Rezolute(RZLT) - 2019 Q2 - Quarterly Report

PART I - FINANCIAL INFORMATION Financial Statements This section presents the unaudited condensed consolidated financial statements for the quarterly period ended December 31, 2018, reflecting a significant net loss and deteriorating capital position with a substantial working capital deficit Unaudited Condensed Consolidated Balance Sheets The balance sheet as of December 31, 2018, shows a significant decline in total assets to $0.46 million from $2.50 million, with total liabilities increasing to $10.24 million from $6.46 million, worsening the stockholders' deficit to $9.79 million Condensed Consolidated Balance Sheet Data (as of Dec 31, 2018 vs. June 30, 2018) | Balance Sheet Item | Dec 31, 2018 | June 30, 2018 | | :--- | :--- | :--- | | Cash | $258,188 | $1,645,872 | | Total Current Assets | $422,278 | $2,007,787 | | Total Assets | $455,662 | $2,502,882 | | Total Current Liabilities | $2,976,210 | $6,248,014 | | Total Liabilities | $10,243,356 | $6,463,637 | | Total Stockholders' Deficit | ($9,787,694) | ($3,960,755) | Unaudited Condensed Consolidated Statements of Operations The company reported a net loss of $4.2 million for the three months and $7.5 million for the six months ended December 31, 2018, an improvement from prior-year periods due to reduced R&D and G&A expenses, partially offset by increased interest expense Statement of Operations Summary (Three and Six Months Ended Dec 31) | Metric | Q4 2018 | Q4 2017 | H2 2018 | H2 2017 | | :--- | :--- | :--- | :--- | :--- | | Total Research and Development | $1,309,093 | $3,413,088 | $2,239,002 | $7,723,726 | | Total General and Administrative | $1,851,856 | $2,337,870 | $3,483,976 | $4,744,362 | | Operating Loss | ($3,160,949) | ($5,750,958) | ($5,722,978) | ($12,468,088) | | Net Loss | ($4,161,432) | ($5,718,587) | ($7,526,665) | ($12,403,200) | | Net Loss Per Share | ($0.07) | ($0.11) | ($0.12) | ($0.23) | Unaudited Condensed Consolidated Statement of Stockholders' Deficit For the six months ended December 31, 2018, the stockholders' deficit increased from $4.0 million to $9.8 million, primarily driven by a net loss of $7.5 million partially offset by $1.7 million in stock-based compensation Reconciliation of Stockholders' Deficit (For the Six Months Ended Dec 31, 2018) | Description | Amount | | :--- | :--- | | Balance, June 30, 2018 | ($3,960,755) | | Stock-based compensation | $1,693,369 | | Net loss | ($7,526,665) | | Balance, December 31, 2018 | ($9,787,694) | Unaudited Condensed Consolidated Statements of Cash Flows For the six months ended December 31, 2018, net cash used in operating activities was $3.1 million, an improvement from the prior year, with investing activities providing $0.2 million and financing activities providing $1.5 million, resulting in a $1.4 million cash decrease to $0.26 million Cash Flow Summary (Six Months Ended Dec 31) | Cash Flow Activity | 2018 | 2017 | | :--- | :--- | :--- | | Net Cash Used In Operating Activities | ($3,082,823) | ($8,052,651) | | Net Cash Provided By (Used In) Investing Activities | $195,139 | ($5,816) | | Net Cash Provided by Financing Activities | $1,500,000 | $4,440,000 | | Net decrease in cash | ($1,387,684) | ($3,618,467) | | Cash at end of period | $258,188 | $868,071 | Notes to Unaudited Condensed Consolidated Financial Statements The notes highlight substantial doubt about the company's going concern status due to significant losses and deficits, mitigated by a $25.0 million Series AA Preferred Stock financing in January 2019, which also triggered convertible note conversions and an amended license agreement with XOMA requiring substantial cash payments - The company's financial statements as of December 31, 2018, reflect conditions that raise substantial doubt about its ability to continue as a going concern, citing a net loss of $7.5 million for the six-month period, a working capital deficit of $2.6 million, and an accumulated deficit of $101.7 million[47] - Subsequent to the quarter end, in January 2019, the company closed a $25.0 million Series AA Preferred Stock financing, providing net proceeds of approximately $17.6 million after a $5.9 million license payment, intended to advance clinical programs[48][49] - In January 2019, the license agreement with XOMA was amended to replace equity issuance with cash payments, including an immediate $5.9 million payment (paid in Feb 2019) and five future payments totaling $8.5 million[96][98] - The closing of the Series AA financing in January 2019 triggered the conversion of $5.34 million in principal of Fiscal 2018 Notes plus accrued interest into Series AA preferred stock[63][106] Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) The MD&A details the company's operational and financial results, emphasizing a strategic shift away from in-house manufacturing, which led to significantly lower operating expenses, and highlights the critical $25.0 million private placement closed in January 2019, while noting that substantial doubt about the company's ability to continue as a going concern remains as further funding will be required in late 2019 - In calendar year 2019, the company's objectives are to initiate a Phase 2 clinical program for RZ358, complete toxicology studies for RZ402 to enable an IND filing, and complete the ongoing Phase 1 study for AB101[116] - The company has ceased in-house manufacturing and research, closing its Colorado facilities in December 2018 to focus on its clinical development strategy[118] Results of Operations For the three and six months ended December 31, 2018, net losses decreased to $4.2 million and $7.5 million respectively, driven by sharp reductions in R&D and G&A expenses following the termination of manufacturing activities and workforce reduction, though partially offset by $2.2 million in interest from convertible notes Change in Operating Expenses (Six Months Ended Dec 31, 2018 vs 2017) | Expense Category | H2 2018 | H2 2017 | Change | | :--- | :--- | :--- | :--- | | Research & Development | $2.2M | $7.7M | ($5.5M) | | General & Administrative | $3.5M | $4.7M | ($1.2M) | - The decrease in R&D costs was primarily due to the termination of manufacturing activities, which led to lower compensation ($2.1M decrease), clinical trial costs ($1.6M decrease), and license costs ($1.1M decrease) for the six-month period[136][137] - Non-operating expense increased by $1.9 million for the six-month period, mainly due to a $2.2 million increase in interest expense from the Fiscal 2018 Notes[139] Liquidity and Capital Resources As of December 31, 2018, the company's liquidity was critical with only $0.3 million in cash and a $2.6 million working capital deficit, with operations dependent on the $25.0 million Series AA financing that provided $17.6 million net proceeds, though additional capital will be needed in late 2019, maintaining substantial doubt about its going concern ability - As of December 31, 2018, the company had approximately $0.3 million of cash, a working capital deficit of $2.6 million, and cumulative net losses of $101.7 million[142] - A pro forma balance sheet shows that after the January 2019 financing and related transactions, cash would increase to $17.8 million, but total liabilities would also increase significantly to $42.1 million, including new long-term payables to Xoma[152] - Management believes the current capital is adequate for the next 12 months but intends to request additional investment from its new investors in late 2019, with no assurance this funding will be provided, which raises substantial doubt about the company's ability to continue as a going concern[151] Quantitative and Qualitative Disclosures About Market Risk This disclosure is not required for the company because it qualifies as a smaller reporting company - The company is not required to provide this information as it is a smaller reporting company[163] Controls and Procedures Management's evaluation concluded that the company's disclosure controls and procedures were not effective as of December 31, 2018, due to material weaknesses in internal control over financial reporting - Management concluded that as of December 31, 2018, the company's internal control over financial reporting was not effective due to material weaknesses[164] - Identified material weaknesses include: (1) lack of segregation of duties, (2) potential for control overrides, (3) one employee handling complex accounting without internal review, and (4) ineffective review controls over financial statements and disclosures[165] PART II – OTHER INFORMATION Legal Proceedings The company reported that there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on its results of operations as of December 31, 2018 - The company reports no material legal proceedings[169] Risk Factors This section adds new risk factors related to potential stockholder dilution from the conversion of Series AA Preferred Stock and any future equity or equity-linked capital raises - The conversion of Series AA Preferred Stock, issued from the recent financing and debt conversion, will result in the dilution of existing common stockholders[170] - Future capital raises may involve issuing equity or equity-linked securities that could have rights senior to common stock and cause further dilution[171] Unregistered Sales of Equity Securities and Use of Proceeds The company reported no unregistered sales of equity securities or use of proceeds during the reporting period - The company reports 'None' for this item[172] Defaults Upon Senior Securities The company reported no defaults upon senior securities - The company reports 'None' for this item[173] Mine Safety Disclosures This item is not applicable to the company's business - This item is 'Not applicable'[174] Other Information The company reported no other information for this item - The company reports 'None' for this item[175] Exhibits This section lists the exhibits filed with the Form 10-Q, including amendments to the Xoma license and stock purchase agreements, the purchase agreement for the Series AA Preferred Stock, and officer certifications - Filed exhibits include amendments to agreements with Xoma, the purchase agreement for Series AA Preferred Stock, and required CEO/CFO certifications[176]