Item 7. Management’s Discussion and Analysis
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following Management’s Discussion
and Analysis of Financial Condition and Results of Operations contain forward-looking statements which involve risks and uncertainties.
Our actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors,
including those set forth under “Risk Factors” and elsewhere in this Annual Report. We assume no obligation to update forward-looking
statements or the risk factors. You should read the following discussion in conjunction with our consolidated financial statements and
related notes included in Item 8 of this Annual Report.
Certain figures, such as interest rates and
other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have
not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason,
percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our
consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due
to rounding.
Recent Developments
Debt Facility
In April 2021, we entered into a $30.0 million
Loan Agreement with SLR and certain other Lenders. The Lenders agreed to loan up to $30.0 million in three tranches consisting of (i) a
$15.0 million term A loan that was funded on April 14, 2021, (ii) a $7.5 million term B loan to be funded upon request by us
no later than January 25, 2022, and (iii) a $7.5 million term C loan to be funded upon request by us no later than September 25,
2022. Funding of the term B loan is subject to our ability to obtain at least $35.0 million of equity or subordinated debt financing by
January 2022 and the achievement of certain clinical milestones related to RZ358 and RZ402. Funding of the term C loan is subject to our
ability to (i) meet the conditions for funding the term B loan, and (ii) obtaining an additional $35.0 million of equity or subordinated
debt financing, and the achievement of certain additional clinical milestones related to RZ358 and RZ402 by September 2022. Accordingly,
no assurance can be provided that any funding will be received pursuant to the term B and term C loans. Each term loan has a maturity
date of April 1, 2026.
Change in Domicile
In June 2021, we merged with and into our Merger
Sub, pursuant to the Reincorporation Merger Agreement between us and Merger Sub, with the Reincorporation Merger which changes our state of domicile from Delaware to Nevada. At the Effective Time,
the Merger Sub was renamed “Rezolute, Inc.” and succeeded to the assets, continued our business and assumed our rights and
obligations by operation of law. The Reincorporation Merger Agreement was approved by our shareholders at the 2021 annual meeting of our
shareholders held on May 26, 2021.
Russell Microcap
In June 2021, we announced that we had been added
to the Russell Microcap® Index at the conclusion of the 2021 Russell indexes annual reconstitution, effective after the U.S. market
opened on June 28, 2021.
Lincoln Park Capital
In August 2021, we entered into a purchase agreement (the
“ Purchase Agreement ”) and a registration rights agreement with Lincoln Park Capital Fund, LLC (“ LPC ”),
which provides that we may sell to LPC up to $20.0 million of shares (the “ Purchase Shares ”) of our common stock. The
aggregate number of shares that we can sell to LPC under the Purchase Agreement may not exceed 1,669,620 shares of our common stock, subject
to certain exceptions set forth in the Purchase Agreement.
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Please refer to our discussion under Liquidity
below and in Notes 1, 5 and 15 to our consolidated financial statements included in Item 8 of this Annual Report for further discussion
of the change in domicile, the Loan Agreement with the Lenders, and the Purchase Agreement with LPC.
Special Note About COVID-19
We
have been actively monitoring the COVID-19 situation and its impact. Our primary objectives have remained the same throughout the pandemic:
to support the safety of our team members and their families and continue to support our preclinical studies and clinical trials .
Currently, with respect to the operation of our facilities, we are closely adhering to applicable guidelines and orders. Essential
operations in research and maintenance that occur within our facilities are continuing in accordance with the permissions granted under
government ordinances. Across all our locations, we have instituted a temporary work from home policy for all office personnel who do
not need to work on site to maintain productivity. We have recently allowed these employees to voluntarily
return to work on site with appropriate health and safety measures.
While
our financial results for the fiscal year ended June 30, 2021 were not significantly impacted by COVID-19, we cannot predict the impact
of the progression of the COVID-19 pandemic on future results due to a variety of factors, including the ongoing challenges associated
with the pandemic, including the emergence of new variants of the coronavirus, such as the Delta variant, resurgences in number of rates
of infections, the continued good health of our employees, the ability of us to maintain operations, access to healthcare facilities and
patient willingness to participate in our clinical trials, any further government and/or public actions taken in response to the pandemic
and ultimately the length of the pandemic. The ultimate impact of the COVID-19 pandemic on our business operations, our ability
to raise capital, as well as our preclinical studies and clinical trial timeliness remains uncertain and subject to change and will
depend on future developments, which cannot be accurately predicted. Any prolonged material disruption
of our employees, suppliers, or manufacturing may negatively impact our consolidated financial position, results of operations and cash
flows. We will continue to monitor the situation closely.
Factors impacting our Results of Operations
We have not generated any revenues since our inception
in March 2010. Since inception, we have engaged in organizational activities, conducted private placements to raise additional capital,
built out a manufacturing suite and produced material for our lead product candidate under good laboratory practices (“ GLP ”),
conducted studies using the GLP material, subsequently changed our strategy to a licensing model that resulted in disposal of our manufacturing
assets, and conducted other research and development activities on our pipeline of product candidates.
Due to the time required to conduct clinical trials
and obtain regulatory approval for our product candidates, we anticipate it will be some time before we generate substantial revenues,
if ever. We expect to generate operating losses for the foreseeable future; therefore, we expect to continue efforts to raise additional
capital to maintain our current operating plans beyond the next year. We cannot assure you that we will secure such financing or that
it will be adequate for the long-term execution of our business strategy. Even if we obtain additional financing, it may be costly and
may require us to agree to covenants or other provisions that will favor new investors over our existing shareholders.
Key Components of Consolidated Statements of
Operations
Research and development expenses. Research
and development (“ R&D ”) expenses consist primarily of compensation and benefits for our personnel engaged in R&D
activities, clinical trial costs, licensing costs, and consultants and outside services. Our R&D costs include an allocable portion
of our cash and share-based compensation, employee benefits, and consulting costs related to personnel engaged in the design and development
of product candidates and other scientific research projects. We also allocate a portion of our facilities and overhead costs based on
the personnel and other resources devoted to R&D activities.
General and administrative expenses. General
and administrative (“ G&A ”) expenses consist primarily of (i) an allocable portion of our cash and share-based compensation
and employee benefits related to personnel engaged in our administrative, finance, accounting, and executive functions, and (ii) an allocable
portion of our facilities and overhead costs based on the personnel and other resources devoted to G&A activities. G&A expenses
also include travel, legal, auditing, investor relations and other costs primarily related to our status as a public company.
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Change in fair value of derivative liabilities. We
recognized a derivative liability related to a deficiency in our authorized shares. Since there was a possibility that we could be required
to settle this share deficiency in cash, we recognized a derivative liability at fair value on the date that the deficiency occurred.
We also recognize liabilities for embedded derivatives in our debt agreements. Derivative liabilities are adjusted to fair value at the
end of each reporting period until the derivative liability contracts are settled, expire, or meet the conditions for equity classification.
Changes in fair value are reflected as a gain or loss in our consolidated statements of operations. Any gains or losses reflected prior
to the deficiency was cured will not be reversed.
Employee retention credit. In response
to the COVID-19 pandemic, the United States government has designed programs to assist businesses in dealing with the financial hardships
caused by the pandemic. We recognize the right to receive governmental assistance payments in the period in which the related conditions
on which they depend are substantially met.
Interest expense. The components
of interest expense include the amount of interest payable in cash at the stated interest rate, and accretion of debt discounts and issuance
costs (“ DDIC ”) using the effective interest method. DDIC arises from the issuance of debt instruments and other related
contracts or agreements which possess certain terms and conditions resulting in additional financing costs arising from origination, exit
and final fees, and other incremental and direct costs incurred to consummate the financing, among others.
Interest and other income. Interest
and other income consist primarily of interest income earned on temporary cash investments.
Critical Accounting Policies and Significant
Judgments and Estimates
Overview
Our management’s discussion and analysis
of financial condition and results of operations is based on our consolidated financial statements, which have been prepared in accordance
with accounting principles generally accepted in the United States. The preparation of the consolidated financial statements requires
us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting
periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could
occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under
the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are
not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known.
Actual results may differ from these estimates under different assumptions or conditions.
With respect to our significant accounting policies
that are described in Note 1 to our consolidated financial statements included in Item 8 of this Annual Report, we believe that the following
accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical
to aid in fully understanding and evaluating our consolidated financial condition and results of operations.
Research and Development
Research and development costs are expensed as
incurred. Intangible assets related to in-licensing costs under license agreements with third parties are charged to expense unless we
are able to determine that the licensing rights have an alternative future use in other research and development projects or otherwise.
Clinical Trial Accruals
Clinical trial costs are a component of research
and development expenses. We accrue and charge to expenses clinical trial activities performed by third parties based upon estimates of
the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research
organizations and clinical trial sites. We determine the estimates through discussions with internal clinical personnel and external service
providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.
Nonrefundable advance payments for goods and services
that will be used or rendered in future research and development activities are deferred and recognized as expense in the period that
the related goods are delivered, or services are performed.
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Change in Fair Value of Derivative Liabilities
We recognized a derivative liability for a deficiency
in our authorized shares of common stock that existed from February 17, 2021 until the deficiency was cured on May 26, 2021. We made an
accounting policy election to select the stock options and warrant agreements with the earliest issuance dates to compute the estimated
fair value of the financial instruments associated with the authorized share deficiency. These stock options and warrants were generally
those with the highest exercise prices that were least likely to be exercised. Fair value of the stock options and warrants associated
with the deficiency were computed on the date the deficiency arose and at the end of each reporting period using the Black-Scholes-Merton
(“ BSM ”) option-pricing model. Key assumptions inherent in this valuation model include the historical volatility of
our common stock, the remaining contractual term of the options and warrants, and the market price of our common stock on the respective
valuation dates. We also recognize liabilities for embedded derivatives in our debt agreements. The determination of the fair value of
the embedded derivatives includes subjective assumptions that can materially affect the fair value
estimates. Derivative liabilities are adjusted to fair value at the end of each reporting period with changes in fair value reflected
as a gain or loss in our consolidated statements of operations.
Share-Based Compensation Expense
We measure
the fair value of services received in exchange for all stock options granted based on the fair market value of the award as of the grant
date. We compute the fair value of stock options with time-based vesting using the BSM option-pricing model and recognize the cost
of the equity awards over the period that services are provided to earn the award. For awards granted which contain a graded vesting schedule,
and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite
service period as if the award was, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture
occurs, rather than estimating the number of awards that are not expected to vest in accounting for share-based compensation. For stock
options that are voluntarily surrendered by employees, all unrecognized compensation is immediately recognized in the period the options
are cancelled.
In July 2019, we granted stock options with vesting
that is dependent on achieving certain market, performance and service conditions (“ Hybrid Options ”). For purposes
of recognizing compensation cost, we determine the requisite service period as the longest of the derived, implicit and explicit vesting
periods for each of the market, performance and service conditions, respectively. Due to achievement of the performance condition, we
began recognizing compensation cost using the grant date fair value in November 2020 and continuing through the end of the requisite service
period. Determination of the requisite service period of the Hybrid Options was based on the date that the performance condition was achieved.
If the Hybrid Options do not ultimately become exercisable due to the option holders’ failure to achieve the required service period,
any previously recognized compensation cost will be reversed. However, if the Hybrid Options do not ultimately become exercisable due
to the failure to achieve the market condition, previously recognized compensation cost will not be reversed.
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Results of Operations
Results of operations for the fiscal years ended
June 30, 2021 and 2020 reflect net losses of approximately $20.9 million and $20.3 million, respectively. Our consolidated statements
of operations for the fiscal years ended June 30, 2021 and 2020, along with the changes between periods, are presented below (in thousands,
except percentages):
Changes
2021
2020
Amount
Percent
Operating expenses:
Research and development:
Compensation and benefits
$
7,174
$
5,883
$
1,291
22
%
Clinical trial costs
4,718
3,955
763
19
%
Licensing costs
1,000
-
1,000
100
%
Consultants and outside services
791
3,209
(2,418
)
-75
%
Material manufacturing costs
765
882
(117
)
-13
%
Facilities and other
539
521
18
3
%
Total research and development
14,987
14,450
537
4
%
General and administrative:
Compensation and benefits
4,887
3,782
1,105
29
%
Professional fees
2,124
1,169
955
82
%
Facilities and other
896
1,120
(224
)
-20
%
Total general and administrative
7,907
6,071
1,836
30
%
Total operating expenses
22,894
20,521
2,373
12
%
Operating loss
(22,894
)
(20,521
)
(2,373
)
12
%
Non-operating income (expense):
Change in fair value of derivative liabilities
1,789
-
1,789
100
%
Employee retention credit
515
-
515
100
%
Interest and other income
63
188
(125
)
-66
%
Interest expense
(375
)
-
(375
)
-100
%
Total non-operating income (expense), net
1,992
188
1,804
960
%
Net loss
$
(20,902
)
$
(20,333
)
$
(569
)
3
%
Presented below is a discussion of the key factors
that resulted in changes in our results of operations for these periods.
Revenue. As a clinical stage
company, we did not generate any revenue for the fiscal years ended June 30, 2021 and 2020. We are at an early stage of development
as a proprietary product specialty pharmaceutical company and we do not currently have any commercial products. Our existing product
candidates will require extensive additional clinical evaluation, regulatory review, significant marketing efforts and substantial
investment before they generate any revenues. We do not expect to be able to market any of our product candidates for several
years.
Research and Development Expenses.
R&D costs increased from $14.5 million for the fiscal year ended June 30, 2020 to $15.0 million for the fiscal year ended June 30,
2021, an increase of approximately $0.5 million. As discussed below, compensation and benefits, licensing costs and clinical trial costs
increased, partially offset by decreases in consultants and outside services and material manufacturing costs.
Compensation and benefits. For the fiscal
year ended June 30, 2021, we had an increase of approximately $1.3 million in compensation and benefits for our R&D workforce, which
was attributable to an increase in cash-based compensation and benefits of $1.0 million and share-based compensation expense of $0.3 million.
The increase of $1.0 million in cash-based compensation and benefits was attributable to (i) a net increase in salaries and benefits cost
of approximately $0.7 million primarily due to increased headcount in fiscal 2021, and (ii) an increase in cash bonuses for our R&D
workforce of $0.3 million. The increase in share-based compensation expense of $0.3 million was primarily due to our June 2021 stock option
grants with time-based vesting to our R&D workforce.
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Clinical trial costs. For the fiscal year
ended June 30, 2021, we incurred clinical trial costs of approximately $4.7 million compared to approximately $3.9 million for the fiscal
year ended June 30, 2020. The increase in clinical trial costs of $0.8 million was primarily attributable to spending of $1.1 million
for RZ402 and an increase in spending for RZ358 of $0.2 million, partially offset by a decrease of $0.5 million due to the completion
of our AB101 Phase 1 study in December 2019.
For the fiscal year ended June 30, 2021, we incurred
$1.1 million of costs for RZ402 that was primarily attributable to a single ascending dose (“ SAD ”) study that was initiated
in January 2021. No clinical trial costs related to RZ402 were incurred for the fiscal year ended June 30, 2020.
For the
fiscal year ended June 30, 2020, our clinical trial costs included $3.2 million for RZ358 that was primarily related to the launch
of our Phase 2b RIZE study where we enrolled our first patient in February 2020. Due to COVID-19, we were required to pause the RIZE
study between March 2020 and January 2021 when we recommenced patient enrollment. Total clinical trial costs related to RZ358
amounted to $3.4 million for the fiscal year ended June 30, 2021.
Consultants and outside services. Consultants
and outside services decreased from $3.2 million for the fiscal year ended June 30, 2020 to $0.8 million for the fiscal year ended June
30, 2021, a decrease of approximately $2.4 million. For the fiscal year ended June 30, 2021, consultants and outside services consisted
of chemistry, manufacturing and control (“ CMC ”) consulting and contract laboratory services of $0.3 million for RZ358
and RZ402, patent maintenance costs of $0.2 million primarily related to RZ358 and RZ402, quality and FDA filing expenses of $0.1 million,
and other consulting services of $0.2 million. For the fiscal year ended June 30, 2020, consultants and outside services consisted of IND
enabling laboratory expense of $1.9 million primarily related to RZ402, patent maintenance costs of $0.5 million primarily related to
AB101, CMC consulting and contract laboratory services of $0.5 million primarily for RZ358, quality and FDA filing expenses of $0.2 million,
and other consulting services of $0.1 million.
Material manufacturing costs. Material
manufacturing costs decreased from $0.9 million for the fiscal year ended June 30, 2020 to $0.8 million for the fiscal year ended June
30, 2021, a decrease of approximately $0.1 million. For the fiscal year ended June 30, 2021, the decrease in our material manufacturing
costs was primarily due to decreased spending in RZ358 for CMC drug product stability.
Licensing costs. Licensing costs increased
by $1.0 million for the fiscal year ended June 30, 2021 compared to the fiscal year ended June 30, 2020, which was attributable to the
$1.0 million milestone payment due to ActiveSite upon FDA clearance of our RZ402 IND application in December 2020.
General and Administrative Expenses.
G&A expenses increased from $6.1 million for the fiscal year ended June 30, 2020 to $7.9 million for the fiscal year ended June 30,
2021, an increase of approximately $1.8 million. As discussed below, this increase was primarily attributable to compensation and benefits
for our administrative and executive workforce along with increased spending in professional services.
Compensation and benefits. Compensation
and benefits for our G&A workforce increased from $3.8 million for the fiscal year ended June 30, 2020 to $4.9 million for the fiscal
year ended June 30, 2021, an increase of approximately $1.1 million. This increase was attributable to an increase in cash-based compensation
and benefits of $0.6 million, severance expense of $0.1 million, and share-based compensation expense of $0.4 million. The increase in
cash-based compensation was primarily attributable to an increase in bonuses for our G&A workforce of $0.6 million. The increase in
share-based compensation expense was primarily due to the voluntary cancellation of certain stock options held by officers in June 2021
that resulted in the acceleration of the previously unrecognized expense for $0.7 million, partially offset by the favorable impact of
stock options that became fully vested in our 2020 fiscal year, resulting in no further compensation expense thereafter.
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Professional fees. Professional fees increased
from approximately $1.2 million for the fiscal year ended June 30, 2020 to approximately $2.1 million for the fiscal year ended June 30,
2021, an increase of approximately $0.9 million. This increase was primarily attributable to our Nasdaq uplisting, corporate development
activities, and strategic financial advisory services.
Facilities and other costs. Costs allocable
to G&A activities for facilities and other costs decreased from $1.1 million for the fiscal year ended June 30, 2020 to $0.9 million
for the fiscal year ended June 30, 2021. The decrease of $0.2 million was primarily due to reduced travel and office-related expenses
due to COVID-19 restrictions.
Change in Fair Value of Derivative Liabilities.
For the fiscal year ended June 30, 2021, we recognized a gain of $1.8 million that was primarily due to reduction in our stock price resulting
to changes in fair value of the derivative liability related to our authorized share deficiency. This deficiency existed from February
17, 2021 until May 26, 2021 when our shareholders approved an increase in our authorized shares of common stock. Our stock price declined from $11.99 per share on February 17, 2021 to $7.69 per share on May 26, 2021 when the authorized share deficiency
was cured. We did not have any gains
or losses from changes in the fair value of derivatives for the fiscal year ended June 30, 2020.
Employee Retention Credit. Employee
retention credit income was $0.5 million for the fiscal year ended June 30, 2021. This income is a result of CARES Act benefits we
qualified for during the fiscal year. We did not qualify for any relief in the fiscal year ended June 30, 2020.
Interest and Other Income. Interest
and other income decreased from $0.2 million for the fiscal year ended June 30, 2020 to $0.1 million for the fiscal year ended June 30,
2021, a decrease of $0.1 million. Interest and other income of $0.1 million for the fiscal year ended June 30, 2021 was primarily due
to a favorable appeal of personal property tax expense. Interest income for the fiscal year ended June 30, 2021 was insignificant to a
decline in interest rates applicable to our temporary cash investments. Interest and other income for the fiscal year ended June 30, 2020
was solely attributable to interest income earned on temporary cash investments of $0.2 million.
Interest Expense. Interest
expense was approximately $0.4 million for the fiscal year ended June 30, 2021, whereas we did not incur any interest expense for the
fiscal year ended June 30, 2020. Interest expense for the fiscal year ended June 30, 2021 was solely attributable to Loan Agreement entered
into in April 2021 consisted of (i) accretion of discount of $0.1 million, and (ii) interest expense of $0.3 million based on the contractual
rate of 8.87%.
Income Taxes. For the fiscal year
ended June 30, 2021 and 2020, we did not recognize any income tax benefit due to our net losses and our determination that a full valuation
allowance was required for our deferred income tax assets.
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Liquidity and Capital Resources
Overview
As of June 30, 2021, we had cash and cash equivalents
of $41.0 million and working capital was approximately $40.0 million. We have incurred cumulative net losses of $168.1 million since our
inception and as a clinical stage company we have not generated any revenue to date.
In October 2020, we received aggregate net proceeds
of approximately $37.4 million from investors in a private placement of units that consisted of approximately 2.5 million shares of common
stock and warrants for the purchase of approximately 0.8 million shares of common stock (the “ Fiscal 2021 Equity Financing ”).
The completion of the Fiscal 2021 Equity Financing
resulted in acceleration of a $1.4 million obligation payable under Amendment No. 3 to our License Agreement with XOMA Corporation (“ Xoma ”).
We made this required payment to Xoma on schedule in October 2020. On October 28, 2020, we submitted an IND to the FDA related to RZ402.
On December 3, 2020, we received FDA clearance for the IND application, which resulted in our obligation to make the first milestone payment
to ActiveSite of $1.0 million in December 2020.
In December 2020, we entered into an EDA with
Oppenheimer & Co. Inc. (the “ Agent ”) that provides for an “at the market offering” for the sale of
up to $50.0 million in shares of our common stock (the “ Placement Shares ”) through the Agent. The Agent is acting as
sales agent and is required to use commercially reasonable efforts to sell all of the Placement Shares that we request to be sold, consistent
with the Agent’s normal trading and sales practices, on mutually agreed terms between the Agent and us. The EDA will terminate when
all of the Placement Shares have been sold, or earlier upon the election of either us or the Agent. We have no obligation to direct the
Agent to sell any of the Placement Shares. We agreed to pay the Agent a commission equal to 3.0% of the gross sales price of the Placement
Shares plus certain expenses incurred by the Agent in connection with the offering. Through June 30, 2021, no shares were sold pursuant
to the EDA and no commissions were incurred. For the period from July 1, 2021 through August 31, 2021, we sold 138,388 shares of our common
stock for which aggregate net proceeds of approximately $1.5 million were received.
In April 2021, we entered into a Loan Agreement
that provides for total borrowings up to $30.0 million in three tranches. The initial tranche of funding for $15.0 million was received
in April 2021. Under the Loan Agreement, we are required to maintain a restricted cash balance of at least $5.0 million beginning
no later than December 31, 2021. The second and third tranches under the Loan Agreement provide for additional loans in the amount
of $7.5 million per tranche, up to a total of $15.0 million. However, our ability to gain access to additional funding is dependent upon
the outcome of certain clinical results and our ability to raise up to an additional $70.0 million in equity or subordinated debt financing
and the achievement of certain clinical milestones related to RZ358 and RZ402 by prescribed deadlines. Accordingly, no assurance can be
provided that we will meet the conditions to qualify for borrowings under the second and third tranches. We are permitted to make
interest-only payments on each term loan at least through May 1, 2023, and the maturity date is on April 1, 2026. See Note 5
to our consolidated financial statements included in Item 8 of this Annual Report for additional information.
In August 2021, we entered into the Purchase Agreement
with LPC that provides for issuances of common stock up to an aggregate of $20.0 million as discussed above under the caption Recent
Developments . We received aggregate proceeds of $1.0 million under the Purchase Agreement in August 2021.
Beginning in March 2020, COVID-19 has resulted
in an economic environment that is unfavorable for many businesses to conduct operations and to pursue new debt and equity financings.
The U.S. economy had been largely shut down by mass quarantines and government mandated stay-in-place orders to halt the spread of the
virus. While these orders have been relaxed, a full recovery of the U.S. economy may not occur until 2022 or later. The long-term effects
on us are expected to result in higher costs in order to comply with safeguards to protect patients and staff engaged in clinical activities,
and extended periods of time may be required to complete clinical trials. The current economic environment and financial market volatility
may make it more challenging for us to continue to obtain funding in the future for our clinical programs.
26
We believe our existing cash and cash equivalents
balance of $41.0 million as of June 30, 2021, combined with additional proceeds available pursuant to the EDA and the Purchase Agreement
with LPC, will be adequate to carry out currently planned activities at least through September 30, 2022.
Presented below is additional discussion about
the ongoing requirements pursuant to our license agreements with Xoma and ActiveSite, along with additional information about our ongoing
financing activities that impacted our liquidity and capital resources for the fiscal year ended June 30, 2021.
Xoma License Agreement
In December 2017, we
entered into a license agreement (“ License Agreement ”) with Xoma pursuant to which Xoma granted us an exclusive global
license to develop and commercialize RZ358 for all indications. In January 2019, the License Agreement was amended. The amended License
Agreement set forth an updated payment schedule, as well as revised the amount we were required to expend on development of RZ358 and
related licensed products.
On March 31, 2020, we
entered into Amendment No. 3 to the License Agreement to extend the previous payment schedule for the remaining balance of approximately
$2.6 million. The revised payment schedule provided for seven quarterly payments to be paid beginning on March 31, 2020, whereby the outstanding
balance was reduced to $1.4 million as of September 30, 2020. Pursuant to Amendment No. 3, we were obligated to repay the remaining outstanding
balance within 15 days following the closing of a financing for $20.0 million or more. Accordingly, the completion of the Fiscal 2021
Equity Financing resulted in acceleration of the $1.4 million outstanding obligation, which was paid in full on October 23, 2020.
Upon the achievement
of certain clinical and regulatory events, we will be required to make up to $37.0 million in aggregate milestone payments to Xoma. The
first such milestone payment of $2.0 million will be triggered upon enrollment of the last patient in our ongoing phase 2 clinical study
and we believe that, subject to COVID-19 conditions, we will be able to substantially complete enrollment by the end of calendar year 2021.
Additionally, upon the future commercialization of RZ358, we will be required to pay royalties to Xoma based on the net sales of the related
products, and milestone payments up to an additional $185.0 million if future annual sales related to RZ358 exceed targets ranging from
$100.0 million to $1.0 billion.
ActiveSite License Agreement
In August 2017, we entered into a Development
and License Agreement with ActiveSite Pharmaceuticals, Inc. (“ ActiveSite ”) pursuant to which we acquired the
rights to ActiveSite’s Plasma Kallikrein Inhibitor program (“ PKI Program ”). We are planning to use the PKI
Program to develop, file, manufacture, market and sell products for diabetic macular edema and other human therapeutic indications. The
ActiveSite License Agreement requires various milestone payments ranging from $1.0 million to $10.0 million when milestone events occur,
up to an aggregate of $46.5 million of aggregate milestone payments. The first milestone payment for $1.0 million paid in December 2020
after completion of the preclinical work and submission of an IND to the FDA for RZ402. We will also be required to pay royalties equal
to 2.0% of any sales of products that use the PKI Program. Through June 30, 2021, no events have occurred that would result in the requirement
to make additional milestone payments and no royalties have been incurred.
Fiscal 2021 Financing
On October 9, 2020, we completed a private placement
of units (the “ Units ”) consisting of (i) approximately 2.5 million shares of common stock, and (ii) warrants entitling
the holders to purchase approximately 0.8 million shares of common stock (the “ Warrants ”). The Warrants are exercisable
at $19.50 per share for a period of 7 years and may be exercised on a cash or cashless basis at the election of the holders. The Units
were issued for a purchase price of $16.50 per unit, resulting in gross proceeds of $41.0 million. Pursuant to a financial advisory agreement,
we agreed to pay the advisors a fee of 6.0% of the gross proceeds, and costs for professional fees and other offering costs are estimated
at approximately 2.0% of the gross proceeds. After deducting the financial advisory fees and other offering costs, the estimated net proceeds
amounted to approximately $37.4 million. Pursuant to the terms of the private placement, we executed the Reverse Stock Split.
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Loan Agreement
On April 14, 2021, we entered into the Loan Agreement
that provides for total borrowings up to $30.0 million in three tranches consisting of (i) a $15.0 million term A loan that was funded
on April 14, 2021, (ii) a $7.5 million term B loan to be funded upon our request no later than January 25, 2022, and (iii) a $7.5 million
term C loan to be funded upon our request no later than September 25, 2022. Funding of the term B loan is subject to our ability to obtain
at least $35 million of equity or subordinated debt financing by January 2022 and the achievement of certain clinical milestones related
to RZ358 and RZ402. Funding of the term C loan is subject to our ability to meet the conditions for funding the term B loan, plus obtaining
an additional $35 million of equity or subordinated debt financing by September 2022 and the achievement of certain additional clinical
milestones related to RZ358 and RZ402. Each term loan has a maturity date of April 1, 2026 (the “ Maturity Date ”). In
addition, our cash and cash equivalents became subject to a blocked account control agreement (“ BACA ”) in favor of
the Lenders whereby a cash balance of at least $5.0 million must be maintained beginning on the earlier of (i) December 31, 2021, and
(ii) the date the term B loan is funded. In the event of a default under the Loan Agreement, the BACA would enable the Lenders to prevent
the release of funds from our cash accounts.
Outstanding borrowings bear interest at a floating
rate equal to (a) 8.75% per annum plus (b) the greater of (i) the rate per annum published by the Intercontinental Exchange Benchmark
Administration Ltd. (“ IEBA ”) for a term of one month and (ii) 0.12% per annum. As of April 14, 2021 and June 30, 2021,
the IEBA rate for a term of one month was approximately 0.12% per annum. Therefore, the contractual rate was 8.87% as of each of these
dates. We are permitted to make interest-only payments on each term loan through May 1, 2023. At our request, the interest-only period
can be extended until May 1, 2024, if we obtain at least $70.0 million of equity or subordinated debt financing by September 2022 and
assuming no event of default has occurred. We will be required to make monthly payments of principal and interest commencing at the end
of the interest-only period of the term loans.
We are obligated to pay the Lenders (i) a non-refundable
facility fee in the amount of 1.00% of each term loan that is funded (the “ Facility Fee ”), and (ii) a final fee equal
to 4.75% of the aggregate amount of the term loans funded (the “ Final Fee ”). At the closing on April 14, 2021, we incurred
debt discounts for an aggregate of $1.7 million that consisted of $0.5 million for financial advisory and legal fees, an aggregate of
$0.8 million for the Facility Fee and the Final Fee, and an aggregate of $0.4 million as an exit fee accounted for as an embedded derivative
and a prepayment fee discussed below. The Final Fee is payable upon the earliest to occur of (i) the Maturity Date, (ii) the acceleration
of the term loans, and (iii) the prepayment of the term loans. The total debt discount of $1.7 million related to the term A loan is being
accreted to interest expense using the effective interest method whereby the current overall effective rate was 12.6% as of June 30, 2021.
Concurrently with the execution of the Loan Agreement,
we entered into an exit fee agreement (the “ Exit Fee Agreement ”) that provides for a fee of 4.0% of the funded principal
balance of each term loan in the event certain transactions (defined as “ Exit Events ”) occur prior to April 13, 2031.
Exit Events include, but are not limited to, sales of substantially all assets, certain mergers, change of control transactions, and issuances
of common stock that result in new investors owning more than 35% of our outstanding shares.
We have the option to prepay all, but not less
than all, of the outstanding principal balance of the term loans. In the event of a voluntary or mandatory prepayment prior to the Maturity
Date, we will incur a prepayment fee ranging from 1.00% to 3.00% of the outstanding principal balance.
Our obligations under the Loan Agreement are secured
by a first-priority security interest in substantially all of our assets, including our intellectual property. The Loan Agreement contains
customary representations, warranties and covenants and also includes customary events of default, including payment defaults, breaches
of covenants, and a default upon the occurrence of a material adverse change affecting us. Upon the occurrence of an event of default,
a default interest rate of an additional 5.0% per annum may be applied to the outstanding loan balance, and the Lenders may declare all
outstanding obligations immediately due and payable and exercise all their rights and remedies as set forth in the Loan Agreement.
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Cash Flows Summary
Presented below is a summary of our operating,
investing and financing cash flows for the years ended June 30, 2021 and 2020 (in thousands):
2021
2020
Change
Net cash provided by (used in):
Operating activities
$ (20,441 )
$ (24,168 )
$ 3,727
Investing activities
-
-
-
Financing activities
51,533
22,550
28,983
Cash Flows Used in Operating Activities
For the fiscal years ended June 30, 2021 and 2020,
cash flows used in operating activities amounted to $20.4 million and $24.2 million, respectively. The key components in the calculation
of our cash used in operating activities are as follows (in thousands):
2021
2020
Change
Net loss
$ (20,902 )
$ (20,333 )
$ (569 )
Non-cash expenses
4,370
3,659
711
Non-cash gains, net
(1,789 )
-
(1,789 )
Changes in operating assets and liabilities, net
(2,120 )
(7,494 )
5,374
Total
$ (20,441 )
$ (24,168 )
$ 3,727
For the fiscal year ended June 30, 2021, our net
loss was $20.9 million compared to $20.3 million for the fiscal year ended June 30, 2020. For further discussion about changes in our
operating results for the fiscal years ended June 30, 2021 and 2020, please refer to Results of Operations above.
For the fiscal year ended June 30, 2021, our non-cash
expenses of $4.4 million primarily consisted of share-based compensation expense of $4.0 million, non-cash lease expense of $0.3 million,
and accretion of debt discount of $0.1 million. For the fiscal year ended June 30, 2020, our non-cash expenses of $3.7 million primarily
consisted of share-based compensation expense of $3.3 million, non-cash lease expense of $0.2 million and the fair value of warrants issued
for services of $0.1 million.
For the fiscal year ended June 30, 2021, non-cash
gains primarily consisted of a gain of $1.8 million attributable to a gain from change in fair value of a derivative liability related
to a deficiency in our authorized shares that existed from February 17, 2021 until May 26, 2021. We did not have any non-cash gains for
the fiscal year ended June 30, 2020.
For the fiscal year ended June 30, 2021, net
changes in operating assets and liabilities reduced operating cash flow by $2.1 million, primarily driven by (i) cash payments to
reduce our license fee obligations to Xoma by $1.8 million; (ii) an increase in prepaid expenses and other assets and other of $0.4
million that was primarily related to prepayments for clinical trials, and (iii) a decrease in other accrued liabilities of $0.1
million. These payments that reduced our operating cash flow were partially offset by an increase in accounts payable of $0.1
million. For the fiscal year ended June 30, 2020, net changes in operating assets and liabilities reduced operating cash flow by
$7.5 million, primarily driven by (i) cash payments to reduce our license fee obligations to Xoma by $6.7 million and (ii) a
reduction in other accrued liabilities of $1.1 million that was primarily related to payments for accrued bonuses of $0.6 million,
operating lease liabilities of $0.2 million, and accrued vacation benefits of $0.2 million. These payments that reduced our
operating cash flow were partially offset by an increase in accounts payable of $0.3 million.
Cash Flows Provided by Investing Activities
We did not have any cash flows from investing
activities for the fiscal years ended June 30, 2021 and 2020.
29
Cash Flows Provided by Financing Activities
Net cash provided by financing activities for
the fiscal year ended June 30, 2021 amounted to $51.5 million. This amount included (i) $41.0 million received from a private placement
of Units in October 2020 for the purchase of approximately 2.5 million shares of common stock at a purchase price of $16.50 per share
and (ii) $15.0 million of gross proceeds from the Loan Agreement entered into in April 2021. The total proceeds from equity and debt financing
activities amounted to $56.0 million and were partially offset by payments of $3.7 million related to financial advisory fees and other
costs of equity financings and payment of $0.7 million for debt discount and issuance costs.
Net cash provided by financing activities for
the fiscal year ended June 30, 2020 amounted to $22.6 million. This amount consisted of (i) $20.0 million received from H&G in July
2019 for the purchase of approximately 1.4 million shares of common stock at a purchase price of $14.50 per share and (ii) $4.1 million
received from other investors in July and August 2019 for the purchase of approximately 0.3 million shares of our common stock at a purchase
price of $14.50 per share. The gross proceeds from these equity issuances totaled $24.1 million and were partially offset by fees of $1.5
million under a financial advisory agreement to result in net proceeds of $22.6 million.
Off-Balance Sheet Arrangements
During the fiscal years ended June 30, 2021 and
2020, we did not have any relationships with unconsolidated organizations or financial partnerships, such as structured finance or special
purpose entities, which were established for the purpose of facilitating off - balance sheet arrangements.
Recently Issued Accounting Pronouncements
See Note 1 to our consolidated financial statements
included in Item 8 of this Annual Report regarding the impact of certain accounting pronouncements on our consolidated financial statements.
Item 7A. Quantitative
and Qualitative Disclosures About Market Risk.
We are a smaller reporting company as defined
by Rule 12b-2 of the Exchange Act and are not required to provide the information under this item.
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PART II
Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.