Rezolute, Inc. — Form 10-Q summary
Business context and reporting period: Clinical-stage biopharmaceutical company with no commercial products or revenue. The filing covers the quarter and six months ended December 31, 2018—the second quarter of the fiscal year ending June 30, 2019. It reports unaudited consolidated results.
Financial performance and liquidity
- Revenue: None in the quarter or six-month period; consequently, gross margins are not applicable.
- Quarter ended December 31: Net loss was $4.16 million, versus $5.72 million in 2017; operating loss was $3.16 million, versus $5.75 million. Research and development expense was $1.31 million (prior year $3.41 million), and general and administrative expense was $1.85 million (prior year $2.34 million). Basic and diluted loss per share was $0.07, versus $0.11.
- Six months ended December 31: Net loss was $7.53 million, versus $12.40 million in 2017; operating loss was $5.72 million, versus $12.47 million. R&D expense was $2.24 million (prior year $7.72 million) and G&A expense was $3.48 million (prior year $4.74 million). Loss per share was $0.12, versus $0.23.
- Cash flow: Operating cash use was $3.08 million for the six months, compared with $8.05 million in the prior-year period. Investing activities provided $0.20 million, largely from equipment sales; financing activities provided $1.50 million from an exclusivity payment. Cash declined from $1.65 million at June 30 to $258,000 at December 31.
- Balance sheet at December 31: Current assets were $422,000 and current liabilities $2.98 million, a working capital deficit of approximately $2.6 million. Total assets were $456,000, total liabilities $10.24 million, and stockholders’ deficit $9.79 million. The balance sheet included $5.02 million of net long-term convertible notes and $764,000 of accrued interest on those notes.
Changes, financing, and unusual items
- Year-over-year losses and cash use improved mainly as the company reduced manufacturing, workforce, facilities, clinical-trial, and license-related spending. Management said it had ceased in-house manufacturing, closed its Colorado facilities, and shifted resources toward advancing clinical programs.
- In December 2018, Rezolute received a $1.5 million exclusivity payment toward a proposed financing. The transaction subsequently closed on January 30, 2019: Handok and Genexine invested $25.0 million in Series AA preferred stock, including that payment, with $23.5 million of additional cash received at closing. After a $5.925 million XOMA payment in February, management cited approximately $17.6 million of net proceeds available primarily for development programs.
- The financing converted approximately $6.17 million of principal and accrued interest on the Fiscal 2018 Notes into preferred stock. The conversion is expected to result in approximately $5.9 million of additional non-cash interest expense in the quarter ending March 31, 2019.
- An amended XOMA license agreement requires $8.5 million of future cash payments through September 2020; until paid, 15% of net proceeds from future financings must be credited against the remaining amount. The company also expected to expense a $5.476 million license fee in the March 2019 quarter. Management said $2.5 million of XOMA payments were due over the following 12 months.
- The Series AA shares are convertible into approximately 113.6 million common shares; converted noteholders’ preferred shares are convertible into approximately 35.0 million more. Automatic conversion depends on shareholder approval to increase authorized common shares to at least 500 million. The new investors held 54% of the company on an as-converted basis and obtained board control. The investors also received options to purchase up to $20 million of additional common stock before December 31, 2020, subject to the specified pricing terms.
- Rezolute recognized a $168,000 gain on termination of its Colorado leases and subleases, as well as losses on asset sales and a $33,000 long-lived-asset impairment. It reported no remaining lease commitments at December 31, but subsequently entered into new office leases.
Outlook, risks, and controls
- For calendar 2019, management’s objectives were to initiate a Phase 2 RZ358 program in the U.S. and/or Europe, complete toxicology studies needed to support an RZ402 IND and clinical studies, and complete the ongoing AB101 Phase 1 study. Management reported beginning preparation for RZ358 clinical studies, project planning for RZ402, and activities to resume AB101 studies.
- The filing states that the company had incurred cumulative losses of $101.7 million, had no revenue, and faced substantial doubt about its ability to continue as a going concern. Management believed the financing supported the next 12 months of obligations and development plans, but expected to seek up to $20 million of further investment in the second half of 2019. There was no assurance investors would exercise their options or that other financing would be available on acceptable terms.
- Risks include clinical and regulatory uncertainty, financing needs, dependence on partners and manufacturers, competition, intellectual property and product-safety risks, and dilution. The January 2019 change of control may significantly limit use of tax-loss carryforwards; the extent was still being assessed.
- Management identified material weaknesses in internal controls, including inadequate segregation of duties, insufficient safeguards against override, limited review of complex accounting, and ineffective review controls over financial reporting. It reported no material control changes during the quarter.
Key facts for investors to verify
- Whether the authorized-share increase and conversion of Series AA preferred stock occurred, and the resulting fully diluted share count and dilution.
- Actual cash runway and spending against the clinical objectives, including whether the investors provide any additional financing.
- Timing and funding of the $8.5 million XOMA payments and the accounting impact of the license fee and note-conversion charge.
- Progress and costs for RZ358, RZ402, and AB101, including any trial or regulatory developments.
- Remediation of the disclosed material weaknesses and any effect on future financial reporting.