to maintain our current operating plans over the next several years. We cannot assure you that we will secure such financing or that it will be adequate for the long-term execution of our business strategy. Even if we obtain additional financing, it may be costly and may require us to agree to covenants or other provisions that will favor new investors over our existing shareholders.
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The COVID-19 pandemic and its adverse effects continue to affect the locations where we, our manufacturers, suppliers or third-party business partners conduct business. Although we have continued our operations and clinical trials to date, we have experienced delays in clinical trials, and we could experience additional delays in our planned clinical trials, which could materially adversely impact our business, results of operations and overall financial performance in future periods. In addition, we may experience an adverse impact from changes in how we and companies worldwide conduct business due to the COVID-19 pandemic, including but not limited to continued restrictions on travel and in-person meetings, delays in future site activations and future enrollment of clinical trials, prioritization of hospital resources toward the COVID-19 pandemic effort, delays in review by the FDA and comparable foreign regulatory agencies, and disruptions in our supply chain for our product candidates. As of the filing date of this Annual Report, the extent to which COVID-19 may impact our financial condition, results of operations or guidance is uncertain. The effect of the COVID-19 pandemic will not be fully reflected in our results of operations and overall financial performance until future periods. See the section entitled “Risk Factors” under Item 1A of this Annual Report for further discussion of the possible impact of the COVID-19 pandemic on our business.
Key Components of Consolidated Statements of Operations
Research and development expenses. Research and development (“R&D”) expenses consist primarily of clinical trial costs, compensation and benefits for our personnel engaged in R&D activities, licensing costs, and consultants and outside services. Our R&D 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”) 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 based on the personnel and other resources devoted to G&A activities. G&A expenses also include travel, legal, auditing, investor relations and other costs primarily related to our status as a public company.
Gain from change in fair value of derivative liabilities, net. We recognize derivative liabilities if we issue stock options and warrants but don’t have sufficient authorized shares of common stock to accommodate all potential exercise. Under these circumstances, accounting as a derivative liability is required since the possibility exists that we could have been required to settle stock options and warrants in cash. Such derivative liabilities are recorded at fair value on the date that the deficiency occurred and subsequently adjusted to fair value at the end of each reporting period through the date the deficiency is cured. We also recognize liabilities for embedded derivatives in our debt agreements. Derivative liabilities are adjusted to fair value at the end of each reporting period until the derivative liability contracts are settled, expire, or meet the conditions for equity classification. Changes in fair value are reflected as gains and losses in our consolidated statements of operations. Gains and losses reflected prior to the date a deficiency is cured are not subsequently reversed.
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 and other income. Interest and other income consist primarily of interest income earned on temporary cash investments.
Discount on issuance of derivative liability. For derivative liabilities issued at a discount to the grant date fair value of the financial instrument, an expense is recognized on the issuance date for the amount of the discount.
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
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resulting in additional financing costs arising from origination, exit and final fees, and other incremental and direct costs incurred to consummate the financing, among others.
Loss on extinguishment of debt. When we repay our debt arrangements prior to the maturity date, we evaluate the terms to determine if the repayment should be accounted for as a troubled debt restructuring, a modification or an extinguishment. If we conclude that accounting as an extinguishment is required, the extinguishment charge includes the write-off of any unaccreted DDIC, prepayment premiums required under the debt agreement, and professional fees incurred to complete the transaction.
Critical Accounting Policies and Significant Judgments and Estimates
Overview
Our management’s discussion and analysis of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of the 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 this Annual Report, we believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Gain from Change in Fair Value of Derivative Liabilities
We recognize derivative liabilities if we issue stock options and warrants but do not have sufficient authorized shares of common stock to accommodate all potential exercises. Under these circumstances, accounting as a derivative liability is required since the possibility exists that we could have been required to settle these financial instruments in cash. Such derivative liabilities are recorded at fair value on the date that the deficiency occurred and subsequently adjusted to fair value at the end of each reporting period through the date the deficiency is cured.
We recognized a derivative liability for a deficiency in our authorized shares of common stock that existed from February 17, 2021, until the deficiency was cured on May 26, 2021. We 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. Fair value of the stock options and warrants associated with the deficiency were computed on the date the deficiency arose and at the end of each reporting period using the Black-Scholes-Merton (“BSM”) option-pricing model. Key assumptions inherent in this valuation model include the historical volatility of our common stock, the remaining contractual term of the options and warrants, and the market price of our common stock on the respective valuation dates.
We also recognized a derivative liability for the Class B PFWs issued in connection with the 2022 RDO financing due to the restrictions on exercisability until the authorized share deficiency was cured on Jun 16, 2022, upon receipt of shareholder approval for an increase in our authorized shares.
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Research and Development
Research and development costs are expensed as incurred. Intangible assets related to in-licensing costs under license agreements with third parties are charged to expense unless we are able to determine that the licensing rights have an alternative future use in other research and development projects or otherwise.
Clinical Trial Accruals
Clinical trial costs are a component of research and development expenses. We accrue and charge to expenses clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. 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 research and development activities are deferred and recognized as expense in the period that the related goods are delivered, or services are performed.
Share-Based Compensation Expense
We measure the fair value of services received in exchange for all stock options granted based on the fair market value of the award as of the grant date. We compute the fair value of stock options with time-based vesting using the BSM option-pricing model and recognize the cost of the equity awards over the period that services are provided to earn the award. For awards granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite service period as if the award was, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for 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.
In July 2019, we granted stock options with vesting that is dependent on achieving certain market, performance and service conditions (“Hybrid Options”). For purposes of recognizing compensation cost, we determine the requisite service period as the longest of the derived, implicit and explicit vesting periods for each of the market, performance and service conditions, respectively. Due to achievement of the performance condition, we began recognizing compensation cost using the grant date fair value in November 2020 and continuing through the end of the requisite service period. Determination of the requisite service period of the Hybrid Options was based on the date that the performance condition was achieved. If the Hybrid Options do not ultimately become exercisable due to the option holders’ failure to achieve the required service period, any previously recognized compensation cost will be reversed. However, if the Hybrid Options do not ultimately become exercisable due to the failure to achieve the market condition, previously recognized compensation cost will not be reversed.
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Results of Operations
Results of operations for the fiscal years ended June 30, 2022 and 2021 reflect net losses of approximately $41.1 million and $20.9 million, respectively. Our consolidated statements of operations for the fiscal years ended June 30, 2022 and 2021, along with the changes between periods, are presented below (in thousands, except percentages):
| Changes |
| ||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
Operating expenses: |
|
|
|
|
|
|
|
| ||||
Research and development: |
| $ | 32,486 |
| $ | 14,987 |
| $ | 17,499 |
| 117 | % |
General and administrative: |
| 9,357 |
| 7,907 |
| 1,450 |
| 18 | % | |||
Total operating expenses |
| 41,843 |
| 22,894 |
| 18,949 |
| 83 | % | |||
Operating loss |
| (41,843) |
| (22,894) |
| (18,949) |
| 83 | % | |||
Non-operating income (expense): |
|
|
|
|
|
|
|
| ||||
Gain from change in fair value of derivative liabilities, net |
| 6,545 |
| 1,789 |
| 4,756 |
| 266 | % | |||
Employee retention credit |
| 231 |
| 515 |
| (284) |
| (55) | % | |||
Interest and other income |
| 80 |
| 63 |
| 17 |
| 27 | % | |||
Underwriting discount on issuance of derivative | (2,495) | — | (2,495) | 100 | % | |||||||
Interest expense |
| (1,807) |
| (375) |
| (1,432) |
| 382 | % | |||
Loss on extinguishment of loan agreement | (1,771) |
| — | (1,771) | 100 | % | ||||||
Total non-operating income (expense), net |
| 783 |
| 1,992 |
| (1,209) |
| (61) | % | |||
Net loss | $ | (41,060) | $ | (20,902) | $ | (20,158) |
| 96 | % |
Presented below is a discussion of the key factors that resulted in changes in our results of operations for these periods.
Revenue. As a clinical stage company, we did not generate any revenue for the fiscal years ended June 30, 2022 and 2021. We are at an early stage of development and do not currently have any commercial products. Our existing product candidates will require extensive additional clinical evaluation, regulatory review, significant marketing efforts and substantial investment before they generate any revenues. We do not expect to be able to market any of our product candidates for several years.
Research and Development Expenses. R&D expenses for the fiscal years ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):
| Increase |
| ||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
Total R&D expenses | $ | 32,486 | $ | 14,987 | $ | 17,499 |
| 117 | % |
The increase of $17.5 million was primarily attributable to an increase of $13.6 million for our two clinical candidate programs, of which the RZ358 program had an increase in spending of $8.2 million and the RZ402 program had an increase in spending of $5.4 million.
The RZ358 program cost increase of $8.2 million consisted of an increase of $6.8 million for higher spending for drug substance and drug product manufacturing related activities and an increase of $0.6 million in clinical operations related activities. Increased expenditures were incurred as we progressed in the ongoing Phase 2b study, reported topline data in May 2022, and began manufacturing activities for a Phase 3 study that is planned to be initiated during the fiscal year ending June 30, 2023. The remaining increase of $0.8 million is attributable to ongoing toxicology and quality related spending to support the clinical development of the RZ358 program.
The RZ402 program cost increase of $5.4 million was primarily attributable to a $2.2 million increase in clinical operation costs for the three Phase 1 studies, a $1.4 million increase in manufacturing related activities for drug product and drug
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substance activities to support the ongoing Phase 1 studies and planned Phase 2 study which is expected to be initiated in the fiscal year ending June 30, 2023. The remaining $1.8 million increase in costs for the RZ402 program are attributable to ongoing toxicology and development costs to support the clinical progression of the program.
For the fiscal year ended June 30, 2021, we incurred clinical trial costs of approximately $4.7 million that was primarily attributable related to $3.3 million of costs for our RZ358 Phase 2b program and $1.1 million of costs for the RZ402 SAD study that was initiated in January 2021.
In addition to the increases in the RZ358 and RZ402 programs noted above in the fiscal year ended June 30, 2022, an increase of approximately $1.0 million was incurred related to licensing costs. Licensing costs of $2.0 million were incurred in the fiscal year ended June 30, 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 fiscal year ended June 30, 2021 under our license agreement with ActiveSite, upon acceptance of our IND by the FDA in December 2020.
For the fiscal year ended June 30, 2022, compensation and benefits amounted to approximately $9.7 million, which included $8.3 million related to cash-based compensation and $1.4 million related to share-based compensation costs. For the fiscal year ended June 30, 2022, compensation and benefits for our R&D workforce increased by approximately $2.5 million primarily attributable to an increase in the average number of R&D employees from 15 for the fiscal year ended June 30, 2021 to 26 for the fiscal year ended June 30, 2022.
For the fiscal year ended June 30, 2021, compensation and benefits amounted to approximately $7.2 million, which included $5.3 million related to cash-based compensation and $1.9 million related to share-based compensation costs.
The remaining increase in R&D costs incurred in the fiscal year ended June 30, 2022 of approximately $0.4 million is mainly attributable to facilities and employee related travel costs allocable to R&D due to the increased headcount as noted above.
General and Administrative Expenses. G&A expenses for the fiscal years ended June 30, 2022 and 2021 were as follows (in thousands, except percentages):
| Increase |
| ||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
Total G&A expenses | $ | 9,357 | $ | 7,907 | $ | 1,450 |
| 18 | % |
The increase in G&A expenses of $1.5 million for the fiscal year ended June 30, 2022 was primarily attributable to an increase in professional fees associated with product candidate market research assessments, consulting services, and strategic advisory services related to ongoing financing efforts, totaling approximately $0.8 million.
The remaining increase in G&A costs of approximately $0.6 million is mainly attributable to facilities and employee related costs allocable to G&A. With reductions in COVID related travel restrictions, employees were able to travel and support the financing activities that occurred during the current fiscal year.
Change in Fair Value of Derivative Liabilities. For the fiscal year ended June 30, 2022, we recognized a gain of $6.6 million that was primarily due to a reduction of $0.60 per share in our stock price, resulting in changes in fair value of the derivative liability related to our authorized share deficiency that arose when we entered into an underwriting agreement for issuance of the Class B PFWs on May 4, 2022. This authorized share deficiency existed to June 16, 2022 when our shareholders approved an increase in our authorized shares of common stock. Our stock price decreased from $3.80 per share on May 4, 2022, to $3.20 per share on June 16, 2022 when the authorized share deficiency was cured.
For the fiscal year ended June 30, 2021, we recognized a gain of $1.8 million that was primarily due to a reduction of $4.30 per share in our stock price that drove a decrease in in fair value of the derivative liability related to an authorized
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share deficiency that arose in February 2021. This deficiency existed from February 17, 2021 until May 26, 2021 when our shareholders approved an increase in our authorized shares of common stock from 10.0 million shares to 40.0 million shares. Our stock price declined from $11.99 per share on February 17, 2021 to $7.69 per share on May 26, 2021 when the authorized share deficiency was cured.
Employee Retention Credit. Employee retention credit income was $0.2 million for the fiscal year ended June 30, 2022. This income is a result of CARES Act benefits for the period of July 1, 2021 through September 30, 2021. Employee retention credit income was $0.5 million for the fiscal year ended June 30, 2021. This income was a result of CARES Act benefits we qualified for during the period of January 1, 2021 through June 30, 2021.
Underwriting discount on issuance of derivative liability. For the fiscal year ended June 30, 2022, we recognized an expense of approximately $2.5 million related to an underwriting discount related to the issuance of the Class B PFWs. The fair value of the Class B PFWs on the date of issuance amounted to $41.6 million and the Class B PFWs were sold to the underwriter for a discounted price of $39.1 million. Accordingly, an expense was recognized on the issuance date for the amount of the underwriting discount of $2.5 million.
Interest Expense. Interest expense for approximately $1.8 million for the fiscal year ended June 30, 2022. Interest expense for the fiscal year ended June 30, 2022 was solely attributable to the Loan Agreement entered in April 2021 and consisted of (i) accretion of discount of $0.4 million, and (ii) interest expense of $1.4 million based on the contractual rate of approximately 8.9%. Interest expense was approximately $0.4 million for the fiscal year ended June 30, 2021. Interest expense for the fiscal year ended June 30, 2021 was solely attributable to Loan Agreement and consisted of (i) accretion of discount of $0.1 million, and (ii) interest expense of $0.3 million based on the contractual rate of approximately 8.9%.
Loss on extinguishment of loan agreement. Loss on extinguishment of the Loan Agreement was approximately $1.8 million for the fiscal year ended June 30, 2022, whereas we did not incur any losses on extinguishment for the fiscal year ended June 30, 2021. The extinguishment loss of $1.8 million was attributable to our exercise of the prepayment option under the Loan Agreement that required a 2.00% prepayment penalty of $0.3 million and the unaccreted discount of $1.5 million was written off.
Income Taxes. For the fiscal year ended June 30, 2022 and 2021, we did not recognize any income tax benefit due to our net losses and our determination that a full valuation allowance was required for our deferred income tax assets.
Liquidity and Capital Resources
Short-term Liquidity Requirements
As of June 30, 2022, we had cash and cash equivalents of $150.4 million and working capital was approximately $149.6 million. We have incurred cumulative net losses of $209.2 million since our inception and as a clinical stage company we have not generated any meaningful revenue to date.
Accordingly, 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 fiscal years ended June 30, 2022 and 2021, we received net proceeds from the issuance of equity securities of $165.2 million and $37.5 million, respectively. The completion of these equity financings is the primary factor that resulted in our cash and cash equivalents balance of $150.4 million as of June 30, 2022. Furthermore, in July 2022 we closed on the Private Placement of shares of common stock that resulted in additional net proceeds of $11.6 million. For further information about the key terms and results of our debt and equity financing activities, please refer to the discussion above under the caption Executive Summary and the discussion below under the caption 2021 Underwritten Public Offering and 2021 Registered Direct Offering.
For the fiscal year ended June 30, 2022, we had cash outflows of $16.3 million due to our election to terminate the Loan Agreement discussed above under the caption Executive Summary. Upon termination of the Loan Agreement, our only remaining contractual obligation is to pay an exit fee of $600,000 which would be triggered if we entered into certain change of control transactions or similar events defined in the exit fee agreement.
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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. Cash payments related to existing contractual obligations for the fiscal year ending June 30, 2023 include approximately (i) $0.3 million under all operating lease agreements, (ii) a potential milestone payment to XOMA of $5.0 million due upon dosing of the first patient in a Phase 3 clinical trial for RZ358 that we expect will occur in the first half of calendar year 2023, and (iii) a potential milestone payment to ActiveSite of $3.0 million due upon dosing of the first patient in a Phase 2 clinical trial for RZ402 that we expect will occur in the fourth quarter of calendar year 2022. Due to uncertainties in the timing associated with clinical trial activities, it is not possible to accurately determine whether the milestone payments to XOMA and ActiveSite will occur during the fiscal year ending June 30, 2023.
Based on our cash and cash equivalents balance of $150.4 million as of June 30, 2022, we believe we have adequate capital resources to meet all of our contractual obligations and conduct all planned activities to advance our clinical trials during the fiscal year ending June 30, 2023.
Long-term Liquidity Requirements
Our most significant long-term contractual obligations consist of milestone payments up to $35.0 million payable to XOMA and up to $45.5 million payable to ActiveSite, for a total of $80.5 million. Of this total, we expect that $5.0 million will be payable to XOMA and $3.0 million will be payable to ActiveSite during the fiscal year ending June 30, 2023. Accordingly, the remainder of $72.5 million is considered a long-term liquidity requirement. Our current expectations are that we will incur additional milestone payments of $5.0 million payable to XOMA for the year ending June 30, 2024. Due to uncertainties in the timing associated with clinical trial activities, there is even greater uncertainty in forecasting the milestone payments to XOMA and ActiveSite during the fiscal year ending June 30, 2024 and thereafter.
In addition to our licensing obligations, we also have long-term contractual obligations under existing operating lease agreements of approximately $0.6 million to $0.7 million for each of the fiscal years ending June 30, 2024 through 2027. Based on our current forecast, we expect that our existing cash and cash equivalents will be sufficient to fund our contractual obligations and conduct all planned activities to advance our clinical trials for at least the first half of the fiscal year ending June 30, 2024. Therefore, we will need to obtain additional equity or debt financing in order to fund all of our long-term liquidity requirements.
Presented below is additional discussion about the ongoing requirements pursuant to our license agreements with XOMA and ActiveSite, along with additional information about our ongoing financing activities that impacted our liquidity and capital resources for the fiscal year ended June 30, 2022.
XOMA License Agreement
In December 2017, we entered into a license agreement (“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.
Upon the achievement of certain clinical and regulatory events, we will be required to make up to $35.0 million in aggregate milestone payments to XOMA. The first such milestone payment of $2.0 million was triggered upon enrollment of the last patient in our ongoing phase 2 clinical study in January 2022. The next milestone payment of $3.0 million will be due upon the enrollment of the first patient in a Phase 3 study, which we believe will occur in the first half of calendar year 2023. 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 June 30, 2022, 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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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 PKI portfolio. 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 an aggregate of $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 next milestone payment for $5.0 million will be due upon enrollment of the first patient in a Phase 2 study, which we expect to occur in the fourth quarter of calendar year 2022. We will also be required to pay royalties equal to 2.0% of any sales of products that use the PKI Program. Through June 30, 2022, no events have occurred that would result in the requirement to make additional milestone payments and no royalties have been incurred.
2021 Underwritten Public Offering and 2021 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 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. The Company granted the Underwriters a 30-day option to purchase up to an additional 1,153,845 shares of its common stock in the 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 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 Underwritten Offering amounted to approximately $47.2 million.
Concurrently with the Underwritten Offering, Handok, an entity affiliated with a member of the Board of Directors, entered into a subscription agreement for a registered direct offering (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.
Cash Flows Summary
Presented below is a summary of our operating, investing and financing cash flows for the years ended June 30, 2022 and 2021 (in thousands):
| 2022 |
| 2021 |
| Change | ||||
Net cash provided by (used in): |
|
|
| ||||||
Operating activities | $ | (39,616) | $ | (20,441) | $ | (19,175) | |||
Investing activities |
| — |
| — |
| — | |||
Financing activities |
| 148,979 |
| 51,533 |
| 97,446 |
28
Cash Flows Used in Operating Activities
For the fiscal years ended June 30, 2022 and 2021, cash flows used in operating activities amounted to $39.6 million and $20.4 million, respectively. The key components in the calculation of our cash used in operating activities are as follows (in thousands):
| 2022 |
| 2021 |
| Change | ||||
Net loss | $ | (41,060) | $ | (20,902) | $ | (20,158) | |||
Non-cash expenses |
| 8,331 |
| 4,370 |
| 3,961 | |||
Non-cash gains, net |
| (6,545) |
| (1,789) |
| (4,756) | |||
Prepayment premium | 300 | — | 300 | ||||||
Changes in operating assets and liabilities, net |
| (642) |
| (2,120) |
| 1,478 | |||
Total | $ | (39,616) | $ | (20,441) | $ | (19,175) |
For the fiscal year ended June 30, 2022, our net loss was $41.1 million compared to $20.9 million for the fiscal year ended June 30, 2021. For further discussion about changes in our operating results for the fiscal years ended June 30, 2022 and 2021, please refer to Results of Operations above.
For the fiscal year ended June 30, 2022, our non-cash expenses of $8.3 million primarily consisted of share-based compensation expense of $3.7 million, a discount on the issuance of the Class B PFWs derivate liability of $2.5 million, a loss on extinguishment of debt of $1.4 million, accretion of debt discount and issuance costs of $0.4 million, and non-cash lease expense of $0.2 million. For the fiscal year ended June 30, 2021, our non-cash expenses of $4.4 million primarily consisted of share-based compensation expense of $4.0 million, non-cash lease expense of $0.3 million, and accretion of debt discount of $0.1 million.
For the fiscal year ended June 30, 2022, non-cash gains consisted of a gain of $6.5 million attributable to changes in fair value of the Class B PFW derivative liability related to a deficiency in our authorized shares that existed from May 4, 2022 until June 16, 2022. For the fiscal year ended June 30, 2021, non-cash gains consisted of a gain of $1.8 million were attributable to a gain from change in fair value of a derivative liability related to a deficiency in our authorized shares that existed from February 17, 2021 until May 26, 2021.
For the fiscal year ended June 30, 2022, we paid a prepayment premium of $0.3 million in connection with the termination of the Loan Agreement. The cash payment for this amount is included as a financing cash outflow and as a component of our net loss. Accordingly, an adjustment is required to remove this amount from our operating cash outflows. A similar charge was not incurred for the year ended June 30, 2021.
For the fiscal year ended June 30, 2022, net changes in operating assets and liabilities reduced operating cash flow by $0.6 million, primarily driven by an increase in prepaid expenses and other assets and other of $0.9 million that was primarily related to prepayments for clinical trials and manufacturing activities, partially offset by a decrease other accrued liabilities of $0.2 million. For the fiscal year ended June 30, 2021, net changes in operating assets and liabilities reduced operating cash flow by $2.1 million, primarily driven by (i) cash payments to reduce our license fee obligations to XOMA by $1.8 million; (ii) an increase in prepaid expenses and other assets and other of $0.4 million that was primarily related to prepayments for clinical trials, and (iii) a decrease in other accrued liabilities of $0.1 million. These payments that reduced our operating cash flow were partially offset by an increase in accounts payable of $0.1 million.
Cash Flows Provided by Investing Activities
We did not have any cash flows from investing activities for the fiscal years ended June 30, 2022 and 2021.
29
Cash Flows Provided by Financing Activities
Net cash provided by financing activities for the fiscal year ended June 30, 2022 amounted to $149.0 million. This amount included (i) $50.7 million received from a the 2021 Underwritten Offering of Units in October 2021 for the issuance of approximately 6.8 million shares of common stock at a purchase price of $6.50 per share and issuance of 1.7 million of the 2021 PFWs at a purchase price of $6.49 per share, (ii) $5.0 million received from the 2021 RDO related to the issuance of common stock in October 2021 for the purchase of approximately 0.8 million shares at a purchase price of $6.50 per share, (iii) $110.5 million of proceeds after underwriter discounts from the 2022 RDO in May 2022 for the purchase of approximately 18.0 million shares of common stock at a purchase price of $3.80 per share and purchase of an aggregate of approximately 12.9 Class A PFWs and Class B PFWs at a purchase price of $3.799 per share, and (iv) $2.7 million in gross proceeds for the issuance of common stock under the Purchase Agreement and the Agent EDA. The total proceeds from equity financing activities amounted to $168.9 million and were partially offset by payments of $3.7 million related to financial advisory fees and other costs of equity financings. Cash inflows from financing activity was also offset by $16.3 million in financing cash outflows due to the early payment of the SLR Term Loan in June 2022.
For the fiscal year ended June 30, 2022, we used cash of $0.3 million for payment of additional debt discount and issuance costs under the Loan Agreement, and $16.0 million for contractual payments required to terminate the Loan Agreement on June 30, 2022. The contractual payments included (i) repayment of the principal balance of the term A loan for $15.0 million, (ii) a prepayment fee equal to 2.00% of the outstanding principal balance for a total of $0.3 million, and (ii) a final fee equal to 4.75% of the aggregate amount of the term loans funded for a total of $0.7 million. The security interests and liens granted in April 2021 when we entered into the Loan Agreement were released on June 30, 2022.
Net cash provided by financing activities for the fiscal year ended June 30, 2021 amounted to $51.5 million. This amount included (i) $41.0 million received from an October 2020 equity financing that provided for the issuance of units consisting of 2.5 million shares of common stock and warrants to purchase 0.8 million shares of common stock, and (ii) $15.0 million of gross proceeds from the term A loan pursuant to the Loan Agreement entered into in April 2021. The total proceeds from equity and debt financing activities amounted to $56.0 million and were partially offset by payments of $3.7 million related to financial advisory fees and other costs of the October 2020 equity financing and payment of $0.7 million for debt discount and issuance costs related to the Loan Agreement.
Off-Balance Sheet Arrangements
During the fiscal years ended June 30, 2022 and 2021, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special purpose entities, which were established for the purpose of facilitating off-balance sheet arrangements.
Recently Issued Accounting Pronouncements
See Note 1 to our consolidated financial statements included in Item 8 of this Annual Report regarding the impact of certain accounting pronouncements on our consolidated financial statements.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
30
Item 8. Financial Statements and Supplementary Data.
TABLE OF CONTENTS
| Page | |
Report of Independent Registered Public Accounting Firm ( | 32 | |
Financial Statements: | ||
34 | ||
Consolidated statements of operations for the fiscal years ended June 30, 2022 and 2021 | 35 | |
Consolidated statements of shareholders’ equity for the fiscal years ended June 30, 2022 and 2021 | 36 | |
Consolidated statements of cash flows for the fiscal years ended June 30, 2022 and 2021 | 37 | |
39 |
31
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Rezolute, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Rezolute, Inc. (the “Company”) as of June 30, 2022 and 2021, the related consolidated statements of operations, stockholders' equity, and cash flows for each of the years in the two-year period ended June 30, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of the Company as of June 30, 2022 and 2021, and the results of their operations and their cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America (“US GAAP”).
Basis for Opinion
The Company's management is responsible for these financial statements. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
32
To the Stockholders and Board of Directors of Rezolute, Inc.
Critical Audit Matter Description
As described in Note 7, the Company issued pre-funded warrants (“PFWs”) pursuant to underwritten offerings completed in October 2021 as part of the 2021 Registered Direct Offering (2021 RDO) and May 2022 as part of the 2022 Registered Direct Offering (2022 RDO). The Company performed an analysis of the pre-funded warrants at each period to ensure the classification of the PFWs is accurate as a liability or equity. The pre-funded warrants issued in October 2021 and the Class A pre-funded warrants in the May offering were determined to be equity classified. Due to the share deficiency related to the 2022 RDO for the Class B pre-funded warrants, the Company recognized a derivative liability until the authorized share deficiency was cured on June 16, 2022.
We identified the Company's accounting treatment of these warrants as a critical audit matter. The principal considerations for our determination include the complex auditor judgement required to evaluate appropriate the classification and disclosure of the warrants and the need to consult outside of the engagement team with one of our accounting technical specialists.
How the Critical Audit Matter Was Addressed in the Audit
The primary procedures we performed to audit this critical audit matter included the following:
● | We obtained an understanding of the internal controls over the accounting and disclosure for issuance of contracts in the Company’s equity including warrants issued during the year. |
● | We reviewed the respective contracts and agreements for identification of all significant rights and obligations relevant to the assessment over proper accounting and disclosure of the warrants in accordance with US GAAP. |
● | We obtained legal confirmation from the Company’s outside counsel of certain rights and obligations pertaining to the underlying security purchase agreements which were relevant to assessing equity versus liability classification. |
● | We evaluated management’s application of the accounting guidance for equity versus liability classification to the terms of the warrant agreements, including satisfaction of all key conditions necessary for equity classification. |
● | We evaluated the conditions necessary to ensure the Company had sufficient authorized shares to cover the issuance of all contracts in the Company’s equity and the presentation associated with the reclassification of liability classified warrants to equity upon satisfying the conditions necessary for equity classification. |
● | We assessed the adequacy of disclosure of the warrant contracts, including related fair value measurements. |
/s/ Plante & Moran, PLLC
We have served as the Company’s auditor since 2013.
Cleveland, Ohio
September 15, 2022
33
REZOLUTE, INC.
Consolidated Balance Sheets
June 30, 2022 and 2021
(In Thousands, Except Per Share Amounts)
| 2022 |
| 2021 | |||
Assets | ||||||
Current assets: |
|
|
|
| ||
Cash and cash equivalents | $ | | $ | | ||
Prepaid expenses and other | | | ||||
Total current assets |
| |
| | ||
Long-term assets: | ||||||
Right-of-use assets |
| |
| | ||
Deposits and other | | | ||||
Property and equipment, net |
| |
| | ||
Total assets | $ | | $ | | ||
Liabilities and Shareholders' Equity |
|
|
|
| ||
Current liabilities: |
|
|
|
| ||
Accounts payable | $ | | $ | | ||
Accrued liabilities: |
|
| ||||
Insurance premiums | | | ||||
Compensation and benefits | — | | ||||
Accrued clinical and other | | | ||||
Current portion of operating lease liabilities | | | ||||
Total current liabilities |
| |
| | ||
Long term liabilities: | ||||||
Long term debt, net of discount |
| — |
| | ||
Operating lease liabilities, net of current portion |
| |
| | ||
Embedded derivative liabilities | | | ||||
Total liabilities |
| |
| | ||
Commitments and contingencies (Notes 3, 4, 7, 10 and 11) |
|
|
|
| ||
Shareholders' equity: |
|
|
|
| ||
Preferred stock, $ |
|
| ||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Accumulated deficit |
| ( |
| ( | ||
Total shareholders’ equity |
| |
| | ||
Total liabilities and shareholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
34
REZOLUTE, INC.
Consolidated Statements of Operations
For the Fiscal Years Ended June 30, 2022 and 2021
(In Thousands, Except Per Share Amounts)
2022 |
| 2021 | ||||
Operating expenses: |
|
|
| |||
Research and development | $ | |
| $ | | |
General and administrative | |
| | |||
Total operating expenses | |
| | |||
Operating loss | ( |
| ( | |||
Non-operating income (expense): |
|
|
| |||
Gain from change in fair value of derivative liabilities, net | | | ||||
Employee retention credit | | | ||||
Interest and other income | | | ||||
Underwriting discount on issuance of derivative | ( | — | ||||
Interest expense | ( |
| ( | |||
Loss on extinguishment of loan agreement | ( | — | ||||
Total non-operating income (expense), net | |
| | |||
Net loss | $ | ( | $ | ( | ||
Net loss per common share: | ||||||
Basic | $ | ( | $ | ( | ||
Diluted | $ | ( | $ | ( | ||
Weighted average number of common shares outstanding: |
| |||||
Basic | |
| | |||
Diluted | | |
The accompanying notes are an integral part of these consolidated financial statements.
35
REZOLUTE, INC.
Consolidated Statements of Shareholders’ Equity
For the Fiscal Years Ended June 30, 2022 and 2021
(In Thousands)
Additional | Total | |||||||||||||
Common Stock | Paid-in | Accumulated | Shareholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Balances, June 30, 2020 |
| | $ | | $ | | $ | ( | $ | | ||||
Issuance of Units for cash Fiscal 2021 Equity Financing | | | | — | | |||||||||
Advisory fees and other offering costs related to issuance of Units | — | — | ( | — | ( | |||||||||
Share-based compensation | — | — | | — | | |||||||||
Reclassification of warrants and stock options from equity to derivative liability due to authorized share deficiency | — | — | ( | — | ( | |||||||||
Reclassification of derivative liability to equity upon cure of authorized share deficiency | — | — | | — | | |||||||||
Fair value of warrants issued to consultants for services | — | — | | — | | |||||||||
Issuance of common stock for consulting services | — | — | | — | | |||||||||
Net loss | — | — | — | ( | ( | |||||||||
Balances, June 30, 2021 | | | | ( | | |||||||||
Proceeds from issuance of equity securities for cash in 2022 Registered Direct Offering, net of discounts: | ||||||||||||||
Common stock | | | | — | | |||||||||
Class A pre-funded warrants | — | — | | — | | |||||||||
Gross proceeds from issuance of equity securities for cash in Underwritten Public Offering: | ||||||||||||||
Common stock | | | | — | | |||||||||
2021 pre-funded warrants | — | — | | — | | |||||||||
Gross proceeds from issuance of common stock for cash: | ||||||||||||||
In 2021 Registered Direct Offering | | | | — | | |||||||||
Under Equity Distribution Agreement | | | | — | | |||||||||
Under LPC Purchase Agreement | | — | | — | | |||||||||
Underwriting commissions and other equity offering costs | — | — | ( | — | ( | |||||||||
Share-based compensation | — | — | | — | | |||||||||
Reclassification of Class B pre-funded warrant derivative liability to equity upon cure of authorized share deficiency | — | — | | — | | |||||||||
Commitment shares issued under LPC Purchase Agreement | | — | | — | | |||||||||
Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balances, June 30, 2022 | | $ | | $ | | $ | ( | $ | |
The accompanying notes are an integral part of these consolidated financial statements.
36
REZOLUTE, INC.
Consolidated Statements of Cash Flows
For the Fiscal Years Ended June 30, 2022 and 2021
(In Thousands)
| 2022 |
| 2021 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
|
|
|
| ||
Net loss | $ | ( | $ | ( | ||
Gain from change in fair value of derivative liabilities, net | ( | ( | ||||
Underwriting discount on issuance of derivative | | — | ||||
Share-based compensation expense | | | ||||
Loss on extinguishment of Loan Agreement | ||||||
Prepayment premium paid | | — | ||||
Other | | — | ||||
Accretion of debt discount and issuance costs | | | ||||
Non-cash lease expense | | | ||||
Depreciation and amortization expense | | | ||||
Fair value of warrants issued for services | — | | ||||
Fair value of shares of common stock issued for services | — | | ||||
Changes in operating assets and liabilities: |
|
|
|
| ||
Increase prepaid expenses and other assets |
| ( |
| ( | ||
Increase (decrease) in accounts payable |
| ( |
| | ||
Increase (decrease) in other accrued liabilities | | ( | ||||
Decrease in license fees payable to XOMA |
| — |
| ( | ||
Net Cash Used in Operating Activities |
| ( |
| ( | ||
CASH FLOWS FROM INVESTING ACTIVITIES |
| — |
| — | ||
CASH FLOWS FROM FINANCING ACTIVITIES: |
|
|
| |||
Gross proceeds from 2022 Registered Direct Offering, net of underwriting discounts: | ||||||
Issuance of common stock | | — | ||||
Issuance of Class A pre-funded warrants | | — | ||||
Issuance of Class B pre-funded warrants | | — | ||||
Gross Proceeds from 2021 Underwritten Offering | ||||||
Common stock | | — | ||||
2021 pre-funded warrants | | — | ||||
Gross proceeds from issuance of common stock for cash: | ||||||
2021 Registered Direct Offering | | — | ||||
Under Equity Distribution Agreement | | — | ||||
Under LPC Purchase Agreement | | — | ||||
Gross Proceeds from issuance of Units for cash in Fiscal 2021 Equity Financing | — | | ||||
Payment of commissions and other deferred offering costs |
| ( | ( | |||
Gross proceeds from Loan Agreement | — | | ||||
Payment of debt discount and issuance costs |
| ( |
| ( | ||
Prepayment of contractual obligations under Loan Agreement, including prepayment fee | ( | — | ||||
Net Cash Provided by Financing Activities |
| |
| | ||
Net increase in cash, cash equivalents and restricted cash | $ | | $ | | ||
Cash, cash equivalents and restricted cash at beginning of fiscal year |
| |
| | ||
Cash, cash equivalents and restricted cash at end of fiscal year | $ | | $ | | ||
The accompanying notes are an integral part of these consolidated financial statements.
37
REZOLUTE, INC.
Consolidated Statements of Cash Flows, Continued
For the Fiscal Years Ended June 30, 2022 and 2021
(In Thousands)
2022 |
| 2021 | ||||
CASH, CASH EQUIVALENTS AND RESTRICTED CASH: | ||||||
Cash and cash equivalents, end of fiscal year | $ | | $ | | ||
Restricted cash, end of fiscal year | — | — | ||||
Total cash, cash equivalents and restricted cash, end of fiscal year | $ | | $ | | ||
SUPPLEMENTARY CASH FLOW INFORMATION: |
|
|
|
| ||
Cash paid for interest | $ | | $ | | ||
Cash paid for income taxes | — | — | ||||
Right-of-use assets acquired in exchange for operating lease liabilities | — | | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | | | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
|
|
|
| ||
Reclassification of derivative liabilities to equity upon cure of authorized share deficiency | $ | | $ | | ||
Issuance of commitment shares for deferred offering costs subsequently charged to additional paid-in capital | | — | ||||
Payables for deferred offering costs subsequently charged to additional paid-in capital | | — | ||||
Reclassification of warrants and stock options from equity to derivative liability due to authorized share deficiency | — | | ||||
Debt discounts incurred for: |