Rezolute, Inc. — Form 10-Q summary
Reporting period: Quarter and nine months ended March 31, 2019. The request metadata says “2018 Q3,” but the filing is for Rezolute’s fiscal third quarter of 2019.
Business context
Rezolute is a clinical-stage biopharmaceutical company with no commercial products or revenue. Its development programs include RZ358, RZ402 and AB101. The unaudited interim statements are prepared under U.S. GAAP.
Financial performance and liquidity
| Metric | Three months ended Mar. 31, 2019 | Nine months ended Mar. 31, 2019 | Comparable 2018 period |
|---|---|---|---|
| Revenue | $0 | $0 | $0 |
| Research and development expense | $15.1 million | $17.4 million | $2.5 million and $10.2 million |
| General and administrative expense | $1.9 million | $5.4 million | $2.5 million and $7.2 million |
| Operating loss | $17.0 million | $22.8 million | $5.0 million and $17.4 million |
| Net loss | $19.8 million | $27.3 million | $5.0 million and $17.4 million |
| Net loss per common share | $0.36 | $0.48 | $0.09 and $0.32 |
| Operating cash used | Not presented for the quarter | $11.5 million | $10.2 million for nine months |
At March 31, 2019, cash was $15.3 million, working capital was approximately $8.7 million, total assets were $15.5 million, and total liabilities were $10.8 million. The balance sheet showed $8.5 million payable to Xoma ($4.5 million current and $4.0 million long-term), plus a $12,762 note due on demand. Stockholders’ equity was $4.6 million. Profit margins are not meaningful because the company had no revenue.
Financing activities provided $25.0 million in the nine-month period, mainly from the Series AA financing. Cash rose from $1.6 million at June 30, 2018 to $15.3 million at March 31, 2019. Investing activities provided $0.2 million, principally from equipment sales.
Material changes and unusual items
- R&D expense rose substantially year over year, chiefly because of $14.0 million in Xoma license costs recognized in the nine-month period. This included a $5.5 million cash license payment and an $8.5 million obligation payable in installments through September 2020.
- Net loss included $2.2 million of interest expense from a beneficial conversion feature on the Fiscal 2018 Notes and $2.1 million of debt-discount accretion for the nine months. These notes, totaling $6.1 million including accrued interest, converted into Series AA Preferred Stock in January 2019.
- In January, Handok and Genexine invested $25.0 million for Series AA Preferred Stock. Following stockholder approval on April 24, 2019, all Series AA shares converted into approximately 148.5 million common shares. The investors obtained majority voting control through the financing and related conversion.
- G&A expense declined year over year, mainly due to reduced compensation and stock-based compensation. Prior-year clinical-trial, manufacturing and facility costs also declined following suspension or termination of activities and the Colorado facility leases.
- The company reported a $0.2 million gain from terminating the Colorado leases and subleases. It sold equipment for $0.3 million in proceeds during the nine months.
Outlook, risks and contingencies
Management’s 2019 objectives were to initiate an RZ358 Phase 2 program in the U.S. and/or Europe, complete RZ402 toxicology studies toward an IND filing in the first half of calendar 2020, and complete the AB101 Phase 1 study, with a readout expected in the second half of 2019. Management expected higher R&D spending over the next 12 months.
The company said the Series AA proceeds supported planned programs and near-term obligations, but disclosed substantial doubt about its ability to continue as a going concern. It intended to request up to $20.0 million of additional investment from the new investors in the second half of calendar 2019. Their participation rights are not a commitment to fund, and alternative financing may be unavailable or unacceptable. The company also reported no revenue to date and substantial accumulated losses.
Other notable risks and obligations include the potential dilution from the 148.5 million-share conversion and future financing; Xoma’s right to receive 15% of net proceeds from future financings until the specified license payments are satisfied; and a Xoma put option that may apply if the company fails to list on Nasdaq or a similar national exchange by December 31, 2019. The ownership change may limit use of approximately $60.7 million of federal and state net operating loss carryforwards; the extent was still being assessed.
Management concluded internal control over financial reporting was not effective at March 31, 2019, citing material weaknesses in segregation of duties, safeguards against control override, review of complex accounting, and review of financial statements and disclosures. No material litigation or off-balance-sheet arrangements were reported.
Key facts for investors to verify
- Whether the company obtained additional financing after March 31, 2019, and how long available cash supports operations and clinical plans.
- Progress, timing and costs for RZ358, RZ402 and AB101, including the stated clinical milestones.
- Payment schedule and financing-related obligations under the amended Xoma license, and whether the listing condition for Xoma’s put option was met.
- Post-conversion share count, dilution, investor voting control and any subsequent financing or registration developments. The filing reports 210,389,859 common shares outstanding as of May 7, 2019.
- Remediation of the disclosed internal-control material weaknesses and any resulting reporting or accounting changes.
- The filing contains a minor inconsistency in Series AA share counts (3,267,515 versus 3,267,519); confirm the definitive figure in subsequent filings.