UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
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Table of Contents
i
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report on Form 10-Q (“Report”) contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this Report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including, but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements represent our reasonable judgment of the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project” and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:
● | our projected operating or financial results, including anticipated cash flows used in operations; |
● | our expectations regarding capital expenditures, research and development expenses and other payments; |
● | our expectation about the extent and duration of the COVID-19 pandemic (“COVID-19”) on our business; |
● | our beliefs and assumptions relating to our liquidity position, including our ability to obtain additional financing; |
● | our ability to obtain regulatory approvals or the speed of such approvals, for our pharmaceutical drugs and diagnostics; and |
● | our future dependence on third party manufacturers or strategic partners to manufacture any of our pharmaceutical drugs and diagnostics that receive regulatory approval, and our ability to identify strategic partners and enter into license, co-development, collaboration or similar arrangements. |
Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known and unknown risks, uncertainties and other factors including, but not limited to, the risks described in Part II, Item 1.A Risk Factors, as well as “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 2022 (the “2022 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on September 15, 2022.
In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this Report are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Report, except as otherwise required by applicable law.
ii
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
Rezolute, Inc.
Unaudited Condensed Consolidated Balance Sheets
(In thousands, except per share amounts)
| December 31, | June 30, | ||||
| 2022 |
| 2022 | |||
Assets | ||||||
Current assets: |
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Cash and cash equivalents | $ | | $ | | ||
Prepaid expenses and other | | | ||||
Total current assets |
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Long-term assets: | ||||||
Right-of-use assets |
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Property and equipment, net |
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Deposits and other | | | ||||
Total assets | $ | | $ | | ||
Liabilities and Shareholders' Equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | ||
Accrued liabilities: |
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Compensation and benefits | | — | ||||
Accrued clinical and other | | | ||||
Insurance premiums | — | | ||||
Current portion of operating lease liabilities | | | ||||
Total current liabilities |
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Long term liabilities: | ||||||
Operating lease liabilities, net of current portion |
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Embedded derivative liabilities | | | ||||
Total liabilities |
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Commitments and contingencies (Notes 3, 4, 8 and 9) |
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Shareholders' equity: |
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Preferred stock, $ |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
| ( |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
3
Rezolute, Inc.
Unaudited Condensed Consolidated Statements of Operations
(In thousands, except per share amounts)
Three Months Ended | Six Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Operating expenses: |
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Research and development |
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| $ | | $ | | $ | | ||
General and administrative |
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Total operating expenses |
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Operating loss |
| ( |
| ( | ( |
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Non-operating income (expense): |
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Interest and other income | | | | | ||||||||
Gain (loss) from change in fair value of derivative liabilities | ( | ( | ( | | ||||||||
Employee retention credit | — | — | — | | ||||||||
Interest expense |
| — |
| ( | — |
| ( | |||||
Total non-operating income (expense), net |
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| ( | |
| ( | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | ||||
Net loss per common share: | ||||||||||||
Basic and diluted | ( | ( | ( | ( | ||||||||
Weighted average number of common shares outstanding: |
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Basic and diluted | | | |
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The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Rezolute, Inc.
Unaudited Condensed Consolidated Statements of Shareholders’ Equity
Six Months Ended December 31, 2022 and 2021
(In thousands)
Additional | Total | |||||||||||||
Common Stock | Paid-in | Accumulated | Shareholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Six Months Ended December 31, 2022: | ||||||||||||||
Balances, June 30, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Gross proceeds from issuance of common stock for cash: | ||||||||||||||
In 2022 Private Placement | | | | — | | |||||||||
Underwriting commissions and other equity offering costs | — | — | ( | — | ( | |||||||||
Share-based compensation | — | — | | — | | |||||||||
Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balances, December 31, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Six Months Ended December 31, 2021: | ||||||||||||||
Balances, June 30, 2021 | | $ | | $ | | $ | ( | $ | | |||||
Gross proceeds from issuance of equity securities for cash in Underwritten Public Offering: | ||||||||||||||
Common Stock | | | | — | | |||||||||
Pre-Funded Warrants | — | — | | — | | |||||||||
Gross proceeds from issuance of common stock for cash: | ||||||||||||||
In Registered Direct Offering | | | | — | | |||||||||
Under Equity Distribution Agreement | | | | — | | |||||||||
Under LPC Purchase Agreement | | — | | — | | |||||||||
Underwriting discounts and other equity offering costs | — | — | ( | — | ( | |||||||||
Share-based compensation | — | — | | — | | |||||||||
Issuance of commitment shares | | — | | — | | |||||||||
Net loss | — | — | — | ( | ( | |||||||||
Balances, December 31, 2021 |
| | $ | | $ | | $ | ( | $ | |
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
5
Rezolute, Inc.
Unaudited Condensed Consolidated Statements of Cash Flows
(In thousands)
| Six Months Ended | |||||
December 31, | ||||||
| 2022 |
| 2021 | |||
CASH FLOWS FROM OPERATING ACTIVITIES: |
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Net loss | $ | ( | $ | ( | ||
Share-based compensation expense | | | ||||
Non-cash lease expense | | | ||||
Loss (gain) from change in fair value of derivative liabilities | | ( | ||||
Depreciation and amortization expense | | | ||||
Accretion of debt discount and issuance costs | — | | ||||
Changes in operating assets and liabilities: |
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Decrease in prepaid expenses and other assets |
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Increase in accounts payable |
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Increase in other accrued liabilities | | | ||||
Net Cash Used in Operating Activities |
| ( |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Purchase of property and equipment | ( |
| — | |||
CASH FLOWS FROM FINANCING ACTIVITIES: |
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Gross proceeds from issuance of equity securities for cash: | ||||||
2022 Private Placement | | — | ||||
Proceeds from 2021 Underwritten Public offering | — | | ||||
Proceeds from 2021 Registered Direct Offering | — | | ||||
Under Equity Distribution Agreement | — | | ||||
Under LPC Purchase Agreement | — | | ||||
Payment of commissions and other offering costs |
| ( | ( | |||
Payment of debt discount and issuance costs |
| — |
| ( | ||
Net Cash Provided by Financing Activities |
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Net increase (decrease) in cash, cash equivalents and restricted cash | ( | | ||||
Cash, cash equivalents and restricted cash at beginning of period |
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Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
SUPPLEMENTARY CASH FLOW INFORMATION: |
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Cash paid for interest | $ | — | $ | | ||
Cash paid for income taxes | — | — | ||||
Cash paid for amounts included in the measurement of operating lease liabilities | | | ||||
Operating lease liabilities incurred in exchange for right-of-use-assets | | — | ||||
NON-CASH INVESTING AND FINANCING ACTIVITIES: |
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Issuance of commitment shares for deferred offering costs subsequently charged to additional paid-in capital | $ | — | $ | | ||
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
6
NOTE 1 — NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Rezolute, Inc. (the “Company”) is a clinical stage biopharmaceutical company developing transformative therapies for metabolic diseases related to chronic glucose imbalance. The Company’s primary clinical assets consist of (i) RZ358, which is a potential treatment for congenital hyperinsulinism, an ultra-rare pediatric genetic disorder characterized by excessive production of insulin by the pancreas, and (ii) RZ402, which is an oral plasma kallikrein inhibitor (“PKI”) being developed as a potential therapy for the chronic treatment of diabetic macular edema.
Basis of Presentation
The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”), the rules and regulations of the SEC for interim financial information, and the instructions to Form 10-Q and Article 8 of Regulation S-X.
The condensed consolidated balance sheet as of June 30, 2022, has been derived from the Company’s audited consolidated financial statements. The unaudited interim financial statements should be read in conjunction with the Company’s 2022 Form 10-K, which contains the Company’s audited financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition and Results of Operations for the fiscal year ended June 30, 2022.
Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all information and footnote disclosures necessary for a comprehensive presentation of financial position, results of operations, and cash flows. It is management’s opinion, however, that all material adjustments (consisting of normal recurring adjustments) that are necessary for a fair financial statement presentation have been made. The interim results for the three and six months ended December 31, 2022 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the fiscal year ending June 30, 2023.
Consolidation
The Company has
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the unaudited condensed consolidated financial statements and the accompanying notes. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant accounting estimates include, but are not necessarily limited to, the fair value of derivative liabilities, fair value of share-based payments, management’s assessment of going concern, and clinical trial accrued liabilities. Actual results could differ from those estimates.
Risks and Uncertainties
The Company’s operations may be subject to significant risks and uncertainties including financial, operational, regulatory and other risks associated with a clinical stage company, including the potential risk of business failure, and the future impact of COVID-19.
7
Significant Accounting Policies
The Company’s significant accounting policies are described in Note 1 to the financial statements in Item 8 of the 2022 Form 10-K.
Recent Accounting Pronouncements
Recently Adopted Standard. The following standard was adopted during the six months ended December 31, 2022:
In August 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that may be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method. The Company adopted this standard using the full retrospective transition method effective July 1, 2022. The adoption did not have any impact on the Company’s financial statements.
Standard Required to be Adopted in Future Periods. The following accounting standard is not yet effective; management has not completed its evaluation to determine the impact that adoption of this standard will have on the Company’s consolidated financial statements.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses. In November 2019, ASU 2016-13 was amended by ASU 2019-10, Financial Instruments- Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) whereby the effective date for ASU 2016-13 for smaller reporting companies is now required for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. The Company does not expect the adoption of ASU 2016-13 will have a material impact on its consolidated financial statements.
Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not currently expected to have a material impact on the Company’s financial statements upon adoption.
NOTE 2 — LIQUIDITY
The Company is in the clinical stage and has not yet generated any revenues. For the six months ended December 31, 2022, the Company incurred a net loss of $
As discussed in Note 4, the Company is subject to license agreements that provide for future contractual payments upon achievement of various milestone events. Pursuant to the ActiveSite License Agreement (as defined below), a $
8
Management believes the Company’s cash and cash equivalents balance of $
NOTE 3 — OPERATING LEASES
In April 2022, the Company entered into a lease agreement for a new corporate headquarters in Redwood City, California. The space consists of approximately
The carrying value of all right-of-use assets and operating lease liabilities are as follows (in thousands):
December 31, | June 30, | |||||
| 2022 |
| 2022 | |||
Right-of-use assets | $ | | $ | | ||
Operating lease liabilities: |
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Current | $ | | $ | | ||
Long-term |
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Total | $ | | $ | |
For the three and six months ended December 31, 2022 and 2021, operating lease expense is included under the following captions in the accompanying condensed consolidated statements of operations (in thousands):
Three Months Ended | Six Months Ended | ||||||||||||
December 31, | December 31, | ||||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | |||||||
Research and development | $ | | $ | | $ | | $ | | |||||
General and administrative |
| |
| |
| |
| | |||||
Total | $ | | $ | | $ | | $ | |
9
As of December 31, 2022, the weighted average remaining lease term under operating leases was
Fiscal year ending June 30, |
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Remainder of fiscal year 2023 | $ | | |
2024 | | ||
2025 | | ||
2026 | | ||
2027 | | ||
Thereafter | | ||
Total lease payments | | ||
Less imputed interest |
| ( | |
Present value of operating lease liabilities | $ | |
NOTE 4 — LICENSE AGREEMENTS
XOMA License Agreement
In December 2017, the Company entered into a license agreement (the “XOMA License Agreement”) with XOMA Corporation (“XOMA”), through its wholly-owned subsidiary, XOMA (US) LLC, pursuant to which XOMA granted an exclusive global license to the Company to develop and commercialize XOMA 358 (formerly X358, now RZ358) for all indications. In January 2019, the XOMA License Agreement was amended with an updated payment schedule, as well as revising the amount the Company was required to expend on development of RZ358 and related licensed products, and revised provisions with respect to the Company’s diligence efforts in conducting clinical studies.
In January 2022, the Company was required to make a milestone payment under the XOMA License Agreement of $
ActiveSite License Agreement
On August 4, 2017, the Company entered into a Development and License Agreement (the “ActiveSite License Agreement”) with ActiveSite Pharmaceuticals, Inc. (“ActiveSite”) pursuant to which the Company acquired the rights to ActiveSite’s Plasma Kallikrein Inhibitor program (“PKI Portfolio”). The Company is initially using the PKI Portfolio to develop an oral PKI therapeutic for diabetic macular edema (RZ402) and may use the PKI Portfolio to develop other therapeutics for different indications. The ActiveSite License Agreement requires various milestone payments up to $
10
NOTE 5 — EMBEDDED DERIVATIVE LIABILTY
On April 14, 2021, the Company entered into a $
Concurrently with the execution of the Loan Agreement, the Company entered into an exit fee agreement (the “Exit Fee Agreement”) that provides for a fee of
NOTE 6 — SHAREHOLDERS’ EQUITY
Changes in Shareholders’ Equity for the Three Months Ended December 31, 2022 and 2021
The following table presents changes in shareholders’ equity for the three months ended December 31, 2022 and 2021:
Additional | Total | |||||||||||||
Common Stock | Paid-in | Accumulated | Shareholders' | |||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Equity | |||||
Three Months Ended December 31, 2022: | ||||||||||||||
Balances, September 30, 2022 |
| | $ | | $ | | $ | ( | $ | | ||||
Share-based compensation | — | — | | — | | |||||||||
Net loss |
| — |
| — |
| — |
| ( |
| ( | ||||
Balances, December 31, 2022 | | $ | | $ | | $ | ( | $ | | |||||
Three Months Ended December 31, 2021: | ||||||||||||||
Balances, September 30, 2021 | | $ | | $ | | $ | ( | $ | | |||||
Gross proceeds from issuance of equity securities for cash in Underwritten Offering: | ||||||||||||||
Common stock | | | | — | | |||||||||
Pre-Funded Warrants | — | — | | — | | |||||||||
Gross proceeds from issuance of common stock for cash in Registered Direct Offering | | | | — | | |||||||||
Underwriting discounts and other equity offering costs | — | — | ( | — | ( | |||||||||
Share-based compensation | — | — | | — | | |||||||||
Net loss | — | — | — | ( | ( | |||||||||
Balances, December 31, 2021 |
| | $ | | $ | | $ | ( | $ | |
11
July 2022 Financing
In May 2022, the Company entered into securities purchase agreements (“SPAs”) with Handok, Inc. (“Handok”) and certain of its affiliates. Handok is an affiliate of a member of the Company’s Board of Directors. In July 2022, the Company entered into amended SPAs for a private placement of common stock (the “2022 Private Placement”). The 2022 Private Placement resulted in gross proceeds of $
Underwritten Public Offering
On October 12, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Oppenheimer & Co., Inc., as representative of the underwriters listed therein (the “Underwriters”) for the planned issuance and sale of equity securities in an underwritten public offering (the “Underwritten Offering”). On October 15, 2021, closing occurred for the Underwritten Offering resulting in the issuance of (i)
In connection with the Underwritten Offering, the Company granted the Underwriters a
Pre-Funded Warrants
The Pre-Funded Warrants issued in the Underwritten Offering have an exercise price of $
The gross proceeds of $
12
Registered Direct Offering
Concurrently with the Underwritten Offering, a major shareholder (the “Purchaser”) that is affiliated with a member of our Board of Directors entered into a subscription agreement for a registered direct offering, pursuant to which the Company agreed to sell to the Purchaser an aggregate of
Equity Distribution Agreement
In December 2020, the Company and Oppenheimer & Co. Inc. (the “Agent”) entered into an Equity Distribution Agreement (the “EDA”) that provides for an “at the market offering” for the sale of up to $
Under the terms of the EDA, the Company agreed to pay the Agent a commission equal to
LPC Purchase Agreement
In August 2021, the Company entered into a purchase agreement (the “Purchase Agreement”) and a registration rights agreement (the “RRA”) with Lincoln Park Capital Fund, LLC (“LPC”), which provides that the Company may sell to LPC up to an aggregate of $
LPC’s initial purchase consisted of
On September 17, 2021, the Company submitted a Regular Purchase Notice, resulting in the sale of
13
NOTE 7 — SHARE-BASED COMPENSATION AND WARRANTS
Stock Option Plans
Presented below is a summary of the number of shares authorized, outstanding, and available for future grants under each of the Company’s stock option plans as of December 31, 2022 (in thousands):
| Plan Termination |
| Number of Shares | |||||
Description |
| Date |
| Authorized |
| Outstanding |
| Available |
2015 Plan |
| February 2020 |
| |
| |
| — |
2016 Plan |
| October 2021 |
| |
| |
| — |
2019 Plan |
| July 2029 |
| |
| |
| — |
2021 Plan | March 2031 | | | | ||||
Total |
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2022 Employee Stock Purchase Plan
On June 16, 2022, the Company’s shareholders approved the adoption of the 2022 Employee Stock Purchase Plan (the “2022 ESPP”). The 2022 ESPP provides an opportunity for employees to purchase the Company’s common stock through accumulated payroll deductions.
The 2022 ESPP has consecutive offering periods that begin approximately every 6 months commencing on the first trading day on or after July 1 and terminating on the last trading day of the offering period ending on December 31 and commencing on the first trading day on or after January 1 and terminating on the last trading day of the offering period ending on June 30. The 2022 ESPP reserves
Stock Options Outstanding
The following table sets forth a summary of the activity under all of the Company’s stock option plans for the six months ended December 31, 2022 (shares in thousands):
| Shares |
| Price (1) |
| Term (2) | ||
Outstanding, June 30, 2022 |
| | $ | | |||
Grants to employees | | | |||||
Forfeited | ( | | |||||
Outstanding, December 31, 2022 |
| |
| |
| ||
Vested, December 31, 2022 |
| |
| |
|
(1) | Represents the weighted average exercise price. |
(2) | Represents the weighted average remaining contractual term for the number of years until the stock options expire. |
14
For the six months ended December 31, 2022, the aggregate fair value of stock options granted for approximately
For the six months ended December 31, 2022, the fair value of stock options was estimated on the date of grant, with the following weighted-average assumptions:
Market price of common stock on grant date | $ | | ||
Expected volatility |
| | % | |
Risk free interest rate |
| | % | |
Expected term (years) |
| |||
Dividend yield |
| | % |
Share-based compensation expense for the three and six months ended December 31, 2022 and 2021 is included under the following captions in the unaudited condensed consolidated statements of operations (in thousands):
Three Months Ended | Six Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
2022 |
| 2021 | 2022 |
| 2021 | |||||||
Research and development | $ | | $ | | $ | | $ | | ||||
General and administrative |
| |
| |
| |
| | ||||
Total | $ | | $ | | $ | | $ | |
Unrecognized share-based compensation expense is approximately $
Warrants
In connection with an underwritten offering in October 2021, the Company issued
In connection with a registered direct offering in May 2022, the Company issued
In addition, the Company has issued warrants in conjunction with various debt and equity financings and for services. As of December 30, 2022, all of the warrants were vested.
15
For the six months ended December 31, 2022,
| Shares |
| Price (1) |
| Term (2) | ||
Outstanding, June 30, 2022 |
| |
| $ | |
| |
Warrants granted |
| — |
| — |
|
| |
Warrant expirations |
| ( |
|
| |
|
|
Outstanding, December 31, 2022 |
| |
|
| |
|
(1) | Represents the weighted average exercise price. |
(2) | Represents the weighted average remaining contractual term for the number of years until the warrants expire. |
NOTE 8 — COMMITMENTS AND CONTINGENCIES
Licensing Commitments
Please refer to Note 4 for further discussion of commitments to make milestone payments and to pay royalties under license agreements with XOMA and ActiveSite.
Legal Matters
From time to time, the Company may be involved in litigation relating to claims arising out of operations in the normal course of business. As of December 31, 2022, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the Company’s results of operations. At each reporting period, the Company evaluates known claims to determine whether a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450, Contingencies. Legal fees are expensed as incurred.
NOTE 9 — RELATED PARTY TRANSACTIONS
Related Party Licensing Agreement
On September 15, 2020, the Company and Handok entered into an exclusive license agreement (the “Handok License”) for the territory of the Republic of Korea. The Handok License relates to pharmaceutical products in final dosage form containing the pharmaceutical compounds developed or to be developed by the Company, including those related to RZ358 and RZ402. The Handok License is in effect for a period of
Investors in 2022 Private Placement
Handok and certain of its affiliates were the sole investors in the 2022 Private Placement and the Registered Direct Offering discussed in Note 6.
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NOTE 10 — INCOME TAXES
Income tax expense during interim periods is based on applying an estimated annualized effective income tax rate applied to the respective quarterly periods, adjusted for discrete tax items in the period in which they occur. The computation of the annualized estimated effective tax rate for each interim period requires certain estimates and significant judgment including, but not limited to, the expected operating results for the year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax environment changes.
For the three and six months ended December 31, 2022 and 2021, the Company did not record any income tax benefit due to a full valuation allowance on its deferred tax assets. The Company did not have any material changes to its conclusions regarding valuation allowances for deferred income tax assets or uncertain tax positions for the three and six months ended December 31, 2022 and 2021.
NOTE 11 — NET LOSS PER SHARE
Basic net loss per share is computed by dividing net loss by the weighted average number of common shares, 2021 PFWs and 2022 PFWs outstanding during the period, without consideration for potentially dilutive securities. PFWs are included in the computation of basic and diluted net loss per share since the exercise price is negligible and all of the PFWs are fully vested and exercisable.
Three Months Ended | Six Months Ended | |||||||||||
December 31, | December 31, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
Common Stock | | | | | ||||||||
2021 PFWs | | | | | ||||||||
2022 PFWs: | ||||||||||||
Class A PFWs | | — | | — | ||||||||
Class B PFWs | | — | | — | ||||||||
Total | | | | |
For the three and six ended December 31, 2022 and 2021, basic and diluted net loss per share were the same since all other common stock equivalents were anti-dilutive.
As of December 31, 2022 and 2021, the following outstanding potential common stock equivalents were excluded from the computation of diluted net loss per share since the impact of inclusion was anti-dilutive (in thousands):
2022 | 2021 | |||
Stock options | | | ||
Warrants | | | ||
Total | | |
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NOTE 12 — FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS
Fair Value Measurements
Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair value measurement:
Level 1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.
Level 2—Other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly through market corroboration, for substantially the full term of the asset or liability.
Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any market activity for the asset or liability at the measurement date.
The Company’s embedded derivative liabilities are classified under Level 3 of the hierarchy and are required to be measured and recorded at fair value on a recurring basis. Fair value is determined based on management’s assessment of the probability and timing of occurrence for the Exit Events discussed in Note 5 using a discount rate equal to the effective interest rate for the term A loan.
2022 |
| 2021 | ||||
Fair value, beginning of period | $ | | $ | | ||
| ( | |||||
Fair value, end of period | $ | | $ | |
Except for embedded derivative liabilities, the Company did not have any other assets or liabilities measured at fair value on a recurring basis as of December 31, 2022 and June 30, 2022.
Due to the relatively short maturity of the respective instruments, the fair value of cash and cash equivalents, accounts payable, and accrued liabilities approximated their carrying values as of December 31, 2022 and June 30, 2022.
The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the six months ended December 31, 2022 and 2021, the Company did not have any transfers of its assets or liabilities between levels of the fair value hierarchy.
Significant Concentrations
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As of December 31, 2022, the Company had cash and cash equivalents consisting of $
NOTE 13 — SUBSEQUENT EVENTS
Employment Agreement Amendments
On January 8, 2023, the Board of Directors approved certain amendments to the employment agreements of the Company’s chief executive officer and chief medical officer (the “Executive Officers”). The amendments provide that if either of the Executive Officers are terminated outside of a change in control event and without cause, (i) all of their stock options that are subject to ongoing vesting conditions over subsequent periods ranging from
The amendment to the chief medical officer’s employment agreement provides that upon the occurrence of a termination event other than a change of control, the Company is required to (i) make severance payments equal to
ActiveSite Milestone Payment
Pursuant to the ActiveSite License Agreement discussed in Note 4, the next scheduled milestone payment for $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Certain figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our unaudited condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding. As used in the discussion below, “we,” “our,” “us,” and the “Company” refers to Rezolute, Inc.
Special Note Regarding Status of Clinical Assets
RZ358
Our lead clinical asset, RZ358, is a potential treatment for congenital hyperinsulinism, an ultra-rare pediatric genetic disorder characterized by excessive production of insulin by the pancreas. We initiated the RZ358-606 Phase 2b study (“RIZE”) globally at multiple study centers in the first quarter of 2020. Following delays in patient dosing as a result of COVID-19, we advanced the study in second half of 2021 and completed patient dosing in the first half of 2022. As a result of the open label nature of RIZE, we were able to announce topline results from the study at the Pediatric Endocrine Society Meeting in May 2022. Following that announcement and a subsequent three-month safety follow-up with the final patients in the study, the study database was locked in the third quarter of 2022. Starting in the fourth quarter of 2022 and continuing into the first quarter of 2023, we are finalizing tables, figures and listings (“TFL”) for the study as well as clinical study reports (“CSRs”). In the second half of 2022, we also began interacting with the FDA and European regulatory authorities regarding our initial plans for an anticipated Phase 3 study in 2023. We plan to interact with both the European regulatory authorities and the FDA in the first half of 2023 with the goal of establishing alignment regarding Phase 3 study design including endpoints for the study, duration of treatment for the patients in the study, as well as the ages of patients to be enrolled. Following these interactions, we anticipate commencing Phase 3 during the Summer of 2023. Based on our current enrollment estimates, we plan to have top line results available from this study in the first quarter of 2025.
RZ402
Our second clinical asset, RZ402, is a selective and potent plasma kallikrein inhibitor (“PKI”) being developed as a potential oral therapy for the chronic treatment of diabetic macular edema (“DME”). We conducted two Phase 1 studies in healthy volunteers for RZ402 in 2021 and 2022 to assess the safety and pharmacological profile of the drug. We announced positive topline results from these studies which demonstrated that oral administration of RZ402 resulted in plasma concentrations that substantially exceeded target pharmacologically active drug levels, demonstrating the potential for once daily dosing. RZ402 was generally safe and well-tolerated at all doses tested, without dose-limiting toxicities. Notably, the second Phase 1 study was a multiple-ascending dose (“MAD”) study that 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 first single ascending dose study. There were no serious adverse events, adverse drug reactions or identified risks in either study.
In December 2022, we initiated a Phase 2 multi-center, randomized, double-masked, placebo-controlled, parallel-arm study to evaluate the safety, efficacy, and pharmacokinetics of RZ402 administered as a monotherapy over a 12-week treatment period in participants with DME who are naïve to, or have received limited anti-VEGF injections. The study population will include DME patients with mild to moderate non-proliferative diabetic retinopathy. Eligible participants will be randomized equally, to one of three RZ402 active treatment arms at doses of 50, 200, and 400 mg, or a placebo control arm, and will receive study drug once daily for 12 weeks, before completing a four-week follow-up. The study is expected to enroll approximately 100 patients overall, across approximately 25 investigational sites in the United States. The principal endpoints of the trial include (i) changes in central subfield thickness on the macula (“CST”), as measured by Spectral Domain Ocular Coherence Tomography (SD-OCT), (ii) changes in visual acuity as measured by the early treatment diabetic retinopathy scale (“ETDRS”), (iii) the repeat dose pharmacokinetics of RZ402 in patients with DME, and (iv) the safety and tolerability of RZ402. We expect to complete dosing in the fourth quarter of 2023 and to announce results from the study in the first quarter of 2024.
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Recent Developments
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 November 2027. The lease provides for a six-month rent abatement period that began upon commencement of the lease term which occurred in October 2022
Financing Activities
In July 2022, we entered into amended securities purchase agreements with Handok, Inc. (“Handok”) and certain of its affiliates (the “2022 Private Placement”), resulting in gross proceeds of $12.3 million in exchange for the issuance of approximately 3.2 million shares of common stock. We incurred approximately $0.8 million for underwriting commissions and other offering costs, resulting in net proceeds of $11.5 million.
Termination of Loan Agreement
On April 14, 2021, we entered into a $30.0 million 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. The scheduled maturity date of the Loan Agreement was on April 1, 2026. In April 2021, we borrowed $15.0 million under the Loan Agreement. 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.
Please refer to our discussion under the caption Liquidity and Capital Resources for further discussion of our recent financing activities.
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 several years before we generate substantial revenues, if ever. We expect to incur 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.
Key Components of Consolidated Statements of Operations
Research and development expenses. Research and development (“R&D”) expenses consist primarily of compensation and benefits for our personnel engaged in R&D activities, clinical trial costs, licensing costs, and consulting and outside services. Our R&D compensation costs include an allocable portion of our cash and share-based compensation, employee benefits, and consulting costs related to personnel engaged in the design and development of product candidates and other scientific research projects. We also allocate a portion of our facilities and overhead costs based on the personnel and other resources devoted to R&D activities.
General and administrative expenses. General and administrative (“G&A”) expenses consist primarily of (i) an allocable portion of our cash and share-based compensation and employee benefits related to personnel engaged in our administrative, finance, accounting, and executive functions, and (ii) an allocable portion of our facilities and overhead costs related to such personnel. G&A expenses also include travel, legal, auditing, consulting, investor relations and other costs primarily related to our status as a public company.
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Interest and other income. Interest and other income consist primarily of interest income earned on temporary cash investments.
Gain (loss) from change in fair value of derivative liabilities. We recognized liabilities for financial instruments that are required to be accounted for as derivatives, as well as embedded derivatives in our debt agreements. Derivative liabilities are adjusted to fair value at the end of each reporting period until the contracts are settled, expire, or otherwise meet the conditions for equity classification. Changes in fair value are reflected as a gain or loss in our unaudited condensed consolidated statements of operations.
Employee retention credit. In response to the COVID-19 pandemic, the United States government has designed programs to assist businesses in dealing with the financial hardships caused by the pandemic. We recognize the right to receive governmental assistance payments in the period in which the related conditions on which they depend are substantially met.
Interest expense. The components of interest expense include the amount of interest payable in cash at the stated interest rate, and accretion of debt discounts and issuance costs (“DDIC”) using the effective interest method. DDIC arises from the issuance of debt instruments and other related contracts or agreements which possess certain terms and conditions resulting in additional financing costs arising from origination, exit and final fees, and other incremental and direct costs incurred to consummate the financing.
Critical Accounting Policies and Significant Judgments and Estimates
Overview
The discussion herein is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.
With respect to our significant accounting policies that are described in Note 1 to our consolidated financial statements included in Item 8 of our 2022 Form 10-K, we believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Accounting for Complex Financings
In order to account for complex financing transactions, we are required to make judgments, assumptions, and estimates to determine the appropriate amounts reported in our consolidated financial statements. These financing transactions typically involve entering into several distinct legal agreements, whereby we are required to identify and account for each freestanding financial instrument separately. The freestanding financial instruments may be classified as debt, temporary equity or permanent equity instruments depending on the results of our evaluation. In addition, we evaluate if any of the financial instruments contain embedded features that are required to be accounted for as derivatives at fair value. Each freestanding financial instrument is required to be recognized at fair value on the closing date of the financing. The fair value of warrants is generally determined using the Black-Scholes-Merton (“BSM”) valuation model and the fair value of common stock is based on the trading price of our shares on the closing date.
For financial instruments classified as debt, a discount is recognized if the stated principal balance exceeds the initial allocation of fair value as of the closing date. This discount is accreted to interest expense using the interest method that results in recognition of interest expense at a fixed rate through the expected maturity date.
Share-Based Compensation Expense
We measure the fair value of services received in exchange for all stock options granted based on the fair value of the award as of the grant date. We compute the fair value of stock options with time-based vesting using the BSM option-pricing model and recognize the
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cost of the equity awards over the period that services are provided to earn the award. For awards that contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite service period as if the award was, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for share-based compensation. For stock options that are voluntarily surrendered by employees, all unrecognized compensation is immediately recognized in the period the options are cancelled.
Research and Development
R&D costs are expensed as incurred. Intangible assets related to in-licensing costs under license agreements with third parties are charged to expense unless we are able to determine that the licensing rights have an alternative future use in other R&D projects or otherwise.
Clinical Trial Accruals
Clinical trial costs are a component of R&D expenses. We accrue and recognize expenses for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. We determine the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services. Nonrefundable advance payments for goods and services that will be used or rendered in future R&D activities, are deferred and recognized as expense in the period that the related goods are delivered, or services are performed.
Results of Operations
Three months ended December 31, 2022 and 2021
Revenue. As a clinical stage company, we did not generate any revenue for the three months ended December 31, 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 generate revenue from any of our product candidates for several years.
Research and development expenses. R&D expenses for the three months ended December 31, 2022 and 2021 were as follows (in thousands, except percentages):
| Increase |
| ||||||||||
| 2022 |
| 2021 |
| Amount |
| Percent |
| ||||
Total R&D expenses | $ | 10,945 | $ | 9,452 |