Indicate by check mark if the registrant is not required
to file reports pursuant to Section 13 or Section 15(d) of the Act.
x
Yes
¨
No
Portions of the registrant’s Proxy Statement for the
registrant’s Annual Meeting of Shareholders to be held on December 4, 2018 are incorporated by reference into Part III,
Items 10-14 of this Annual Report on Form 10-K.
PART I
ITEM 1. BUSINESS
Rezolute, Inc. (“
Rezolute
”,
the “
Company
”, “
we
” or “
us
”) is a clinical stage biopharmaceutical company
specializing in the development of innovative drug therapies to improve the lives of patients with metabolic and orphan diseases.
We leverage metabolic and corporate
development expertise to bring forward a compelling portfolio. This past year, we advanced a strategy we feel will be
increasingly attractive to investors. This included executing our in- / out-licensing model, with two successful program
acquisitions, closing down in-house manufacturing, and plans to seek a strategic partner for AB101 upon completion of its
Phase 1 study during calendar year 2019.
Our Pipeline
RZ358
RZ358 is the leading asset within our portfolio.
We intend to fully develop and market this compound.
On December 6, 2017, we licensed from XOMA
LLC (“
XOMA
”) the exclusive rights to develop and commercialize XOMA 358 (now RZ358) for an orphan indication,
Congenital Hyperinsulinism (“
CHI
”).
CHI is a rare genetic disorder that affects 1 in 30,000 newborns.
It is also the most common cause of persistent hypoglycemia in children. About 60 percent of infants with CHI experience a hypoglycemic
episode within the first month of life. Other affected children develop hypoglycemia by early childhood.
Ordinarily, beta cells in the pancreas secrete just enough insulin
to keep blood sugar in the normal range. With CHI, the secretion of insulin is not properly regulated as the beta cells secrete
too much insulin resulting in excessive low blood sugar, severe hypoglycemia.
In infants and young children, these episodes are characterized
by lethargy, irritability, and difficulty feeding. Repeated episodes of hypoglycemia increase the risk of serious complications
such as breathing difficulties, seizures, developmental delays, intellectual disability, vision loss, brain damage, coma, and possibly
death.
To avoid hypoglycemia, many children require frequent glucose
monitoring and feeding, including intravenous or intestinal administration of sugar solutions, particularly overnight. This burdensome
treatment regimen has a substantially negative effect on the quality of life for these children and their families.
A significant number of children cannot be adequately treated
with, or do not tolerate, existing medical therapies. Surgical removal of all or part of the pancreas is a cornerstone of management
for many children, but is invasive and diabetes inducing.
RZ358 is a first-in-class fully human monoclonal antibody that
counteracts the effects of elevated insulin (hyperinsulinemia) by, in effect, turning down the insulin receptor when too much insulin
is present. As such, it is well-suited as a treatment for severe, persistent hypoglycemia. XOMA demonstrated clinical proof-of-concept
for RZ358 in Phase 1 and Phase 2a studies.
RZ358 has designated orphan status in the US and EU.
We plan to launch Phase 2b studies in
calendar year 2018 or 2019 with the potential to accelerate late-stage pivotal trials for an abbreviated path-to-market
strategy.
RZ402 and RZ602
On August 4, 2017, we licensed from ActiveSite
Pharmaceuticals, Inc. (“
ActiveSite
”) their oral plasma kallikrein inhibitor portfolio (“
Portfolio
”)
targeting the treatment of diabetic macular edema (“
DME
”) and other plasma kallikrein-medicated diseases such
as hereditary angioedema (“
HAE
”).
RZ402
It is estimated that approximately 50 million individuals worldwide
suffer from vision-threatening complications of diabetes, including DME, which is one of the main causes of vision loss in working-age
adults globally. With the growth of diabetes, DME is expected to increase in prevalence beyond its current estimate of 750,000
individuals in the US and 21 million worldwide.
DME is a metabolic disease that results from an increase in
retinal vascular permeability (RVP) in the setting of diabetic retinopathy (abnormal retinal blood vessel growth caused by poorly
controlled blood sugar levels). Vascular leakage from retinal blood vessels leads to swelling of the retina, including the macula,
an area of the retina that is very important for vision. The kinin system and the production of bradykinin have been implicated
in the vascular leakage associated with DME.
Current treatment approaches are onerous, involving injections
into the eye by retinal specialists on a monthly or bimonthly basis. In addition to a segment of the DME population that does not
respond to these treatments, the extent of therapeutic benefit directly correlates with adherence to this route of administration
and regimen. Intravitreal injection represents a route of administration with significant burden for both patients and their healthcare
providers, leading to high rates of non-adherence and ultimately, suboptimal therapeutic outcomes.
RZ402 is a potential new therapy for DME from the PKI portfolio.
RZ402 has been shown to normalize RVP in clinically-relevant animal models of macular edema as effectively as the current injectable
treatments, thereby supporting its potential as a stand-alone therapy for macular edema resulting from diabetes and other causes.
We plan to file an IND for RZ402 in calendar year 2019 and afterwards,
embark upon Phase 1 studies.
RZ602
Approximately one in 50,000 patients worldwide have HAE.
HAE is an orphan disease characterized by recurring attacks
of sudden and extreme swelling that can affect the face and mucous membranes, abdomen, and genitalia. Attacks can be painful, debilitating,
varied in frequency and even life-threatening, due to swelling around the airway.
The disease is caused by a problem with a gene that controls
the management of a specific protein, the C1 inhibitor. When there is an imbalance in the C1 inhibitor, there may be excessive
bradykinin production causing tiny blood vessels to “leak” or push fluid into parts of the patient’s body, resulting
in an HAE attack. The trigger for an attack is variable from person to person and even time to time.
Currently available therapies target the prevention or termination
of attacks, but are highly invasive and inconvenient due to the subcutaneous / intravenous routes of administration or have an
undesirable side effect profile.
RZ602 is a potential new therapy for HAE from the PKI portfolio.
Similar to our efforts with RZ402 for DME, the objective of RZ602 is to stop the inflammatory cascade by inhibiting the production
of kallikrein and thereby halting the downstream release of bradykinin and eventual swelling.
We plan to file an IND for RZ602 in
calendar year 2020 and afterwards, embark upon Phase 1 studies.
AB101
Our next product candidate (“
AB101
”),
a microsphere formulation of PEGylated human recombinant insulin, is being developed as an extended acting basal insulin intended
for once-weekly subcutaneous injection, for use alone and in combination with bolus prandial insulin or oral glucose lowering therapies,
to improve glycemic control in patients with Type 1 and Type 2 Diabetes Mellitus.
We believe AB101 has the potential to provide
a near peak-less, slow and uniform release of basal insulin. The current standard of care in the $11 billion basal insulin market
is daily or twice-a-day injections.
In July of 2017, we dosed our first patient
in our Phase 1 first-in-human clinical trial of AB101. The Phase 1 clinical trial is a first-in-human single ascending dose study
to assess the safety and tolerability, pharmacokinetics and pharmacodynamics of AB101 in patients with Type 1 Diabetes Mellitus.
The first study part will be sequential
cohort dose ranging of AB101, while an optional second study part will compare one or more tested doses of AB101 from part 1 to
active comparator Lantus
®
(insulin glargine). In addition to safety and pharmacokinetic assessments, the time-action
pharmacology of AB101 (onset, peak, and end of action) will be evaluated using several measures of glycemic response, including
the hyperinsulinemic euglycemic clamp technique, continuous glucose monitoring, and background insulin use.
Following the completion of the first part
of the study, we expect to review data and high-level results within calendar year 2018 or 2019. Afterwards, we will evaluate out-licensing
potential.
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 a handful of companies developing
therapies for CHI that could pose as potential competitors to RZ358. Zealand Pharma, Xeris Pharma, and Hanmi are three such companies.
There are a handful of companies developing
therapies for diabetic macular edema that could pose as potential competitors to the plasma kallikrein inhibitor therapy we recently
acquired from ActiveSite Pharmaceuticals. KalVista Pharmaceuticals, Verseon, and Thrombogenics are three such companies.
If successfully commercialized, AB101 would
compete directly against Sanofi’s Lantus and Toujeo, Novo Nordisk’s Levemir and Tresiba, Eli Lilly’s Basaglar
as well as any other branded or biosimilar basal insulin therapies that obtain regulatory approval in advance of AB101.
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 the 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 $17,280,000 and
$12,095,000 in research and development expenses for the years ended June 30, 2018 and 2017, respectively.
Employees
As of June 30, 2018, we had twenty full-time
employees as well as one contract employee, all of whom have experience with pharmaceutical, biotechnology or medical product companies.
None of our employees or contractors are covered by collective bargaining agreements.
Corporate Information
We were incorporated in Delaware in 2010.
We maintain executive offices located at 1450 Infinite Drive, Louisville, Colorado 80027 and our phone number is 303-222-2128.
Our website is located at
www.rezolutebio.com
. 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 information about these 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.
Risks Related to Our Business
We will need substantial additional
capital to fund our operations. If we fail to obtain additional capital, we may be unable to sustain operations.
Our operations consume substantial
amounts of cash and we expect that our cash used by operations will continue to increase for the next several years. As of
June 30, 2018, we had approximately $1.6 million in cash on hand. We will need to raise additional capital in order to
sustain our operations. If we are unable to raise additional capital, we may have to significantly delay, scale back or
discontinue one or more of our drug development or 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 ourselves on terms that are less favorable than might otherwise be available.
Our corporate objectives are dependent
upon one another and to the extent that there is a delay or complication in any one objective, our ability to timely complete our
other goals could be adversely impacted.
Our corporate objectives are dependent
upon one another and to the extent that there is a delay, complication or failure in any one objective, our ability to complete
our other goals in a timely fashion could be adversely impacted. For example, we are currently conducting a Phase 1 first-in-human
clinical study of AB101, a once-weekly injectable basal insulin for patients with Type 1 and Type 2 diabetes mellitus (“
Study
”)
while concurrently expanding our pipeline and advancing additional potential drug candidates towards clinical studies. We anticipate
generating results from the Study in calendar year 2018 or 2019 when we also anticipate needing to raise additional capital. It
is likely that potential investors and / or partners will want to review the results from the Study prior to making an investment
decision. In the event that the results from the Study do not meet or exceed expectations, we may not be able to raise capital
and advance additional pipeline candidates or sustain operations.
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 the Study or other clinical studies for additional programs produces promising results, there is no assurance that such
results will be replicated or exceeded in later clinical studies. A number of companies in the biopharmaceutical 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 the Study or any other clinical studies that we may
conduct 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 any of 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.
We may experience delays in our clinical
trials that could adversely affect our financial position.
Many factors could affect the
timing of the Study and other clinical trials 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 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.
We may not be successful in our efforts
to partner AB101 or any of our programs with larger pharmaceutical companies.
We intend to seek a partner for AB101 upon
completion of the Phase 1 trial. Our failure to partner AB101 could have a material and adverse impact on our ability to further
develop the program or continue our overall operations.
We may not be successful in our efforts
to identify, discover or formulate product pipeline candidates.
Research and development programs require
substantial technical, financial and human resources to identify new product pipeline candidates. Our research and development
programs may initially demonstrate success in identifying potential product pipeline candidates but subsequently fail to yield
them. Through our research and development programs, if we are unable to formulate innovative long-acting therapies based on our
microsphere platform technology or otherwise, our long-term business, financial position, income, expansion and outlook may be
materially adversely affected.
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 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.
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-market 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-market 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:
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issue warning letters or untitled letters;
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seek an injunction or impose civil or criminal penalties or monetary fines;
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suspend or withdraw regulatory approval;
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suspend any ongoing clinical studies;
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refuse to approve pending applications or supplements to applications filed by us;
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suspend or impose restrictions on operations, including costly new manufacturing requirements;
or
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seize or detain products, refuse to permit the import or export of products, or require us to initiate
a product recall.
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The occurrence of any event or penalty
described above may inhibit our ability to commercialize our products and generate revenue.
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:
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demonstration of clinical safety and efficacy compared to other products;
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prevalence and severity of any adverse effects;
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limitations or warnings contained in a product’s FDA-approved labeling;
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availability of alternative treatments;
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pricing and cost-effectiveness;
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the effectiveness of our or any future collaborators’ sales and marketing strategies;
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our ability to obtain and maintain sufficient third-party coverage or reimbursement from government
health care programs, including Medicare and Medicaid; and
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the willingness of patients to pay out-of-pocket in the absence of third-party coverage.
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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.
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 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:
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a product candidate may not be safe or effective;
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our manufacturing processes or facility may not meet the applicable requirements; and
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changes in regulatory agency approval policies or adoption of new regulations may require additional
clinical trials or work on our end.
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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:
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offer therapeutic benefit or other improvements over existing, comparable therapeutics;
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be proven safe and effective in clinical studies;
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meet applicable regulatory standards;
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be capable of being produced in sufficient quantities at acceptable costs;
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be successfully commercialized; or
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obtain favorable reimbursement.
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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.
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 clinical 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.
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.
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.
Recently enacted and future legislation
or regulatory reform of the health care system in the US and foreign jurisdictions may affect our ability to sell our products
profitably.
Our ability to commercialize our future
products successfully, alone or with collaborators, will depend in part on the extent to which reimbursement for the products will
be available from government and health administration authorities, private health insurers and other third-party payors. The continuing
efforts of the US and foreign governments, insurance companies, managed care organizations and other payors of health care services
to contain or reduce health care costs may adversely affect our ability to set fair prices for our products, generate revenues
and achieve and maintain profitability.
Specifically, in both the US and some foreign
jurisdictions, there have been a number of legislative and regulatory proposals to change the health care system in ways that could
impact our ability to sell our products profitably. In March 2010, President Obama signed into law the Patient Protection and Affordable
Care Act, as amended by the Health Care and Education Reconciliation Act, or collectively, the Health Care Reform Law, a sweeping
law intended to broaden access to health insurance, reduce or constrain the growth of healthcare spending, enhance remedies against
fraud and abuse, add new transparency requirements for healthcare and health insurance industries, impose new taxes and fees on
the health industry and impose additional health policy reforms.
We will not know the full effects of the
Health Care Reform Law until applicable federal and state agencies issue regulations or guidance under the new law. Although it
is too early to determine the effect of the Health Care Reform Law, the new law appears likely to continue the pressure on pharmaceutical
pricing, especially under the Medicare program, and also may increase our regulatory burdens and operating costs. We expect further
federal and state proposals and health care reforms to continue to be proposed by legislators, which could limit the prices that
can be charged for the products we develop and may limit our commercial opportunity.
Also in the US, the Medicare Prescription
Drug, Improvement, and Modernization Act of 2003, also called the Medicare Modernization Act, or MMA, changed the way Medicare
covers and pays for pharmaceutical products. The legislation expanded Medicare coverage for drug purchases by the elderly and introduced
a new reimbursement methodology based on average sales prices for drugs. In addition, this legislation authorized Medicare Part
D prescription drug plans to use formularies where they can limit the number of drugs that will be covered in any therapeutic class.
As a result of this legislation and the expansion of federal coverage of drug products, we expect that there will be additional
pressure to contain and reduce costs. These cost reduction initiatives and other provisions of this legislation could decrease
the coverage and price that we receive for any approved products and could seriously harm our business. While the MMA applies only
to drug benefits for Medicare beneficiaries, private payors often follow Medicare coverage policy and payment limitations in setting
their own reimbursement rates, and any reduction in reimbursement that results from the MMA may result in a similar reduction in
payments from private payors.
The continuing efforts of government and
other third-party payors to contain or reduce the costs of health care through various means may limit our commercial opportunity.
It will be time-consuming and expensive for us to go through the process of seeking reimbursement from Medicare and private payors.
Our products may not be considered cost-effective, and government and third-party private health insurance coverage and reimbursement
may not be available to patients for any of our future products or sufficient to allow us to sell our products on a competitive
and profitable basis. Our results of operations could be adversely affected by the MMA, the Health Care Reform Law, and additional
prescription drug coverage legislation, by the possible effect of this legislation on amounts that private insurers will pay and
by other health care reforms that may be enacted or adopted in the future. In addition, increasing emphasis on managed care in
the US will continue to put pressure on the pricing of pharmaceutical products. Cost control initiatives could decrease the price
that we or any potential collaborators could receive for any of our future products and could adversely affect our profitability.
In some foreign countries, including major
markets in the European Union and Japan, the pricing of prescription pharmaceuticals is subject to governmental control. In these
countries, pricing negotiations with governmental authorities can take up to 12 months or longer after the receipt of regulatory
marketing approval for a drug product. To obtain reimbursement or pricing approval in some countries, we may be required to conduct
a clinical study that compares the cost effectiveness of our product candidates to other available therapies. Such pharmacoeconomic
studies can be costly and the results uncertain. Our business could be harmed if reimbursement of our products is unavailable,
limited in scope or amount or if pricing is set at unsatisfactory levels.
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:
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impairment of our business reputation;
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withdrawal of clinical study participants;
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costs of related litigation;
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distraction of management’s attention from our primary business;
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substantial monetary awards to patients or other claimants;
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the inability to commercialize our product candidates; and
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decreased demand for our product candidates, if approved for commercial sale.
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We currently have clinical trial insurance
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.
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.
Our independent registered public
accounting firm’s report, contained herein, includes an explanatory paragraph that expresses substantial doubt about our
ability to continue as a going concern.
Our financial statements have been
prepared on the basis that we will continue as a going concern. For the period from March 24, 2010 to June 30, 2018, we have
an accumulated deficit of $94,183,738. As of June 30, 2018, our total stockholder’s deficit was $3,960,755 and we had
working deficit of $4,240,227. We expect to continue to incur losses for the foreseeable future as we develop and
commercialize our pipeline, and we must raise additional capital from external sources in order to sustain our operations.
Primarily as a result of our history of losses and limited cash balances, our independent registered public accounting firm
has included in their audit report an explanatory paragraph expressing substantial doubt about our ability to continue as a
going concern. Our ability to continue as a going concern is contingent upon, among other factors, our ability to obtain
financing to continue to fund our operations. We cannot provide any assurance that we will be able to raise additional
capital. If we are unable to secure additional capital, we may be required to curtail our research and development
initiatives and 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 are at an early stage of development
as a company and we do not have, and may never have, any products that generate significant revenues.
We are at an early stage of development
as a proprietary product specialty 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:
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our product candidates may not prove to be safe and effective in clinical trials;
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we may not be able to obtain regulatory approvals for our product candidates or approved uses may
be narrower than we seek;
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we may not have adequate financial or other resources to complete the development and commercialization
of our product candidates; or
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any products that are approved may not be accepted or reimbursed in the marketplace.
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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.
We have never generated any revenues
and may never become profitable.
Since inception, we have not generated
any revenues. 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 revenues or
become profitable.
Our limited operating history makes
it difficult to evaluate our business and prospects.
Our operations to date have been limited
to organizing and staffing our company, acquiring product and technology rights, conducting preclinical studies and producing product
under cGMP conditions. We have not demonstrated an ability to conduct clinical trials, obtain regulatory approval for or commercialize
a product candidate. Consequently, any predictions about our future performance may not be as accurate as they could be if we had
a history of successfully testing, developing and commercializing pharmaceutical products.
If we are unable to successfully
remediate the material weaknesses 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 the
fiscal 2018 consolidated financial statements of Rezolute, Inc., we noted material weaknesses in our controls, principally as
a result of not having segregated duties as one employee can initiate and complete transactions, not having measures that
would prevent the employees from overriding the internal control system, one employee is responsible for
complex accounting issues without additional reviews within the Company and the Company did not have effective review
controls over financial reporting over the financial statements and related disclosures in accordance with U.S. GAAP and SEC
rules and regulations. A material weakness is a deficiency or combination of deficiencies in internal control over
financial reporting that results in more than reasonable possibility that a material misstatement of annual or interim
financial statements will not be prevented or detected on a timely basis. We have also begun evaluating and implementing
additional procedures to improve the segregation of duties. We cannot assure that these or other measures will fully
remediate the deficiencies or material weaknesses described above. We also cannot assure you that we have identified all of our
existing significant deficiencies and material weaknesses, or that we will not in the future have additional significant
deficiencies or material weaknesses.
Operations outside the United States
may be affected by different local politics, business and cultural factors, different regulatory requirements and prohibitions
between jurisdictions.
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.
The persistently weak global economic
and financial environment in many countries and increasing political and social instability may have a material adverse effect
on our results.
Many of the world’s largest economies
and financial institutions continue to be impacted by a weak ongoing global economic and financial environment, with some continuing
to face financial difficulty, liquidity problems and limited availability of credit. It is uncertain how long these effects will
last, or whether economic and financial trends will worsen or improve. Such uncertain times may have a material adverse effect
on our results of operations, financial condition and, if circumstances worsen, our ability to raise capital at reasonable rates.
In addition, the varying effects of difficult
economic times on the economies, currencies and financial markets of different countries could unpredictably impact, the conversion
of our operating results into our reporting currency, the US dollar. Alternately, inflation could accelerate, which could lead
to higher interest rates, which would increase our costs of raising capital.
In addition, increasing political and social
instability around the world may lead to significant business disruptions or other adverse business conditions. Similarly, increased
scrutiny of corporate taxes and executive pay may lead to significant business disruptions or other adverse business conditions,
and may interfere with our ability to attract and retain qualified personnel.
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 a kallikrein inhibitor
portfolio from ActiveSite Pharmaceuticals and in consideration for such license, we will owe milestone payments and royalties to
ActiveSite if and when 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 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 or patent interference proceedings may be necessarily brought against 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.
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 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.
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:
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we or our licensors were the first to make the inventions covered by each of our pending patent
applications;
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we or our licensors were the first to file patent applications for these inventions;
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others will not independently develop similar or alternative technologies or duplicate any of our
technologies;
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any of our or our licensors’ pending patent applications will result in issued patents;
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any of our or our licensors’ patents will be valid or enforceable;
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any patents issued to us or our licensors and collaborators will provide a basis for commercially
viable products, will provide us with any competitive advantages or will not be challenged by third parties;
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we will develop additional proprietary technologies or product candidates that are patentable;
or
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the patents of others will not have an adverse effect on our business.
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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.
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, our sales and profits could suffer 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 US, 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 US.
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.
If the Company is required to impair
their long-lived assets, the Company’s financial condition and results could be negatively affected.
If we are unable to further
successfully develop products using our patents that were purchased, the Company may experience events which could cause our
long-lived assets to be impaired. If we evaluate our long-lived assets and deem that there is an impairment, under current
accounting standards, the Company will be required to write down the assets. Any write-down would have a negative effect on
our consolidated financial statements. During the year ended June 30, 2018, the Company incurred an impairment charge of
approximately $1,691,000 due to the shutdown of its manufacturing facility.
Risks Related to Our Common Stock
Investors may experience dilution
if we issue additional shares of common stock.
In general, stockholders do not have preemptive
rights to any common stock issued by us in the future. Therefore, stockholders may experience dilution of their equity investment
if we issue additional shares of common stock in the future. This includes shares issuable under equity incentive plans, or if
we issue securities that are convertible into shares of our common stock. Given that we will we require additional capital, we
intend to raise funds in the future by issuing common stock that will cause dilution to our stockholders. We also have significant
outstanding warrants to purchase common stock as well as a stock option pool available to employees, which if exercised, would
cause dilution to our stockholders.
There is a limited trading market
for our common stock, which could make it difficult to liquidate an investment in our common stock, in a timely manner.
Our common stock is currently traded on
the OTCQB. Because there is a limited public market for our common stock, investors may not be able to liquidate their investment
whenever desired. We cannot assure that an active trading market for our common stock will ever develop and the lack of an active
public trading market means that investors may be exposed to increased risk. In addition, if we failed to meet the criteria set
forth in SEC regulations, various requirements would be imposed by law on broker-dealers who sell our securities to persons other
than established customers and accredited investors. Consequently, such regulations may deter broker-dealers from recommending
or selling our common stock, which may further affect its liquidity.
With a limited trading market for
our common stock, the trading price can be impacted by naked short selling.
Our stock price has been under downward
pressure for over a year and we have been puzzled as to why there would be consistent downward pressure on our stock even in the
face of positive news about the Company and our prospects. Following some investigation and with the assistance of outside advisors,
we believe we are the target of naked short selling. Naked short selling is when an investor sells short shares that they do not
possess and have not confirmed their ability to possess. If the trade associated with the short does not take place within the
clearing time period and the short-seller does not tender shares to the buyer, the trade is considered a “failure to deliver.”
Naked short selling, a practice that is
prohibited by the SEC's Regulation SHO, reduces the value of companies and shareholders' investments by artificially pushing a
company’s stock price down. For smaller companies like ours that are looking to raise working capital, it makes the process
difficult. Upon tracking our trading activity, we have determined that approximately 44% of our daily trading volume is short selling
and we believe that the short sellers have been lax at complying with Regulation SHO since early 2013. There are no assurances
that we will be able to curb the naked short selling of our stock.
If securities analysts do not publish
research or reports about our business or if they downgrade us or our sector, the price of our common stock could decline.
The trading market for our common stock
will depend in part on research and reports that industry or financial analysts publish about us or our business. We do not control
these analysts. Furthermore, if one or more of the analysts who cover us downgrades us or the industry in which we operate or the
stock of any of our competitors, the price of our common stock will likely decline. If one or more of these analysts ceases coverage
altogether, we could lose visibility, which could also lead to a decline in the price of the common stock.
We cannot ensure that our common
stock will be listed on a securities exchange, which may adversely affect your ability to dispose of our common stock in a timely
fashion.
We plan to seek listing of our common stock
on the NYSE MKT or NASDAQ exchange as soon as reasonably practicable. In 2011, the NYSE MKT and the NASDAQ amended their listings
to restrict the ability of companies that have completed reverse mergers to list their securities on such exchanges. In order to
become eligible to list their securities on such exchange, reverse merger companies must have had their securities traded on an
over-the-counter (OTC) market for at least one year, maintained a certain minimum closing price for no less than 30 of the most
recent 60 days prior to the filing of an initial listing application and prior to listing, and timely filed with the SEC all required
reports since consummation of the reverse merger, including one annual report containing audited financial statements for a full
fiscal year commencing after the date of the filing of the Form 8-K containing the Company’s Form 10 information. To date
the Company has not met all of the filing requirements above and may not be able to satisfy the initial listing standards of the
NYSE MKT or NASDAQ exchanges in the foreseeable future or at all. Even if we are able to list our common stock on such exchange,
we may not be able to maintain a listing of the common stock on such stock exchange.
The market price and trading volume
of our common stock may be volatile, which may adversely affect its market price.
The market price of our common stock could
be subject to significant fluctuations due to factors such as:
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actual or anticipated fluctuations in our financial condition or results of operations;
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limited trading activity;
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success or failure of our operating strategies and our perceived prospects; realization of any
of the risks described in this section; failure to be covered by securities analysts or failure to meet the expectations of securities
analysts;
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decline in the stock prices of peer companies; and
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discount in the trading multiple of our common stock relative to that of common stock of certain
of our peer companies due to perceived risks associated with our smaller size.
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As a result, shares of our common stock
may trade at prices significantly below the price an investor paid to acquire them. Furthermore, declines in the price of our common
stock may adversely affect the Company’s ability to conduct future offerings or to recruit and retain key employees.
Our common stock may be considered
a “penny stock.”
Trades of our common stock are subject
to Rule 15g-9 promulgated by the SEC under the Exchange Act, which imposes certain requirements on broker-dealers who sell securities
subject to the rule to persons other than established customers and accredited investors. For transactions covered by the rule,
broker-dealers must make a special suitability determination for purchasers of the securities and receive the purchaser’s
written agreement to the transaction prior to sale. The SEC also has other rules that regulate broker-dealer practices in connection
with transactions in “penny stocks.” Penny stocks generally are equity securities with a price of less than $5.00 (other
than securities listed on a national securities exchange, provided that current price and volume information with respect to transactions
in that security is provided by the exchange or system). The penny stock rules require a broker-dealer, prior to a transaction
in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document prepared by the SEC that
provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must
provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson
in the transaction, and monthly account statements showing the market value of each penny stock held in the customer’s account.
The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally
or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer’s
confirmation. These disclosure requirements have the effect of reducing the level of trading activity in the secondary market for
our common stock. As a result of the foregoing, investors may find it difficult to sell their shares.
We have no current plan to pay dividends
on our common stock and investors may lose the entire amount of their investment.
We have no current plans to pay dividends
on our common stock. Therefore, investors will not receive any funds absent a sale of their shares. We cannot assure investors
of a positive return on their investment.
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not required for smaller reporting companies.
ITEM 2. PROPERTIES
Our corporate headquarters are located
at 1450 Infinite Drive, Louisville, Colorado.
On May 5, 2014, we entered into a lease
agreement for the lease of 27,000 square feet of office, lab and clean room space in Louisville, Colorado. We have subsequently
subleased a portion of this facility.
ITEM 3. LEGAL PROCEEDINGS
On March 31, 2017, Alpha Venture Capital
Partners, L.P., a stockholder, filed a derivative complaint. In September 2017, the Company settled with the plaintiff’s
lawyer to pay certain legal expenses. In the year ended June 30, 2018, the Company made payments of $250,000 for these expenses.
There were no additional legal proceedings.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
Notes to Consolidated Financial Statements
June 30, 2018
Note 1 Nature of Operations
These financial statements represent the
consolidated financial statements of Rezolute, Inc. (“Rezolute”), and its wholly owned operating subsidiary, AntriaBio
Delaware, Inc. (“Antria Delaware”). Rezolute and Antria Delaware are collectively referred to herein as the “Company”.
Note 2 Summary of Significant Accounting
Policies
The principal accounting policies applied
in the preparation of these financial statements are set out below.
Basis of Presentation
-
The
financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America
(“GAAP”).
Principals of Consolidation
–
These consolidated financial statements include the accounts of Rezolute, and its wholly owned subsidiary. All material intercompany
transactions and balances have been eliminated.
Accounting Estimates
- The preparation of financial
statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts in the
financial statements and the accompanying notes. Such estimates and assumptions impact, among others, the following: the useful
lives of depreciable assets and measurement of any impairment, the fair value of share-based payments and warrants, fair value
of derivative instruments, estimates of the probability and potential magnitude of contingent liabilities, debt extinguishment,
the valuation allowance for deferred tax assets due to continuing and expected future operating losses and going concern. Actual
results could differ from those estimates.
Risks and Uncertainties
-
The Company's operations may be subject to significant risk and uncertainties including financial, operational, regulatory and
other risks associated with a clinical stage company, including the potential risk of business failure. See Note 3 regarding going
concern matters.
Cash
- In the statement
of cash flows, cash includes cash in hand and other short-term highly liquid investments with original maturities of three months
or less. The Company places its cash on deposit with financial institutions it believes to be of high quality. At times during
the year and at June 30, 2018, such cash investments may be in excess of the Federal Deposit Insurance Corporation (“FDIC”)
insurance limits.
Fixed Assets
–
Fixed assets are carried at cost, adjusted for any impairment, less accumulated depreciation and amortization. Depreciation
is computed using the straight-line method over the estimated useful lives.
Intangible Assets
–
Costs
of establishing patents, consisting of legal and filing fees paid to third parties, are expensed as incurred. The value of
the current intangible asset is based on the asset values assigned in the asset acquisition, which are periodically
reassessed for reasonableness, based on the Company’s planned use and any changes in legal or economic factors. The intangible
assets are being amortized over 11 years which is the life of the patents at the time they were acquired. The amortization
expense is expected to be approximately $7,000 for each of the next five fiscal years.
Deposits
– Deposits
represent amounts paid as a security deposit on the lease of the facilities and is recorded at cost.
Convertible Notes Payable -
Borrowings
are recognized initially at the principal amount received. Borrowings are subsequently carried at amortized cost;
any difference between the proceeds (net of transaction costs) and the redemption value is recognized as interest expense in
the statements of operation over the period of the borrowings using the effective interest method. The Company records
any identified beneficial conversion feature (“BCF”) related to the issuance of a convertible note when
issued. Beneficial conversion features that are contingent upon the occurrence of a future event are recorded when the
contingency is resolved. The value of the BCF is recorded in the financial statements as a debt discount from the face amount
of the note and such discount is amortized over the expected term of the convertible note (or to the conversion date of
the note, if sooner) and is charged to interest expense. If convertible notes are issued in conjunction with warrants, the
Company allocates the proceeds to each component using a relative fair value.
Debt Issue Costs
-
Costs associated with obtaining debt financing are deferred and amortized to interest expense using the effective interest
method over the term of the related financing.
Research and Development Costs
- Research and development costs are expensed as incurred and include salaries, benefits and other staff-related costs; consultants
and outside costs; material manufacturing costs; and facilities and other related costs. These costs relate to research and development
costs without an allocation of general and administrative expenses.
General and Administrative Expenses
-
Such costs are expensed in the period incurred.
Share-based Compensation
–
The Company has various share-based employee and non-employee compensation plans, which are described more
fully in Note 8. The Company accounts for stock options granted to employees and non-employees by recognizing the costs
resulting from all share-based payment transactions in the consolidated financial statements at their estimated fair values.
The Company estimates the fair value of each option on the date of grant using the Black
-
Scholes
closed-form option
-
pricing model based on assumptions of
expected volatility of its common stock, prevailing interest rates, an estimated forfeiture rate, and the expected term of
the stock options, and the Company recognizes that cost as an expense ratably over the associated employee service
period, which is generally the vesting period.
Impairment of Long-Lived Assets
–
The Company routinely performs an evaluation of the recoverability of the carrying value of our long-lived assets to determine
if facts and circumstances indicate that the carrying value of assets or intangible assets may be impaired and if any adjustment is
warranted. As of June 30, 2018, the Company’s evaluation identified there were facts and circumstances that indicated impairment
of certain assets. The Company recorded an impairment charge of approximately $1,691,000, as further discussed in Note 4.
Derivatives
-
We account for our embedded derivatives and liability warrants by recording the fair value. The fair value of the warrants
is calculated using the Black-Scholes pricing model. The embedded derivatives’ fair value was calculated based on the
payment obligation if exercised. We recorded the derivative expense at the inception of each instrument reflecting the
difference between the fair value and the cash received. Changes in the fair value in subsequent periods are recorded as
derivative gains or losses for the period.
Income Taxes
–
The Company accounts for income taxes under an asset and liability approach. This process involves calculating the
temporary and permanent differences between the carrying amounts of the assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes and net of loss carry-forward. The temporary differences result in
deferred tax assets and liabilities, which would be recorded on the Company’s balance sheets in accordance with ASC
740, which established financial accounting and reporting standards for the effect of income taxes. The Company must assess
the likelihood that its deferred tax assets will be recovered from future taxable income and, to the extent the Company
believes that recovery is not likely, the Company must establish a valuation allowance. Changes in the Company’s
valuation allowance in a period are recorded through the income tax provision on the statements of operations.
The Company follows ASC 740 (formerly known
as FIN No. 48,
Accounting for Uncertainty in Income Taxes
). ASC 740 clarifies the accounting for uncertainty in income taxes
recognized in an entity’s financial statements and prescribes a recognition threshold and measurement attributes for financial
statement disclosure of tax positions taken or expected to be taken on a tax return. Under ASC 740, the impact of an uncertain
income tax position on the income tax return must be recognized at the largest amount that is more-likely-than-not to be sustained
upon audit by the relevant taxing authority. An uncertain income tax position will not be recognized if it has less than a 50%
likelihood of being sustained. Additionally, ASC 740 provides guidance on derecognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. As a result of the implementation of ASC 740, the Company recognized
no material adjustment in the liability for unrecognized income tax benefits. The Company reports tax related interest and penalties
as a component of interest expense.
Segment Reporting –
Operating
segments are reported in a manner consistent with the internal reporting provided to the chief operating decision maker. The chief
operating decision-maker, who is responsible for allocating resources and assessing performance of the operating segments, has
been identified as the Chief Executive Officer and the board of directors that makes strategic decisions. The Company operates
one segment.
Income (Loss) Per Common Share
–
Basic income (loss) per common share is calculated by dividing the net income (loss) available to the common
shareholders by the weighted average number of common shares outstanding during that period. Diluted earnings per share
reflects the effects of dilutive instruments including stock options and warrants, by dividing income available to common
shareholders, adjusted for the effects of dilutive convertible securities, by the weighted average number of shares of common
shares outstanding during the period and all additional common shares that would have been outstanding had all potential
dilutive common shares been issued. The convertible notes issued in April 2018 would have a dilutive impact to earnings per share, but as the conversion feature
was not resolved at the date of the balance sheet, they are not included in the dilutive calculation.
Although there were common stock equivalents
of 57,106,492 and 39,454,065 shares outstanding at June 30, 2018 and 2017, respectively, consisting of stock options and warrants;
they were not included in the calculation of earnings per share because they would have been anti-dilutive.
Fair Value of Financial Instruments
-
The Company follows ASC 820,
Fair Value Measurements and Disclosures
, which provides a framework for measuring fair
value under GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability
(an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market
participants on the measurement date. The standard also expands disclosures about instruments measured at fair value and establishes
a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable
inputs when measuring fair value. The standard describes three levels of inputs that may be used to measure fair value:
|
·
|
Level 1: Quoted prices for identical assets and liabilities in active markets;
|
|
·
|
Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant
inputs and significant value drivers are observable in active markets; and
|
|
·
|
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
|
The carrying amounts of financial
instruments including cash, accounts payable and accrued expenses, approximated fair value as of June 30, 2018 and 2017 due
to the relatively short maturity of the respective instruments. The fair value of the convertible notes payable approximates
the face value of $4,140,000 due to the one-year term.
The warrant derivative liability recorded
as of June 30, 2018 and 2017 is recorded at an estimated fair value based on a Black-Scholes pricing model. The warrant derivative
liability is a level 3 fair value instrument with the entire change in the balance recorded through earnings. See significant assumptions
in Note 8. The following table sets forth a reconciliation of changes in the fair value of financial instruments classified as
level 3 in the fair value hierarchy:
Balance as of June 30, 2017
|
|
$
|
(588
|
)
|
Total unrealized gains (losses):
|
|
|
|
|
Included in earnings
|
|
|
588
|
|
Balance as of June 30, 2018
|
|
$
|
-
|
|
The embedded derivative liability
is recorded at an estimated fair value based on the present value of the probability of the weighted exercise of the
payment obligation. The embedded derivative liability is a level 3 fair value measurement with the entire change in the
balance recorded through earnings each reporting period. The significant inputs to the calculation are a term of one year and
a weighted probability of 95%. Refer to Note 6 for further discussion. The following table sets forth a reconciliation of
changes in the fair value of financial instruments classified as level 3 in the fair value hierarchy:
Value Recorded at issuance
|
|
|
100,000
|
|
Total unrealized gains (losses):
|
|
|
|
|
Included in earnings
|
|
|
(26,096
|
)
|
Balance as of June 30, 2018
|
|
$
|
73,904
|
|
Recently Issued Accounting Pronouncements
-
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall
:
Recognition and Measurement
of Financial Assets and Financial Liabilities
, which addresses certain aspects of recognition, measurement, presentation, and
disclosure of financial instruments. ASU 2016-01 will be effective for us starting on July 1, 2018, and early adoption is not permitted.
We are currently evaluating the impact that the standard will have on our consolidated financial statements.
In February 2018, the FASB issued ASU No. 2018-03, Technical
Corrections and Improvements to Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities, that clarifies the guidance in ASU No. 2016-1, Financial Instruments-Overall (Subtopic 825-10)
related to: Equity Securities without a Readily Determinable Fair Value- Discontinuation, Equity Securities without a Readily Determinable
Fair Value- Adjustments, Forward Contracts and Purchased Options, Presentation Requirements for Certain Fair Value Option Liabilities,
Fair Value Option Liabilities Denominated in a Foreign Currency and Transition Guidance for Equity Securities without a Readily
Determinable Fair Value. The Company is currently in the process of assessing the impact of this ASU on its consolidated financial
statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This update requires organizations to recognize lease assets and lease liabilities on the balance sheet
and also disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or
after December 15, 2018, and interim periods within those annual periods. ASU 2016-02 requires modified retrospective adoption for all leases existing at, or entered after, the date of initial application,
with an option to use certain transition relief. We will be required to adopt ASU 2016-02 starting on
July 1, 2019. We are currently evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09.
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The update
will affect all entities that issue share-based payment awards to their employees and is effective for annual periods beginning
after December 15, 2016 for public entities. The areas for simplification in ASU 2016-09 involve several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. We adopted the ASU starting on July 1, 2017 and there was a minimal impact
on our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-9.
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.
The update includes guidance on what
changes to share-based payment awards would require modification accounting and is effective for annual periods after December
15, 2017. We expect to adopt the ASU 2017-9 on July 1, 2018. We do not expect the adoption of the new provisions to have a material
impact on our financial condition or results of operations.
In July 2017, the FASB issued Accounting
Standards Update (“ASU”) No. 2017-11. “Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity
(Topic 480); Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features, II.
Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain
Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. ASU 2017-11 revises the guidance for instruments with
down round features in Subtopic 815-40, Derivatives and Hedging – Contracts in Entity’s Own Equity, which is considered
in determining whether an equity-linked financial instrument qualifies for a scope exception from derivative accounting. An entity
still is required to determine whether instruments would be classified in equity under the guidance in Subtopic 815-40 in determining
whether they qualify for that scope exception. If they do qualify, freestanding instruments with down round features are no longer
classified as liabilities. ASU 2017-11 is effective for annual and interim periods beginning December 15, 2018, and early adoption
is permitted, including adoption in an interim. ASU 2017-11 provides that upon adoption, an entity may apply this standard retrospectively
to outstanding financial instruments with a down round feature by means of a cumulative-effect adjustment to the opening balance
of retaining earnings in the fiscal year and interim period adoption. The Company is currently in the process of assessing the
impact of this ASU on its consolidated financial statements.
Subsequent Events
–
The Company has considered subsequent events through the date of issuance of this Report on Form 10-K, and has determined no additional
disclosure is necessary, other than those disclosed in the footnotes.
Note 3 Going Concern
As reflected in the accompanying financial
statements, the Company has a net loss of $29,861,776 and net cash used in operations of $14,113,080 for the year ended June 30,
2018, and a stockholders’ deficit of $3,960,755 and an accumulated deficit of $94,183,738 at June 30, 2018. In
addition, the Company is in the clinical stage and has not yet generated any revenues. These factors raise substantial doubt about
the Company’s ability to continue as a going concern.
The Company expects that its current
cash resources as well as expected lack of operating cash flows will not be sufficient to sustain operations for a period
greater than one year from the filing date of these financial statements. The ability of the Company to continue its
operations is dependent on Management's plans, which include continuing to raise equity and debt based financing. There is no
assurance that the Company will be successful in accomplishing this objective on terms acceptable to the Company.
The accompanying financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets
or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 Fixed Assets
The following is a summary of fixed assets
and accumulated depreciation:
|
|
Useful
|
|
|
|
|
|
|
|
|
Life
|
|
June 30, 2018
|
|
|
June 30, 2017
|
|
Furniture and fixtures
|
|
5 - 7 years
|
|
$
|
118,450
|
|
|
$
|
118,450
|
|
Lab equipment
|
|
3 - 15 years
|
|
|
738,415
|
|
|
|
3,946,040
|
|
Leasehold Improvements
|
|
5 - 7 years
|
|
|
29,296
|
|
|
|
3,247,038
|
|
|
|
|
|
|
886,161
|
|
|
|
7,311,528
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
(517,787
|
)
|
|
|
(1,986,127
|
)
|
|
|
|
|
$
|
368,374
|
|
|
$
|
5,325,401
|
|
Depreciation expense was $1,058,435 and
$1,106,878 for the years ended June 30, 2018 and 2017, respectively.
On June 22, 2018, the Company
completed a sale of certain laboratory assets, including manufacturing assets, and leasehold improvements to an independent
company for proceeds of $1,550,000. The sale of assets resulted in the Company recognizing a loss on the sale of long lived
assets for $663,017.
Additionally, during the year
ended June 30, 2018, the Company entered into discussions regarding the sublease of its manufacturing and laboratory space
in Louisville, Colorado. The Company also had a strategic shift in April 2018, resulting in the manufacturing plant being
shut down and a restructuring plan being implemented. This shift was to focus on finding a partner for continued development
of AB101 and developing RZ358 with external manufacturing organizations. As the Company was completing its analysis
of long-lived assets, an evaluation of the Company’s leasehold improvements was conducted to evaluate the
recoverability of assets carrying value. Upon completion of this impairment analysis, the Company concluded it would not be
able to recover future benefits from leasehold improvements with a net book value of $1,691,391 due to factors discussed
above. As such the Company recorded an impairment charge for this amount in June 2018. There were no impairment charges
recorded in the year ended June 30, 2017.
Note 5 Related Party Transactions
During the year ended June 30,
2018, the Company incurred investor relation expenses of $33,322 and general and administrative expenses of $67,726 for
services performed by related parties of the Company and included in the statement of operations. During the year ended June
30, 2017, the Company incurred investor relation expenses of $113,175 and general and administration expenses of $13,829 for
services performed by related parties of the Company and included in the statement of operations. As of June 30, 2018 and
2017, there were $0 and $25,200, respectively, related party expenses recorded in accounts payable and accrued expense.
Note 6 Convertible Notes Payable
Historical Note
As of June 30, 2018, the Company had one
historical convertible note outstanding with a balance of $10,000, which consists of notes which were not converted at the time
of an equity transaction in 2017. As of June 30, 2018, this outstanding convertible note has matured, and payments were due. This
convertible note which has not been repaid or converted continues to accrue interest at a rate of 8%.
Q3 2018 Notes
On February 26, 2018, the Company
issued a secured convertible promissory note for gross proceeds of $500,000. The note bears interest at a rate of 15% per
annum and expires one year from issuance. The note contains an optional conversion feature in which if the Company raises $10
million then, at the investor’s option, the notes would convert into the financing at a 20% discount of the financing
terms. With the promissory note, the investor also received warrants to purchase 500,000 shares of common stock which expire
five years from date of issuance. The exercise price for these warrants was set on of June 29, 2018 at $0.52 per share. The
note also contains an embedded derivative liability for the acceleration of the maturity date as discussed in Note 2,
which states a $25,000 penalty plus all unpaid interest to be accrued will be paid if note is paid prior to maturity. The embedded
derivative liability of $100,000 is reflected as a debt discount. The embedded derivative liability is amortized into
interest expense over the life of the note.
During the
quarter ended March 31, 2018, the Company issued two secured convertible promissory notes for gross proceeds of $700,000. The
notes bore interest at a rate of 12% per annum and expire one year from issuance or 10 days after the closing of a financing
of at least $10 million. The notes included a default interest rate provision, in which the stated interest rate will
increase to 15% during an event of default. Subsequent to June 30, 2018, the stated interest rate has increased to 15% as the
quarterly interest payment is past due. The notes contained an optional conversion feature in which if the Company raises
$20 million then, at the investor’s option, the notes would convert into the financing at a 20% discount of the
financing terms. This conversion feature was a contingent beneficial conversion feature that was not calculated as a
separate derivative until the contingent event has occurred. With the promissory note, the investor also received warrants to
purchase 350,000 shares of common stock equal to one-half of the principal amount of the note. The warrants had an exercise
price of $1.00 per share and are exercisable for five years from date of issuance.
The above two notes and
related warrants to purchase shares of stock were modified on April 3, 2018 with four changes. The first being the
optional conversion was amended to an automatic conversion in the event of a qualified financing. Second, the maturity date
on both were amended to January 31, 2019 or if the Company successfully offers and sells at least $15 million of its
securities in a single equity financing (a “Qualified Financing”), then the outstanding principal and interest
due shall automatically be converted at the closing of the Qualified Financing at a 20% discount to the terms set forth in
such Qualified financing. Third, the warrants issued were modified to a number of shares set by the
principal amount divided by $0.41, which was set on June 29, 2018. Finally, the exercise price was amended from $1.00 to 120%
the average closing price of the 10 days preceding July 1, 2018, or $0.52.
As the debt issued in January and
February 2018 was modified to mirror the terms of the April 3, 2018 financing closing, the Company completed a modification
or extinguishment evaluation. As the future cash flows of the instruments fair value changed an amount greater than 10% and
debt extinguishment accounting was applied. Accordingly, the net book value of the original note payable, including the
unamortized debt discount of $626,797 was removed and the fair value of the modified notes payable and warrants was recorded
as $683,737 and $545,257, respectively. This resulted in the Company recording a loss on the extinguishment
of debt of $602,193.
Q4 2018 Notes
On April 3, 2018 and April 11, 2018,
the Company closed on a series of Senior Secured Promissory Notes with gross proceeds of $4.1 million, which had cash
issuance costs of approximately $239,000. The notes also include warrants to purchase common stock with the number of shares
and exercise price to be determined at the at the close of the next financing or based on the average trading prices prior to
July 1, 2018. As the Company did not complete a financing event prior to July 1, 2018, the warrant conversion share price was
set based on the average closing price of the 20 trading days preceding July 1, 2018, or $0.41. The exercise price was set at
120% of the average closing price of the 10 trading days preceding July 1, 2019, or $0.52. As discussed in Note 8, the
warrants had a fair value of $134,000. The notes bear interest at 12% per annum, with a 15% default interest rate provision,
and mature on January 31, 2019 or if the Company successfully offers and sells at least $15 million of its securities in
a single equity financing, then the outstanding principal and interest due shall automatically be converted at the closing
of the Qualified Financing at a 20% discount to the terms set forth in such Qualified Financing. The notes contained
a mandatory conversion feature, in which the notes will convert into shares at the close of a qualified financing.
This conversion feature is a contingent beneficial conversion feature that is not calculated as a separate derivative until
the contingent event has occurred. The notes include a default interest rate provision, in which the stated interest rate
will increase to 15% during an event of default.
With the promissory notes issued in
April 2018, each investor also received warrants to purchase an adjustable number of shares of common stock at an adjustable
exercise price. The number of shares was to be set at the conversion price of the convertible notes or if no Qualified
Financing occurs prior to July 1, 2018, the shares are set by the average closing stock price for the 20-day period preceding
July 1, 2018. The exercise price is to be determined at 120% of the conversion price of the Convertible note if a financing
occurs or 120% of the average closing stock price of the Company for 10 days prior to July 1, 2018. As no qualifying
financing event had occurred prior to July 1, 2018, the number of warrants to purchase common stock was fixed as of June 30,
2018, based on the preceding 20-day average stock price, and 11,685,176 of warrants to purchase
shares of common stock were issued. The exercise price of the shares was also fixed at $0.52, which is 120% of the 10-day
closing price for the period preceding July 1, 2018.
The value of the notes and warrants
is determined using the relative fair value. The fair value of the promissory notes and warrants was $7,186,883 and $177,893,
resulting in relative fair values $2,319,000 allocated to notes and $1,821,000 allocated to warrants. As of June 30, 2018, the outstanding balance of the secured convertible
promissory notes was $4,840,000, with a current debt discount outstanding of approximately $2,120,611 and unamortized debt
issuance costs of approximately $265,000.
Note
7 Shareholders’ Equity (Deficit)
Common Stock
The Company is authorized to issue 200,000,000
shares of $0.001 par-value common stock. All shares of the Company’s common stock have equal rights and privileges with respect
to voting, liquidation and dividend rights. Each share of common stock entitles the holder thereof to:
|
a.
|
One non-cumulative vote for each share held of record on all matters submitted to a vote of the
stockholders;
|
|
b.
|
To participate equally and to receive any and all such dividends as may be declared by the Board
of Directors out of funds legally available therefore; and
|
|
c.
|
To participate pro rata in any distribution of assets available for distribution upon liquidation.
|
Stockholders have no pre-emptive rights
to acquire additional shares of common stock or any other securities. Common shares are not subject to redemption and carry no
subscription or conversion rights.
Preferred Stock
The Company is authorized to issue 20,000,000
shares of Preferred Stock with each share having a par value of $0.001.
During the year ended June 30, 2017, the Company closed private
placement transactions in which the Company issued 5,783,184 units to accredited investors. Each investor was issued either Class
A Units or Class B units of the Company. Each Class A Unit received one share of common stock and one-half of one common share
purchase warrant. If the investor had previously invested in the Company they were eligible for a Class B Unit which received one
share of common stock and one common share purchase warrant. Each common share purchase warrant is exercisable at $1.65 per share
and will expire 60 months following the issuance. As of June 30, 2017, the Company received net proceeds of approximately $5.2
million after the placement agent compensation and issuance costs paid of $683,194 and $516,550 of warrant expense recorded as
issuance costs.
The Company also entered into a
private placement transaction during 2017 and 2018 in which the Company issued common stock to accredited investors at
an offering price of $1.00 per share. During the years ended June 30, 2018 and 2017, the Company received net proceeds of
approximately $12.6 million after the placement agent compensation of $246,671 of warrant expense recorded as issuance costs,
as there was no placement agent compensation.
Additionally, during 2018 the Company closed a private placement
transaction in which the Company issued 4,500,000 shares of common stock to accredited investors at an offering price of $1.00
per share. The Company received net proceeds of $4.44 million after the placement agent compensation of $60,000.
Lincoln Park Transaction
On December 22, 2017, we entered into the
Lincoln Park Purchase Agreement pursuant to which Lincoln Park has agreed to purchase from us up to an aggregate of $10.0 million
of the Company’s common stock (subject to certain limitations) from time to time over the 36-month term of the agreement.
We also entered into a registration rights agreement with Lincoln Park pursuant to which the Company filed with the Securities
and Exchange Commission (the “SEC”) the registration statement to register for resale under the Securities Act of 1933,
as amended, or the Securities Act, the shares of common stock that have been or may be issued to Lincoln Park under the Purchase
Agreement.
As a result, on December 22, 2017, 344,669
newly issued shares of the Company’s common stock, equal to three percent of the $10 million availability, were issued to
Lincoln Park as consideration for Lincoln Park’s commitment to purchase shares of the Company’s common stock under
the agreement.
Under the terms and subject to the conditions
of the Lincoln Park Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln
Park is obligated to purchase up to $10.0 million worth of shares of the Company’s common stock. Such future sales of common
stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s option,
over the 36-month term of the agreement.
As contemplated by the Lincoln Park Purchase
Agreement, and so long as the closing price of the Company’s common stock exceeds $0.40 per share, then the Company may direct
Lincoln Park, at its sole discretion to purchase up to 65,000 shares of its common stock on any business day, provided that five
business day has passed since the most recent purchase. The price per share for such purchases will be equal to the lower of: (i)
the lowest sale price on the applicable purchase date and (ii) the arithmetic average of the three (3) lowest closing sale prices
for the Company’s common stock during the twelve (12) consecutive business days ending on the business day immediately preceding
such purchase date (in each case, to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock
split or other similar transaction that occurs on or after the date of the purchase agreement). The maximum amount of shares subject
to any single regular purchase increases as the Company’s share price increases, subject to a maximum of $500,000.
In addition to regular purchases, the Company
may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional purchases if the closing sale
price of the common stock exceeds certain threshold prices as set forth in the purchase agreement. In all instances, the Company
may not sell shares of its common stock to Lincoln Park under the purchase agreement if it would result in Lincoln Park beneficially
owning more than 9.99% of its common stock. There are no trading volume requirements or restrictions under the purchase agreement
nor any upper limits on the price per share that Lincoln Park must pay for shares of common stock.
The Lincoln Park Purchase Agreement and
the registration rights agreement contain customary representations, warranties, agreements and conditions to completing future
sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the purchase agreement
at any time, at no cost or penalty. During any “event of default” under the purchase agreement, all of which are outside
of Lincoln Park’s control, Lincoln Park does not have the right to terminate the purchase agreement; however, the Company
may not initiate any regular or other purchase of shares by Lincoln Park, until such event of default is cured. In addition, in
the event of bankruptcy proceedings by or against the Company, the purchase agreement will automatically terminate.
Actual sales of shares of common stock
to Lincoln Park under the purchase agreement will depend on a variety of factors to be determined by the Company from time to time,
including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate
sources of funding for the Company and its operations. Lincoln Park has no right to require any sales by the Company, but is obligated
to make purchases from the Company as it directs in accordance with the purchase agreement. Lincoln Park has covenanted not to
cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares.
XOMA Equity Issuance
As the closing of the debt
financing in April 2018 was considered to be the initial closing for the Common Stock purchase agreement, on April 3, 2018,
the Company issued approximately 7 million shares of Common Stock to XOMA as well as approximately 1.1 million shares for
$4,570,000 related to the interim financing which reduce the amount of shares to be issued upon the closing of a Qualified
financing, as discussed in Note 10.
Other
The Company has not declared or paid any
dividends or returned any capital to common stock shareholders as of June 30, 2018 and 2017.
Note 8 Stock-Based
Compensation
Options
On October 31, 2016, the Board
adopted the AntriaBio, Inc. 2016 Non Qualified Stock Option Plan which allows the Company to issue up to 35,000,000 shares of
common stock in the form of stock options. Due to a shareholder settlement the 2016 Non Qualified Stock Option Plan was
amended on August 21, 2017 to reduce the number of shares to be issued to 15,000,000 shares of common stock in the form of
stock options. The Board had issued options to purchase 28,995,000 of these shares to current employees and directors as of
June 30, 2017, of which 4,360,000 were cancelled before their terms were established and 11,090,000 were additionally
cancelled by the Board during the year ended June 30, 2017. The Company had 1,550,000 of the cancelled stock options that had
begun vesting prior to the cancellation and with the cancellation the Company recorded $1,199,847 of unrecognized stock
compensation expense. Due to a shareholder settlement we agreed to among other things (i) cancel certain options granted to
certain members of the board of directors and our executive officers, (ii) reduce the number of options issuable under the
2016 plan, (iii) include an amendment to the Company’s Bylaws at the Company’s next annual meeting and (iv)
implement certain corporate governance changes. The proposed settlement was conditioned upon, among other things, approval by
the Chancery Court.
The Company granted 255,000 of
2016 Non Qualified Stock Option Plan options to current employees and directors of the Company during the year ended June
30, 2018. The options have an exercise price from $1.00 to $1.15 per share. The options expire no later than ten years from
the date of the grant. The options vest on a monthly basis over 48 months, except for 75,000 of the options which do not
begin to vest until specific events have occurred and then begin to vest over 48 months and 60,000 of the options that all
vest at the end of the consulting contract. Some options are subject to a one year cliff and all options have an exercise
price based on the fair value of the common stock on the date of grant.
The Company has computed the fair
value of all options granted that have begun vesting using the Black-Scholes option pricing model. The options that require
specific events before they begin to vest are valued at the grant date, however; have not been recorded as the
specific event is not probable of occuring. In order to calculate the fair value of the options, certain assumptions are made
regarding components of the model, including the estimated fair value of the underlying common stock, risk-free interest
rate, volatility, expected dividend yield and expected option life. Changes to the assumptions could cause significant
adjustments to valuation. The Company estimated a volatility factor utilizing comparable published volatility of several peer
companies. Due to the small number of option holders, the Company has estimated a forfeiture rate of zero as the value of
each option holder is calculated individually. The Company estimates the expected term based on the average of the vesting
term and the contractual term of the options. The risk-free interest rate is based on the U.S. Treasury yield in effect at
the time of the grant for treasury securities of similar maturity.
Rezolute has computed the fair value of
all options granted during the year ended June 30, 2018 using the following assumptions:
Expected volatility
|
|
|
84
|
%
|
Risk free interest rate
|
|
|
2.0 - 2.21
|
%
|
Expected term (years)
|
|
|
7
|
|
Dividend yield
|
|
|
0
|
%
|
Rezolute has computed the fair value of
all options granted during the year ended June 30, 2017 using the following assumptions:
Expected volatility
|
|
|
74 - 80
|
%
|
Risk free interest rate
|
|
|
1.46% - 2.43
|
%
|
Expected term (years)
|
|
|
7
|
|
Dividend yield
|
|
|
0
|
%
|
Stock option activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
Outstanding, June 30, 2016
|
|
|
8,947,418
|
|
|
$
|
2.73
|
|
|
|
|
|
Granted
|
|
|
24,725,000
|
|
|
$
|
1.19
|
|
|
|
|
|
Cancelled
|
|
|
(12,256,667
|
)
|
|
$
|
1.51
|
|
|
|
|
|
Forfeited
|
|
|
(125,000
|
)
|
|
$
|
1.12
|
|
|
|
|
|
Outstanding, June 30, 2017
|
|
|
21,290,751
|
|
|
$
|
1.65
|
|
|
|
7.7
|
|
Granted
|
|
|
255,000
|
|
|
$
|
1.08
|
|
|
|
|
|
Forfeited
|
|
|
(1,880,505
|
)
|
|
$
|
1.62
|
|
|
|
|
|
Expired
|
|
|
(250,000
|
)
|
|
$
|
4.50
|
|
|
|
|
|
Outstanding, June 30, 2018
|
|
|
19,415,246
|
|
|
$
|
1.55
|
|
|
|
7.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at June 30, 2018
|
|
|
11,398,855
|
|
|
$
|
1.92
|
|
|
|
6.4
|
|
Stock options outstanding at June 30, 2018 are summarized
in the table below:
Range of Exercise Prices
|
|
Number of Options
Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average
Remaining Contractual Lives
|
|
$1.00 - $1.99
|
|
|
12,908,287
|
|
|
$
|
1.20
|
|
|
|
6.5
|
|
$2.00 - $2.99
|
|
|
3,778,208
|
|
|
$
|
2.06
|
|
|
|
7.3
|
|
$3.00 - $4.50
|
|
|
2,728,751
|
|
|
$
|
3.14
|
|
|
|
2.2
|
|
|
|
|
19,415,246
|
|
|
$
|
1.64
|
|
|
|
5.3
|
|
Stock-based compensation expense related
to the fair value of stock options was included in the statement of operations as research and development - compensation and benefits
expense of $982,468 and $1,790,851 for the years ended June 30, 2018 and 2017, respectively and as general and administrative –
compensation and benefits expense of $4,112,947 and $4,214,819 for the years ended June 30, 2018 and 2017, respectively. The unrecognized
stock-based compensation expense at June 30, 2018 is $5,058,172. Rezolute determined the fair value as of the date of grant using
the Black-Scholes option pricing method and expenses the fair value ratably over the vesting period.
Warrants
Rezolute issued warrants to
agents and security holders in conjunction with the closing of various financings, note conversions, and private placements
as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
Outstanding, June 30, 2016
|
|
|
28,964,376
|
|
|
$
|
2.11
|
|
|
|
3.1
|
|
Warrants issued in private placements
|
|
|
3,248,184
|
|
|
$
|
1.65
|
|
|
|
|
|
Warrantes issued to placement agent
|
|
|
786,150
|
|
|
$
|
1.54
|
|
|
|
|
|
Warrants issued for consulting services
|
|
|
250,000
|
|
|
$
|
1.00
|
|
|
|
|
|
Warrants expired
|
|
|
(452,262
|
)
|
|
$
|
2.39
|
|
|
|
|
|
Outstanding, June 30, 2017
|
|
|
32,796,448
|
|
|
$
|
1.71
|
|
|
|
3.7
|
|
Warrants issued for consulting services
|
|
|
650,000
|
|
|
$
|
1.03
|
|
|
|
|
|
Warrants issued in debt financing
|
|
|
12,185,176
|
|
|
$
|
0.54
|
|
|
|
|
|
Warrants issued to placement agent
|
|
|
289,000
|
|
|
$
|
0.54
|
|
|
|
|
|
Warrants expired
|
|
|
(285,407
|
)
|
|
$
|
2.43
|
|
|
|
|
|
Outstanding, June 30, 2018
|
|
|
45,635,217
|
|
|
$
|
1.37
|
|
|
|
3.4
|
|
Year Ended June 30, 2018
The Company issued warrants
to purchase 100,000 shares of common stock at a price of $1.00 per share in connection with a consulting agreement. The
Company also issued warrants to purchase 50,000 shares of common stock at a price of $1.00 per share in connection with
investor services. The Company issued warrants to purchase 500,000 shares of common stock at a price of $1.04 per share in
connection with a consulting agreement. The Company issued warrants to purchase 350,000 shares of common stock at a
price of $1.00 per share in connection with the issuance of convertible notes. The Company issued also warrants to purchase
500,000 shares of common stock at a price to be determined at a future date in connection with the issuance of convertible
notes at a price of $0.52 per share. The warrants to purchase 350,000 shares of common stock were modified as of April 3,
2018, in connection with the issuance of the promissory notes discussed in Note 6
The Company issued warrants to purchase shares of common stock in connection with the April 3, 2018 and April 11, 2018 interim
financing closings. The number of shares was to be set at the time of a qualified financing. If no qualified financing event had occurred
prior to July 1, 2018, the number of shares was to be set based on the average closing price of the 20-day period preceding July
1, 2018. The exercise price of the warrants was to be set at 120% of a qualified financing event or 120% of the average closing
price of the 10-day period prior to July 1, 2018.
As the Company had not completed a qualified
financing as of July 1, 2018, which was not a trading day, the number of warrants to purchase shares of common stock and the exercise
price of these warrants were fixed on June 29, 2018, the last trading day of the period. The number of shares issued amounted to
11,685,177, with an exercise price of $0.52.
The warrants issued for the
11,685,177 shares of common stock were accounted for as equity at the date of issuance. The fair value of the warrants was
valued at $3,770,028 and was recorded based on relative fair value through equity and as a debt discount, as discussed in
Note 6.
The Company issued warrants to purchase
289,000 shares of common stock at an exercise price to be determined at 120% of the share price of a qualified financing if it
occurs prior to July 1, 2018 or the exercise price will be 120% of the average closing price of the Company’s share price
for the ten trading days prior to July 1, 2018, which had an exersise price of $0.52.
These warrants were valued using the Black-Scholes
option pricing model on the date of issuance. In order to calculate the fair value of the warrants, certain assumptions were made
regarding components of the model, including the closing price of the underlying common stock, risk-free interest rate, volatility,
expected dividend yield, and warrant term. Changes to the assumptions could cause significant adjustments to valuation. Rezolute
estimated a volatility factor utilizing a comparable published volatility of several peer companies. The risk-free interest rate
is based on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity. The Black-Scholes
valuation methodology was used because that model embodies all of the relevant assumptions that address the features underlying
these instruments.
The Lattice pricing model was used to
determine the fair value of the warrants to purchase 289,000 shares of common stock on the day they were issued. The Lattice
model accommodates the probability of changes in the exercise price as outlined in the warrant agreement. Under the terms of
the warrant agreement, the exercise price of the warrant will be 120% of the share price of a qualified financing if it
occurs prior to July 1, 2018 or the exercise price will be 120% of the average closing price of the Company’s
share price for the ten trading days prior to July 1, 2018. The estimated fair value was derived using the lattice model, due
to the unknown exercise price at date at issuance, with the following assumptions
Significant assumptions for
the warrants issued for the year ended June 30, 2018 used in both the Black-Scholes option pricing model and the Lattice
model were as follows:
Expected volatility
|
|
|
24% -96
|
%
|
Risk free interest rate
|
|
|
0.45% - 2.91
|
%
|
Warrant term (years)
|
|
|
0 - 7
|
|
Dividend yield
|
|
|
0
|
%
|
Significant assumptions for the warrants
issued for the year ended June 30, 2017 were as follows:
Expected volatility
|
|
|
24-110
|
%
|
Risk free interest rate
|
|
|
0.45% - 2.35
|
%
|
Warrant term (years)
|
|
|
0-7
|
|
Dividend yield
|
|
|
0
|
%
|
Note 9 Income Taxes
Taxing jurisdictions related to income
taxes are the Unites States Federal Government, the State of Colorado and the State of California. The provision for income taxes
is as follows:
|
|
Year Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Current tax benefit
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Deferred tax benefit
|
|
|
|
|
|
|
|
|
Federal
|
|
|
1,410,582
|
|
|
|
5,542,631
|
|
State
|
|
|
(1,326,566
|
)
|
|
|
618,192
|
|
Change in valuation allowance
|
|
|
(84,016
|
)
|
|
|
(6,160,823
|
)
|
|
|
|
|
|
|
|
|
|
Total tax expense
|
|
$
|
-
|
|
|
$
|
-
|
|
Deferred taxes are a result of differences
between income tax accounting and GAAP with respect to income and expenses. The following is a summary of the components of deferred
taxes recognized in the financial statements as of June 30, 2018 and 2017:
|
|
As of June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets
|
|
|
|
|
|
|
|
|
Net operating loss carryforward
|
|
$
|
15,563,220
|
|
|
$
|
15,358,843
|
|
Start-up and organizational expenses
|
|
|
333,868
|
|
|
|
540,221
|
|
Stock-based compensation
|
|
|
4,161,916
|
|
|
|
5,111,766
|
|
Fixed assets
|
|
|
514,878
|
|
|
|
-
|
|
Other
|
|
|
467,372
|
|
|
|
529,096
|
|
Total deferred tax assets
|
|
|
21,041,254
|
|
|
|
21,539,926
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities
|
|
|
|
|
|
|
|
|
Fixed assets
|
|
|
-
|
|
|
|
349,346
|
|
Federal benefit for state deferred taxes
|
|
|
798,221
|
|
|
|
863,531
|
|
Total deferred tax liabilities
|
|
|
798,221
|
|
|
|
1,212,877
|
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(20,243,033
|
)
|
|
|
(20,327,049
|
)
|
Net deferred taxes
|
|
|
-
|
|
|
|
-
|
|
The valuation allowance was established
because the Company had not reported earnings in order to support the recognition of the deferred tax asset. The Company has net
operating loss carryforwards of approximately $60,700,000 for federal and state income tax purposes. Federal and state net operating
loss carryforwards, to the extent not used, will expire starting in 2031. Under provisions of the Internal Revenue Code, substantial
changes in the Company’s ownership may result in limitations on the amount of net operating loss carryforwards that can be
utilized in future years. As of June 30, 2018, approximately $6,281,000 of the net operating loss carryforwards are subject to
IRS limitations. The Company is no longer subject to income tax examinations for federal income taxes before 2013 and for Colorado
before 2012.
The Tax Cuts and Jobs Act of 2017 (the
“Act”) was enacted on December 22, 2017 and significantly revises tax law. The Act reduces the U.S. federal corporate
tax rate from 35% to 21%, effective requires companies to pay a one-time transition tax on earnings of certain foreign subsidiaries
that were previously deferred and includes a variety of other changes. Consequently, we recorded a provisional decrease of
approximately $8.9 million. This reduction way fully offset by a corresponding change in the valuation allowance recorded against
the deferred tax assets.
The income tax provision differs from the amount of income
tax determined by applying the U.S. federal income tax rate of 27.5% to pretax income for the following periods, due to the following:
|
|
Year Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Computed “expected” tax expenses (benefit)
|
|
$
|
(8,078,305
|
)
|
|
$
|
(6,894,226
|
)
|
Change in income taxed From:
|
|
|
|
|
|
|
|
|
State Taxes net of Federal Benefit
|
|
|
(984,553
|
)
|
|
|
(617,139
|
)
|
Permanent Difference
|
|
|
12,406
|
|
|
|
18,150
|
|
Return To provision
|
|
|
-
|
|
|
|
(205,794
|
)
|
Stock option expiration
|
|
|
644,780
|
|
|
|
1,538,186
|
|
Tax Cuts and Jobs Act
|
|
|
8,489,688
|
|
|
|
-
|
|
Change in valuation allowance
|
|
|
(84,016
|
)
|
|
|
6,160,823
|
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Note 10 Commitments and Contingencies
Lease Commitments
In May 2014, the Company entered into a
lease of approximately 27,000 square feet of office, laboratory and clean room space to be leased for seventy-two months. The lease
requires monthly payments of $28,939 adjusted annually by approximately 3% plus triple net expenses monthly of $34,381 adjusted
annually. The Company also made a security deposit of $750,000 which is held by the landlord, of which $562,500 has been returned
to the Company and the remaining balance will be returned gradually over the next several years.
On March 17, 2017, the Company entered
into a lease of approximately 20,000 square feet of office space to be leased for eighty-two months. The lease requires monthly
payments of $28,425 adjusted annually plus triple net expenses monthly of $28,410 adjusted annually. The Company also made a security
deposit of $56,851 which will be returned at the end of the lease.
On March 17, 2017, the Company sub-leased
their original approximately 10,000 square feet of office space to another company. The sublease is for eighty-two months unless
the Company is unable to extend its current lease then the sub-lease will expire on March 31, 2020. The Company is to receive monthly
payments of $12,523 adjusted annually plus triple net expenses monthly of $12,828 adjusted annually. The Company also received
a security deposit of $25,046 which will be returned at the end of the lease.
On July 1, 2018 the Company sub-leased
approximately 4,100 square feet of office space and 6,770 square feet of clean room and lab space to other companies. The Company
is to receive monthly payments of approximately $30,300 for this sublease through the conclusion of the lease.
Additionally, the Company sub-leased approximately
3,200 square feet of lab space to another company. The Company is to receive monthly payments of approximately $8,000 for this
space through the conclusion of the lease.
As of June 30, 2018, minimum rental commitment
under the leases is as follows:
|
|
Operating Leases
|
|
|
Sub-lease Income
|
|
|
Total
|
|
Year Ending June 30,
|
|
|
|
|
|
|
|
|
|
2019
|
|
|
747,953
|
|
|
|
(398,712
|
)
|
|
|
349,241
|
|
2020
|
|
|
688,892
|
|
|
|
(390,076
|
)
|
|
|
298,816
|
|
2021
|
|
|
338,392
|
|
|
|
-
|
|
|
|
338,392
|
|
2022
|
|
|
347,836
|
|
|
|
-
|
|
|
|
347,836
|
|
2023
|
|
|
357,279
|
|
|
|
-
|
|
|
|
357,279
|
|
Thereafter
|
|
|
212,085
|
|
|
|
-
|
|
|
|
212,085
|
|
|
|
$
|
2,692,437
|
|
|
$
|
(788,788
|
)
|
|
$
|
1,903,649
|
|
License Agreement
On August 4, 2017, the Company
entered into a Development and License Agreement with ActiveSite Pharmaceuticals, Inc.
(“
ActiveSite
”) pursuant to which the Company acquired the rights to ActiveSite’s Plasma Kallikrein
Inhibitor program (“
PKI Program
”). The Company desires to use the PKI Program to develop, file,
manufacture, market and sell products for diabetic macular edema and other human therapeutic indications. The Company
was required to make an upfront payment of $750,000, which was expensed to research and development license expense,
payable within five (5) days of the date the parties execute the License Agreement and then various milestone payments
ranging from $1 million to $10 million when milestone events occur up to an aggregate of $36 million. The Company would
also be required to pay royalty payments of 2% of sales for any products that use the PKI Program up to an aggregate of
$10 million.
On December 6, 2017, the Company entered
into a License Agreement and Common Stock Purchase Agreement (collectively “
Transaction Documents
“) with
XOMA LLC (“
XOMA
”) pursuant to which the Company acquired the exclusive rights to develop and commercialize
XOMA 358 (now RZ358) for an orphan indication, Congenital Hyperinsulinism. The Company is responsible for all development, regulatory,
manufacturing and commercialization activities associated with RZ358. Pursuant to the Transaction Documents, the Company is required
to pay XOMA $6 million and to issue XOMA $12 million of the Company’s common stock based upon the Company’s financing
activities in 2018. The Company would be required to issue additional shares and a put option to XOMA if certain financing activities
did not occur in 2018, as more fully described in the agreements. The Company also has a required development spend every year
related to RZ358. The Company is also required to make certain clinical, regulatory and annual net sales milestone payments of
up to $222 million in the aggregate. The Company is also obliged to pay XOMA royalties ranging from the high single digits to the
mid-teens based upon annual net sales of RZ358. Finally, under the terms of the License Agreement, the Company is required to pay
XOMA a low single digit royalty on sales of the Company’s other products.
On March 30, 2018, the Company amended
the License Agreement and Common Stock Purchase Agreement. The License Agreement was amended to add terms specifying the financial
responsibility for certain tasks related to the technology transfer. The Purchase Agreement was amended as follows: (1) adjusted
the total shares due upon the Initial Closing (as defined in the Purchase Agreement) from $5 million in value to 7,000,000 shares;
(2) increase the shares due upon a Qualified Financing (as defined in the Purchase Agreement) from $7 million in value to $8.5
million in value; and (3) increase the shares due upon the 2019 Closing (as defined in the Purchase Agreement) from $7 million
in value to $8.5 million in value.
On April 3, 2018, the Company closed on
a debt financing which was considered the initial closing for the Common Stock Purchase Agreement and the initial seven million
shares were issued to XOMA as well as approximately 1.1 million interim financing shares which reduce the shares to be issued upon
a Qualified Financing.
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 June 30, 2018, there were no pending or threatened lawsuits that could reasonably
be expected to have a material effect on the results of our operations. There are no proceedings in which any of our directors,
officers or affiliates, or any registered or beneficial shareholders, is an adverse party or has a material interest adverse to
our interest.
Reduction
in Force
On April 5, 2018, the Company did a reduction
of the workforce based on the changing needs of the Company. The Company reduced its workforce by 30 employees and recorded the
expense on that date for the severance payouts of approximately $575,000 that were due to all employees that were impacted.