Rezolute, Inc. — FY2019 Form 10-K
Reporting period: Fiscal year ended June 30, 2019; this is an annual filing, not a standalone 2018 fourth-quarter report. The company is a clinical-stage biotechnology business with no commercial products or revenue.
Business context and pipeline
Rezolute develops therapies for rare and metabolic diseases. Its lead candidate, RZ358, was in Phase 2 development for congenital hyperinsulinism (CHI); the company expected to begin dosing in a Phase 2b study in 2019. RZ402, a potential oral therapy for diabetic macular edema, was preclinical, with an IND filing planned for mid-2020. AB101, a once-weekly basal insulin formulation, was in a Phase 1 study; top-line results were anticipated later in 2019.
Financial performance and liquidity
- Revenue: None in FY2019 or FY2018. Gross profit and margins are not applicable.
- Net loss: $30.4 million in FY2019 versus $29.9 million in FY2018. Net loss attributable to common stockholders was $32.7 million in FY2019, including a $2.3 million beneficial conversion feature; basic and diluted loss per share was $0.37, compared with $0.54 in FY2018.
- Operating expenses: $25.9 million, down 9.7% from $28.7 million. R&D increased 10.4% to $19.1 million, mainly due to $14.0 million of licensing costs, including costs under the amended Xoma agreement. G&A decreased 25.1% to $6.8 million.
- Cash flow: Operating cash use was $15.3 million, versus $14.1 million in FY2018. Financing provided $25.0 million; investing provided $0.2 million. Cash and cash equivalents were $11.6 million at June 30, 2019.
- Liquidity and liabilities: Working capital was $3.8 million; total liabilities were $10.5 million, including $8.5 million payable to Xoma under the license amendment. The FY2018 convertible notes, with $5.3 million principal and $0.8 million accrued interest, converted to equity in January 2019. A $10,000 demand note remained outstanding.
- Capitalization: Stockholders’ equity was $1.8 million, compared with a $4.0 million deficit in FY2018. Shares outstanding were 210.4 million at June 30, 2019 and 293.3 million at September 5, 2019.
Material changes and significant events
- R&D licensing costs rose to $14.0 million from $6.3 million, while R&D compensation and clinical-trial costs fell following workforce reductions and suspension of AB101 trials during FY2019. The company reported 19 full-time employees at year-end.
- Interest expense increased to $5.0 million from $0.7 million, principally due to the convertible notes, including $2.2 million of beneficial-conversion-feature expense and $2.1 million of debt-discount accretion.
- In January 2019, Handok and Genexine (H&G) invested $25.0 million. The preferred shares and converted notes became common stock after shareholder approval in April. H&G owned approximately 54% at June 30, 2019; following subsequent financing, the filing reports their combined ownership at approximately 64%.
- In July and August 2019, the company issued approximately 82.9 million shares for $24.1 million gross proceeds, or $22.6 million net after costs. It paid Xoma approximately $3.4 million in early payments from these proceeds. These are post-year-end events, not FY2019 cash flows.
- The company terminated its former Colorado leases in December 2018, recording a $168,000 gain, and established new offices in California and Oregon.
Outlook, risks and contingencies
- Management estimated that FY2019 year-end cash plus the subsequent $22.6 million net financing proceeds would fund planned activities through at least September 2020. Management expected to seek additional financing for FY2021 and beyond; funding is not assured, and development programs could be delayed or reduced.
- FY2020 priorities were to initiate the RZ358 Phase 2b study, complete RZ402 toxicology work toward an IND, and complete the AB101 Phase 1 study while evaluating partnership opportunities. Management expected R&D spending to increase.
- The Xoma agreement requires $8.5 million in future cash payments, subject to early-payment provisions; the July–August 2019 financing triggered approximately $3.4 million of early payments. The ActiveSite license carries up to $36.0 million in contingent milestones and royalties; no milestones or royalties had been incurred by June 30, 2019.
- The company has a history of losses, an accumulated deficit of $126.9 million, no product revenue, and dependence on additional capital. Clinical outcomes, regulatory approval, manufacturing and third-party execution are substantial risks.
- Management concluded that disclosure controls and internal control over financial reporting were ineffective at June 30, 2019 because of material weaknesses involving segregation of duties, override controls, review of complex accounting, and financial-reporting disclosures. Remediation had begun, but completion was not assured. The financial-statement auditor did not provide an opinion on internal-control effectiveness.
- The change in ownership may significantly limit use of approximately $81 million of federal NOL carryforwards; the Section 382 impact was still being quantified. H&G’s control, the absence of independent directors at the filing date, substantial potential share issuance, and limited OTCQB trading also merit attention.
Important facts for investors to verify
- Whether the RZ358, RZ402 and AB101 development milestones and timing subsequently occurred, and what clinical data showed.
- Actual cash runway, spending, and any financing raised after the filing’s stated September 2020 runway estimate.
- Remaining Xoma payments and any ActiveSite milestone obligations triggered, including the timing and basis of the first stated milestone.
- How much of the NOL carryforwards remains usable after the ownership changes.
- Whether the identified internal-control material weaknesses were fully remediated and whether governance and audit oversight changed.
- Potential dilution from outstanding warrants and options, including the 34.0 million options granted after year-end, and any reverse stock split or exchange listing.