Business Context and Reporting Period
This Form 6-K filing by Redhill Biopharma Ltd. covers the month of November 2022. The company, a foreign private issuer based in Israel, is reporting significant developments regarding its financial condition, indebtedness, and regulatory compliance status. The filing serves as a supplement to the Annual Report on Form 20-F and highlights critical risk factors affecting the company's operations and future viability.
Key Financial Metrics and Liquidity
- Cash Position: As of June 30, 2022, the cash balance was $43.2 million, which included $16.0 million of restricted cash (Cash Collateral) under the Credit Agreement.
- Operating Cash Flow: Cash used in operations was $16.6 million for the first and second quarters of 2022 combined. For the three months ended September 30, 2022, estimated cash flow from operating activities was approximately $6.7 million.
- Estimated Cash Balance (Sept 30, 2022): Approximately $31.4 million, including the $16.0 million restricted cash.
- Debt Obligations: The company has a term loan facility under a Credit Agreement with an aggregate principal amount of $80 million ($30 million for commercial operations and $50 million for the acquisition of Movantik rights).
- Liquidity Constraints: The company is currently unable to access the $16.0 million Cash Collateral due to a dispute with its lender, HCR Collateral Management, LLC.
Material Changes and Events
- Event of Default Notice: On September 13, 2022, the company received a notice from HCR alleging breaches of representations, warranties, and financial covenants under the Credit Agreement. This triggered a Default Rate on interest and the potential acceleration of all outstanding obligations.
- Control of Collateral: HCR exercised control over the Collateral Account, instructing the bank to transfer the $16.0 million Cash Collateral. Although HCR later withdrew the notice of exclusive control, the company remains unable to access these funds until the dispute is resolved.
- Going Concern Doubt: Management has expressed substantial doubt about the company's ability to continue as a going concern, citing insufficient resources to fund operations for the next twelve months without resolving the debt dispute or raising additional capital.
- Financial Restatement: On November 7, 2022, the company restated financial statements for the quarter ended March 31, 2022, due to a material weakness in internal controls regarding the calculation of revenue deductions.
- Nasdaq Non-Compliance: On October 12, 2022, Nasdaq notified the company that its ADSs failed to meet the minimum bid price requirement of $1.00 per ADS. The company has a compliance period until April 10, 2023, to regain compliance.
Outlook, Risks, and Management Commentary
- Strategic Alternatives: The company is evaluating the potential sale or disposition of its rights to Movantik to satisfy debt obligations. However, there is no assurance such a sale will occur or on favorable terms. A sale would eliminate the company's primary revenue source and reduce its business scope.
- Legal Contingencies: The company filed a lawsuit against Kukbo Co. Ltd. on September 2, 2022, seeking $6.5 million in unpaid amounts under a Subscription Agreement and an Exclusive License Agreement. Recovery of these funds is uncertain.
- Internal Controls: A material weakness was identified in internal controls over financial reporting. While remedial measures are underway, there is no assurance they will be successful or prevent future misstatements.
- Capital Needs: The company may need to raise additional capital to finance losses and negative cash flows. Failure to do so could result in the curtailment or cessation of operations.
- Delisting Risk: If the company fails to regain compliance with Nasdaq's minimum bid price requirement by the end of the compliance period, its ADSs may be delisted, which could negatively impact liquidity and the ability to raise capital.
Investor Verification Checklist
- Verify the current status of the dispute with HCR Collateral Management, LLC and the likelihood of resolving the alleged events of default.
- Confirm the progress and terms of any potential sale of the Movantik rights and its impact on future revenue streams.
- Review the updated financial statements following the November 7, 2022, restatement to understand the corrected revenue and cost figures.
- Monitor the company's ADS bid price to assess the risk of delisting from the Nasdaq Global Market.
- Assess the outcome of the lawsuit against Kukbo Co. Ltd. and the probability of recovering the $6.5 million in claimed damages.
- Evaluate the company's plan to remediate the material weakness in internal controls over financial reporting.