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Item 7. Management’s Discussion and Analysis

2024-09-19 compared with 2023-09-14 · 122 added, 156 removed, 132 unchanged (68% of the section changed)

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Executive Summary

Our priorities going into the second half of 2024 and first half of 2025 are to (i) complete enrollment of ex-U.S.

participants in the sunRIZE study, (ii) initiate study start-up activities in the U.S.

to enable U.S.

participant enrollment in the sunRIZE study, and (iii) continue study start-up activities and begin enrollment for the Phase 3 registrational tumor HI clinical study.

Clinical Development

Our key objectives in the fourth quarter of 2023 are completing enrollment for the RZ402 Phase 2 study in DME to enable announcement of topline results in the first quarter of 2024, as well as initiation of the sunRIZE Phase 3 study for RZ358.

RZ358 Regulatory Status

As discussed in our disclosures on Current Reports on Form 8-K filed with the SEC, toxicology studies in rats and monkeys were conducted as part of the early RZ358 development program and in these studies, rats demonstrated a microvascular liver injury at potentially clinically relevant doses and exposures (“ rat findings ”).

However, there were no adverse liver findings in monkeys at dose levels that were more than 10 times higher than doses that were toxic in rats, and more than 4 times higher than human doses evaluated in clinical studies.

Based on the absence of liver toxicity in monkeys and the lack of adverse liver findings in closely monitored human trials, the Company believes that the toxicity is unique to rats and unlikely relevant to humans.

As is customary in pediatric drug development, there is a progression of the inclusion of younger participants as a program advances through different stages and continues to demonstrate a good safety profile and a prospect of benefit for children based on previous stages.

After the completion of Phase 1 adult healthy volunteer studies for RZ358, Phase 2a single-dose proof of concept studies (“ Phase 2a ”) were conducted in participants with congenital HI who were 12 years of age and older in countries governed by the Regulatory Authorities in the European Union and elsewhere in Europe.

In the US, FDA restricted enrollment in Phase 2a to participants 18 years of age and older and, based on the rat findings, imposed a human drug exposure limit equating to repeat doses of approximately 3 mg/kg per week (“ exposure cap ”).

Subsequently, in the RIZE study European Authorities and other regulatory bodies continued the expected downward age progression, lowering the age for study participants down from 12 years of age to 2 years of age and older.

At the start of the RIZE study the clinical program in the US remained under the 18 years of age and older restriction as well as the exposure cap.

However, in the first half of 2020, while the RIZE study was underway, we reached agreement with FDA to proceed with the RIZE study in the US at all dose levels (no exposure cap) and in younger participants (ages 12 and older).

Following these developments, the study protocol was harmonized globally, other than a regional difference in the minimum permitted age (12 years and older in the US versus 2 years and older in all other geographies).

After the completion of the RIZE study, in the second half of 2022 and the first half of 2023, the Company conducted scientific advice meetings with the Regulatory Authorities in Europe which resulted in alignment with our proposed Phase 3 program including overall study design, dosing regimen, endpoints, sample size and patient population.

Notably, with all available nonclinical (including the rat findings) and clinical information under review, European Authorities aligned with a further downward age progression whereby participants 3 months of age and older will be permitted to be enrolled in the Phase 3 study.

Prior to engaging FDA on Phase 3 planning in the US, we began interacting with the agency in the second half of 2022 to further liberalize the age restriction to achieve alignment with the parameters established by the European Authorities in the RIZE study.

Over the course of these post-RIZE regulatory interactions with FDA, the agency revisited prior concerns regarding the rat findings and, despite the absence of new clinical or nonclinical data (other than the RIZE data), the agency decided to maintain the age restriction of 12 years and above and re-imposed the previous exposure cap which had been removed during the RIZE study (collectively, “ New Restrictions ”).

In the second half of 2022 and the first half of 2023, we interacted with FDA to resolve the New Restrictions, particularly in the context of the advancement of the clinical program in the rest of the world.

Nonetheless, FDA affirmed the New Restrictions at a meeting held with us on May 24, 2023.

We have concluded pre-Phase 3 regulatory and scientific advice meetings with Regulatory Authorities outside of the U.S.

and have reached agreement on the design of the Phase 3 study that will include participants 3 months of age and older.

We believe that the New Restrictions make it infeasible to include the U.S.

in the Phase 3 study at this time, particularly given that the pediatric population with congenital HI has the greatest therapeutic need.

We are evaluating potential nonclinical studies to address FDA’s concerns in parallel with the initiation and advancement of the Phase 3 study outside of the U.S.

Specifically, in the fourth quarter of 2023, we plan to initiate the Phase 3 sunRIZE clinical study of RZ358 which will be a randomized, double-blind, placebo-controlled, parallel arm evaluation of RZ358 in participants with congenital HI who are not adequately responding to standard of care medical therapies.

Topline results from the study are anticipated to be available in the first half of 2025.

In December 2022, we initiated a Phase 2 multi-center, randomized, double-masked, placebo-controlled, parallel-arm study to evaluate the safety, efficacy, and pharmacokinetics of RZ402 administered as a monotherapy over a 12-week treatment period in participants with DME who are naïve to, or have received limited anti-VEGF injections.

The study population is comprised of DME patients with mild to moderate non-proliferative diabetic retinopathy.

Eligible participants are being randomized equally, to one of three RZ402 active treatment arms at doses of 50, 200, and 400 mg, or a placebo control arm, to receive study drug once daily for 12 weeks, before completing a four-week follow-up.

The study is expected to enroll up to approximately 100 patients overall, across approximately 25 investigational sites in the United States.

The principal endpoints of the trial include (i) changes in central subfield thickness of the macula, as measured by Spectral Domain Ocular Coherence Tomography, (ii) changes in visual acuity as measured by the early treatment diabetic retinopathy scale, (iii) the repeat dose pharmacokinetics of RZ402 in patients with DME, and (iv) the safety and tolerability of RZ402.

We expect to complete enrollment in 2023 and to announce results from the study in the first quarter of 2024.

Investment in Marketable Debt Securities

In January 2023, our Board of Directors determined that it was in our best interest to diversify our cash position, which amounted to $146.7 million as of December 31, 2022.

Accordingly, we reinvested an aggregate of $115.0 million of cash held in demand deposit accounts in a portfolio of marketable debt securities and an overnight money market mutual fund with the objective of achieving higher returns on investment.

Our focus as a Company is advancing ersodetug in two Phase 3 clinical studies for congenital HI and tumor HI.

To that end, we are actively enrolling the pivotal Phase 3 sunRIZE clinical study of ersodetug, which is a randomized, double-blind, placebo-controlled, parallel arm evaluation of ersodetug in participants with congenital HI who are not adequately responding to standard of care medical therapies.

To date, in this study we have been screening and enrolling participants outside the U.S.

because the U.S.

FDA had imposed an age restriction of 12 years of age and older on ersodetug clinical studies as well as dose level restrictions based on historical rat toxicology findings.

On September 4, 2024, FDA lifted those restrictions and authorized U.S.

inclusion in the ongoing sunRIZE study.

Currently, the Company is conducting study start-up activities at sites in the U.S.

in anticipation of enrolling U.S.

participants in the sunRIZE study in the first part of 2025.

Topline results from the study are anticipated to be available in the second half of calendar 2025.

Additionally, we have begun study start-up activities for our Phase 3 registrational tumor HI clinical study which we anticipate to begin enrolling patients in the first half of calendar 2025.

In May of 2024 we announced topline results from the Phase 2 proof-of-concept study of RZ402 in patients with DME, which met primary study endpoints, demonstrating a significant reduction in central subfield thickness in the Study Eye at all RZ402 dose levels compared to placebo (up to approximately a 50 micron improvement) and was safe and well-tolerated.

The program is available for partnering and we are actively engaged in conversations with potential partners to take RZ402 into further development.

Recent Developments

Exchange Agreement.

On March 8, 2024, we entered into a securities exchange agreement (the “Exchange Agreement”) with certain of our stockholders (the “Exchanging Shareholders”), whereby we purchased 3,000,000 shares of common stock representing approximately 7% of our outstanding shares with an aggregate fair value of $5,700,000 (the “Retired Shares”) from the Exchanging Shareholders.

The Retired Shares were immediately cancelled whereby they will remain as authorized shares for future issuance in accordance with Nevada law.

Consideration for the acquisition of the Retired Shares consisted of (i) a cash payment to the Exchanging Shareholders of $3,000, and (ii) the issuance of pre-funded warrants (the “Exchange PFWs”) to the Exchanging Shareholders with an estimated fair value of $5,697,000.

The Exchange PFWs do not expire and were exercisable as of June 30, 2024 to purchase an aggregate of 3,000,000 shares of our outstanding common stock at an exercise price of $0.001 per share.

The Exchange PFWs required approval by our shareholders if the exercise of the Exchange PFWs resulted in aggregate beneficial ownership by the holders in excess of 19.99%.

Even though the Exchange PFWs only entitled the holders to purchase 7% of our outstanding shares of common stock, the requirement to obtain shareholder approval for ownership in excess of 19.99% resulted in the treatment of the exchange PFWs as a warrant derivative liability of $5.7 million as of the issuance date.

The fair value of this warrant derivative liability increased by approximately $2.9 million, for a total of $8.5 million as of May 13, 2024 when the Exchange PFWs were amended to permit equity classification.

Accordingly, the derivative liability of $8.5 million was reclassified to shareholders’ equity on May 13, 2024.

2024 Underwritten Offering.

On June 13, 2024, we entered into an underwriting agreement for the planned issuance and sale of equity securities in an underwritten public offering (the “2024 Underwritten Offering”).

The 2024 Underwritten Offering provided for the issuance of (i) 11,250,000 shares of common stock at a price of $4.00 per share for gross proceeds of $45.0 million, and (ii) pre-funded warrants to purchase 3,750,000 shares of common stock at a public offering price of $3.999 per pre-funded warrant (the “2024 PFWs”) for gross proceeds of $15.0 million.

The Company granted the

underwriters a 30-day option to purchase up to an additional 2,250,000 shares of its common stock at a public offering price of $4.00 per share, less underwriting discounts of 6.0% of the gross proceeds.

The underwriters’ option was partially exercised for 1,786,589 shares of common stock for gross proceeds of $7.1 million.

Closing occurred on June 24, 2024, whereby the aggregate gross proceeds amounted to $67.1 million.

The net proceeds of the 2024 Underwritten Offering amounted to approximately $62.6 million.

In July 2024, we utilized approximately $59.7 million of the net proceeds from the 2024 Underwritten Offering to purchase investments in marketable debt securities with maturities that range from October 2024 through December 2025.

2024 Private Placement.

In June 2024, we entered into a securities purchase agreement (the “2024 SPA”) with Handok, Inc.

and one other investor relating to a private placement (the “2024 Private Placement”), pursuant to which we agreed to sell 1,500,000 shares of common stock at a purchase price of $4.00 per share.

Closing of the 2024 Private Placement occurred in July 2024, whereby we received net proceeds of $6.0 million after deduction of underwriting discounts and other offering costs .

Factors Impacting our Results of Operations

We have not generated any meaningful revenues since our inception in March 2010.

Over the last several years, we have conducted private placements and public offerings to raise additional capital, adopted a licensing model to pursue development of product candidates, conducted pre-clinical and clinical trials, and conducted other research and development activities on our pipeline of product candidates.

Over the last several years, we have conducted private placements and public offerings to raise additional capital, conducted pre-clinical and clinical trials, 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.

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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.

G&A expenses also include travel, legal, auditing, investor relations and other costs primarily related to our operations as a public company.

Interest and other income.

Interest and other income consist primarily of interest income earned on marketable debt securities and temporary cash investments, amortization of investment premiums and accretion of investment discounts.

Gain from change in fair value of derivative liabilities, net.

We recognize derivative liabilities if we issue stock options and warrants but don’t have sufficient authorized shares of common stock to accommodate all potential exercise.

Under these circumstances, accounting as a derivative liability was required since the possibility existed that we could have been required to settle stock options and warrants in cash.

Such derivative liabilities were recorded at fair value on the date that the deficiency occurred and subsequently adjusted to fair value at the end of each reporting period through the date the deficiency was cured.

Loss from change in fair value of derivative liabilities.

We recognize liabilities for financial instruments that are required to be accounted for as derivatives, as well as embedded derivatives in our debt agreements.

Warrant and embedded derivative liabilities are adjusted to fair value at the end of each reporting period until the contracts are settled, expire, or otherwise meet the conditions for equity classification.

We also recognize liabilities for embedded derivatives that arose in connection with our legacy debt agreement.

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 gains and losses in our consolidated statements of operations.

Gains and losses reflected prior to the date a deficiency is cured are not subsequently reversed.

Employee retention credit.

In response to the COVID-19 pandemic, the United States government 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.

Underwriting discount on issuance of derivative.

For derivative liabilities that were issued at a discount versus the grant date fair value of the financial instrument, an expense equal to the amount of the discount was recognized on the issuance date since the derivative liability would have been required to be settled at fair value.

Interest expense.

The components of interest expense include the amount of interest payable in cash at the stated interest rate set forth in the debt agreement, and accretion of debt discounts and issuance costs (“DDIC”) using the effective interest

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.

Loss on extinguishment of loan agreement.

When we repay our debt arrangements prior to the maturity date, we evaluate the terms to determine if the repayment should be accounted for as a troubled debt restructuring, a modification or an extinguishment.

If we conclude that accounting as an extinguishment is required, the extinguishment charge includes the write-off of any unaccreted DDIC, prepayment premiums required under the debt agreement, and professional fees incurred to complete the transaction.

Critical Accounting Policies and Significant Judgments and Estimates

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Investments in Marketable Debt Securities

We account for our investments in marketable debt securities as available-for-sale securities whereby they are recorded in the consolidated balance sheet at fair value.

We account for investments in marketable debt securities as available-for-sale securities whereby they are recorded in our consolidated balance sheets at fair value.

Interest income consists of accrued interest earned based on the coupon rate of the security, plus the impact of accreting discounts and amortizing premiums to maturity using the straight-line method which approximates the interest method.

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We review the components of our portfolio of available-for-sale debt securities, using both quantitative and qualitative factors, to determine if declines in fair value below amortized cost have resulted from a credit-related loss or other factors.

If declines in fair value are due to a deterioration of credit quality of the issuer, we recognize (i) a loss in other comprehensive income (loss) if the reduction in fair value is considered temporary, or (ii) a loss in the consolidated statement of operations if the reduction in fair value is considered other than temporary.

To the extent that declines in fair value are due to a deterioration of credit quality of the issuer, we will recognize an allowance for credit losses related to such investments with a corresponding loss in the consolidated statements of operations.

Allowances for credit losses may be reversed in subsequent periods if conditions improve and credit-related losses are no longer expected.

For a decline in fair value that is solely due to changes in interest rates, impairment is not recognized if we have the ability and intent to hold the investment until maturity.

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We determine our 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.

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 on the grant date the number of awards that are not expected to vest in accounting for share-based compensation.

We measure the fair value of services received in exchange for grants of stock options based on the fair value of the award as of the grant date.

We compute the fair value of stock options with time-based vesting using the Black-Scholes Merton (“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 that 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.

Gain from Change in Fair Value of Derivative Liabilities

We recognize derivative liabilities whenever we issue stock options and warrants but do not have sufficient authorized shares of common stock to accommodate all potential exercises.

Under these circumstances, accounting as a derivative liability was required since the possibility existed that we could have been required to settle these financial instruments in cash.

Loss from Change in Fair Value of Derivative Liabilities

We recognize warrant derivative liabilities based on assessment of the warrant’s specific terms and applicable authoritative guidance set forth by FASB in Accounting Standards Codification (“ASC”) 480, Distinguishing Liabilities from Equity (“ASC 480”) and ASC 815, Derivatives and Hedging (“ASC 815”).

The assessment considers whether the warrants are freestanding financial instruments and meet the definition of a liability pursuant to ASC 480, and whether the warrants meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to the Company’s own common shares and whether the warrant holders could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification.

This assessment, which requires the use of professional judgment, is conducted at the time of warrant issuance and as of the end of each subsequent quarterly period while the warrants are outstanding.

Liability classified warrants are valued using the BSM option-pricing model at issuance and for each reporting period when applicable.

Changes in fair value are reflected as gains and losses in our consolidated statements of operations.

Gains and losses reflected prior to the date a deficiency is cured are not subsequently reversed.

We also recognize liabilities for embedded derivatives that arose in connection with a legacy debt agreement .

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Interest and other income

Gain (loss) from change in fair value of derivative liabilities

Employee retention credit

Underwriting discount on issuance of derivative

Interest expense

Loss on extinguishment of loan agreement

Loss from change in fair value of warrant derivative liability

Loss from change in fair value of embedded derivative liability

Total non-operating income, net

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We are at an early stage of development and 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.

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.

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Total R&D expenses

The increase of $11.3 million was primarily attributable to an increase of $5.3 million in R&D compensation and benefits for our R&D workforce.

Cash-based R&D compensation and benefits increased by $3.5 million from $8.2 million for the fiscal year ended June 30, 2022 to $11.7 million for the fiscal year ended June 20, 2023.

This increase was primarily attributable to an increase in the average number of R&D employees from 26 to 36 and an increase in bonuses.

R&D share-based compensation increased by $1.8 million from $1.4 million for the fiscal year ended June 30, 2022 to $3.2 million for the fiscal year ended June 30, 2023.

This increase is primarily attributable to the expense related to stock options granted to employees in June 2022.

Additional increases of $4.3 million were incurred for our two clinical candidate programs, of which the RZ358 had an increase in spending of $1.1 million and the RZ402 program had an increase in spending of $3.2 million.

The increase in RZ358 program costs of $1.1 million primarily was driven by an increase of $3.1 million for higher spending for drug substance and drug product manufacturing and other development activities as we began manufacturing activities for a Phase 3 study where enrollment is planned to be initiated during the fiscal year ending June 30, 2024.

This increase was partially offset by a $2.0 million reduction in milestone payments under our license agreement with XOMA.

For the fiscal year ended June 30, 2022, we incurred a milestone payment due to XOMA upon dosing of the last patient in the Phase 2b clinical study.

We did not incur any RZ358 milestone related costs during the fiscal year ended June 30, 2023.

The RZ402 program cost increase of $3.2 million was primarily attributable to a $3.0 million increase in milestone payments due under our license agreement with ActiveSite.

The increase of $11.9 million was primarily attributable to a net increase of $8.7 million in costs incurred for our two clinical candidate programs, of which the ersodetug program had an increase in spending of $10.9 million and the RZ402 program had a decrease in spending of $2.2 million.

The increase in ersodetug program costs of $10.9 million primarily was driven by (i) an increase of $3.9 million for higher spending on drug substance and drug product manufacturing and other development activities as we began manufacturing activities for process performance qualification activities, (ii) $5.0 million in milestone payments under our license agreement with XOMA due to the dosing of the first patient in a Phase 3 clinical study, (iii) a $1.3 million increase in other ersodetug costs incurred for toxicology studies to support the efforts to lift the FDA clinical hold and (iv) a $0.7 million increase in clinical trial costs due to the ongoing enrollment of patients in the Phase 3 clinical study.

We did not incur any ersodetug milestone related costs during the fiscal year ended June 30, 2023.

The RZ402 program cost decrease of $2.2 million was primarily attributable to a $3.0 million decrease in milestone payments due under our license agreement with ActiveSite.

In February 2023, we dosed the first patient in the RZ402 Phase 2 study, triggering a milestone payment due for $3.0 million to ActiveSite.

There were no RZ402 related milestone costs incurred during the fiscal year ended June 30, 2024.

In addition to the $3.0 million increase in milestone costs, there was a $1.9 million increase in clinical operation costs related to the ongoing Phase 2 study.

These increases were partially offset by a decrease in preclinical, toxicology and other related costs of approximately $1.7 million.

In addition to the increases in R&D compensation and benefits and our clinical programs noted above for the fiscal year ended June 30, 2023, an increase of approximately $0.8 million was incurred related to facilities and employee related travel costs allocable to R&D due to the increased headcount as noted above.

A further decrease in manufacturing preclinical, toxicology and other related costs of $1.2 million resulted in a total decrease of $4.2 million in RZ402 costs.

This $4.2 million decrease in RZ402 costs was partially offset by a $2.0 million increase in clinical operation costs related to the ongoing Phase 2 study, for which the final patients completed the protocol in April 2024.

In addition to the net increase of $8.7 million in our clinical candidate programs, we had an increase of $2.6 million in R&D compensation and benefits for our R&D workforce.

Cash-based R&D compensation and benefits increased by $2.4 million from $11.7 million for the fiscal year ended June 30, 2023 to $14.1 million for the fiscal year ended June 30, 2024.

This increase was primarily attributable to an increase in the average number of R&D employees from 36 to 42 and an increase in annual performance bonuses.

R&D share-based compensation increased by $0.2 million from $3.2 million for the fiscal year ended June 30, 2023 to $3.4 million for the fiscal year ended June 30, 2024.

This increase in share-based compensation was primarily attributable to stock options granted to R&D employees hired during the fiscal year ended June 30, 2024.

In addition to the increases in R&D compensation and benefits and our clinical programs noted above for the fiscal year ended June 30, 2024, an increase of approximately $0.6 million was incurred related to higher facilities costs and employee related travel costs allocable to R&D due to the increased headcount as noted above.

General and Administrative Expenses.

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Cash-based G&A compensation and benefits increased by $1.2 million from $3.8 million for the fiscal year ended June 30, 2023 to $5.0 million for the fiscal year ended June 30, 2024.

This increase was attributable to an increase in the average number of G&A employees from 9 to 12 and an increase in compensation related to bonuses.

G&A share-based compensation increased by $1.8 million from $2.2 million for the fiscal year ended June 30, 2022 to $4.0 million for the fiscal year ended June 30, 2023.

This increase is primarily attributable to the expense related to stock options granted to employees in June 2022.

This increase was attributable to an increase in the average number of G&A employees from 12 to 15 and an increase in compensation related to annual performance bonuses.

Investor relations expenses and other G&A professional fees increased by $1.1 million from $2.4 million for the fiscal year ended June 30, 2023 to $3.5 million for the fiscal year ended June 30, 2024.

This increase in investor relations expense and other G&A professional fees resulted from pre-commercial planning activities, post regulatory approval market approval planning and other professional fee increases.

In addition to the increases in G&A compensation and benefits and our other professional expenditures noted above for the fiscal year ended June 30, 2024, an increase of approximately $0.2 million was incurred related to higher facilities costs and employee related travel costs allocable to G&A due to the increased headcount as noted above.

Interest and other income.

For the fiscal year ended June 30, 2024, we recognized $4.9 million of interest income compared to $4.2 million of interest income for the fiscal year ended June 30, 2023.

This increase was primarily due to our decision in January 2023 to invest an aggregate of approximately $115.0 million in marketable debt securities and an overnight money market mutual fund that bear interest at a weighted average effective rate of approximately 5.0%, whereas our temporary cash investments as of June 30, 2022 provided for earnings that were less than 1.0%.

This change in strategy midway through the fiscal year ended June 30, 2023 resulted in interest income of $1.2 million for the first half of the fiscal year and $3.0 million for the second half of the fiscal year.

Change in Fair Value of Derivative Liabilities.

For the fiscal year ended June 30, 2022, we recognized a gain of $6.6 million that was primarily due to a reduction of $0.60 per share in our stock price, resulting in changes in fair value of the derivative liability related to our authorized share deficiency that arose when we entered into an underwriting agreement for issuance of the Class B PFWs on May 4, 2022.

This authorized share deficiency existed until June 16, 2022 when our shareholders approved an increase in our authorized shares of common stock.

Our stock price decreased from $3.80 per share on May 4, 2022, to $3.20 per share on June 16, 2022 when the authorized share deficiency was cured.

For the fiscal year ended June 30, 2023 and 2022, we recognized losses from the change in fair value of embedded derivative liabilities of $5,000 and $20,000, respectively.

Employee Retention Credit.

Employee retention credit income was $0.2 million for the fiscal year ended June 30, 2022.

This income is a result of CARES Act benefits for the period of July 1, 2021 through September 30, 2021.

For the fiscal year ended June 30, 2023, no income was recognized since governmental assistance was no longer available under the CARES Act.

Underwriting discount on issuance of derivative liability.

For the fiscal year ended June 30, 2023, we did not recognize any expense related to underwriting discounts.

For the fiscal year ended June 30, 2022, we recognized an expense of approximately $2.5 million for an underwriting discount related to the issuance of the Class B PFWs.

The fair value of the Class B PFWs on the date of issuance amounted to $41.6 million and the Class B PFWs were sold to the underwriter for a discounted price of $39.1 million.

Accordingly, an expense was recognized on the issuance date for the amount of the underwriting discount of $2.5 million.

Interest Expense.

Interest expense was $1.8 million for the fiscal year ended June 30, 2022.

Interest expense for the fiscal year ended June 30, 2022 was solely attributable to a loan agreement entered in April 2021 and consisted of (i) accretion of discount of $0.4 million, and (ii) interest expense of $1.4 million based on the contractual rate of approximately 8.9%.

For the fiscal year ended June 30, 2023 we did not incur any interest expense due to the repayment of a loan agreement on June 30, 2022.

Loss on extinguishment of loan agreement.

We incurred a loss on extinguishment of a loan agreement of approximately $1.8 million for the fiscal year ended June 30, 2022.

This extinguishment loss was attributable to our exercise of the loan prepayment option that required a 2.00% prepayment penalty of $0.3 million and the unaccreted discount of $1.5 million was written off.

We did not incur any losses on extinguishment for the fiscal year ended June 30, 2023.

This increase of $0.7 million was primarily due to our decision in January 2023 to invest an aggregate of approximately $115.0 million in marketable debt securities and an overnight money market mutual fund that provided for interest at a weighted average effective rate of approximately 5.0% for the fiscal year ended June 30, 2024.

Even though we had substantially more funds available for investment during the first half of the fiscal year ended June 30, 2023, our effective interest rate was less than 2.0% compared to approximately 5.0% after we began investing in marketable debt securities in January 2023.

This change in strategy occurred midway through the fiscal year ended June 30, 2023 whereby interest income was $1.2 million for the first half of the fiscal year and $3.0 million for the second half of the fiscal year.

Change in Fair Value of Warrant Derivative Liability.

For the fiscal year ended June 30, 2024, we recognized a loss of $2.9 million during the period from March 8, 2024 through May 13, 2024 when the Exchange PFWs were classified as liabilities.

This loss was due to an increase of $0.95 per share in our stock price, resulting in an increase in the fair value of the derivative liability that was recognized due to shareholder approval provision regarding ownership limitations that prohibited equity classification.

This liability existed until May 13, 2024 when the Exchange PFW holders agreed to an amendment that eliminated this provision.

Our stock price increased from $1.90 per share on March 8, 2024, to $2.85 per share on May 13, 2024 when the Exchange PFWs were modified.

For the fiscal year ended June 30, 2023, the Company did not have any warrant derivative liabilities.

Income Taxes.

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Short-term Liquidity Requirements

As of June 30, 2023, we had cash and cash equivalents of $16.0 million, investments in marketable debt securities $102.3 million and working capital was approximately $99.7 million.

As of June 30, 2024, we had cash and cash equivalents of $70.4 million, investments in marketable debt securities $56.7 million for a total of $127.1 million.

Working capital amounted to approximately $119.0 million as of June 30, 2024.

We have incurred cumulative net losses of $329.4 million since our inception and as a clinical stage company we have not generated any meaningful revenue to date.

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For the fiscal years ended June 30, 2024 and 2023, we received net proceeds from the issuance of equity securities of $62.6 million and $11.6 million, respectively.

As of June 30, 2022, we exercised the prepayment option under a loan agreement which used approximately $16.0 million of the funding from issuances of equity securities earlier in the fiscal year.

The completion of these equity financings is the primary source of remaining cash and cash equivalents and investments in marketable debt securities as of June 30, 2023.

For further information about the key terms and results of our debt and equity financing activities, please refer to the discussion above under the caption Executive Summary .

In April 2022 we entered into a lease agreement for a new corporate headquarters facility in Redwood City, California.

This lease, which commenced in October 2022, provides for total base rent payments of approximately $2.9 million through the expected expiration of the lease in July 2027.

Cash payments related to existing contractual obligations for the fiscal year ending June 30, 2024 include approximately (i) $0.7 million under all of our operating lease agreements, and (ii) a potential milestone payment to XOMA of $5.0 million that will be due upon dosing of the first patient in a Phase 3 clinical trial for RZ358 that we expect will occur in the next twelve months.

Due to uncertainties in the timing associated with clinical trial activities, it is possible that the milestone payments to XOMA could be delayed beyond our the fiscal year ending June 30, 2024.

Based on our cash and cash equivalents balance of $16.0 million combined with our investment in marketable debt security balance of $102.3 million as of June 30, 2023, we believe we have adequate capital resources to meet all of our contractual obligations and conduct all planned activities to advance our clinical trials at least through the third quarter of calendar year 2025.

The completion of equity financings between May 2022 and June 2024 is the primary source of total cash and cash equivalents and investments in marketable debt securities of $127.1 million as of June 30, 2024.

In July 2024, we received net proceeds of approximately $6.0 million related to a private placement of 1.5 million shares of common stock.

For further information about the key terms and results of our equity financing activities completed in the fourth quarter of fiscal year 2024 and the first quarter of fiscal year 2025, please refer to the discussion above under the caption Recent Developments .

Expected cash payments related to our existing contractual obligations for the fiscal year ending June 30, 2025 include approximately (i) $0.7 million under our operating lease agreements, and (ii) a milestone payment to XOMA of $5.0 million that will become due upon dosing of the last patient in our Phase 3 clinical trial for ersodetug.

Due to uncertainties in the timing associated with clinical trial activities, it is possible that the milestone payment due upon dosing of the last patient could be delayed beyond June 30, 2025.

Based on our cash, cash equivalents and marketable debt security investments totaling $127.1 million as of June 30, 2024, plus the July 2024 private placement proceeds of $6.0 million, we believe we have adequate capital resources to meet all of our contractual obligations and conduct all planned activities to advance our clinical trials at least through the second quarter of calendar year 2026.

Long-term Liquidity Requirements

Our most significant long-term contractual obligations consist of additional clinical and regulatory milestone payments up to $30.0 million payable to XOMA and additional milestone payments up to $25.0 million payable to ActiveSite.

Of this total, we expect that $5.0 million will be payable to XOMA during the fiscal year ended June 30, 2024 as discussed above under the caption Short-term Liquidity Requirements .

Of this total, we expect that $5.0 million will be payable to XOMA during the fiscal year ending June 30, 2025 as discussed above under the caption Short-term Liquidity Requirements .

The remaining $50.0 million is considered a long-term liquidity requirement.

Due to uncertainties in the timing associated with clinical trial activities and regulatory approvals, there is even greater uncertainty in forecasting the timing of future clinical and regulatory milestone payments to XOMA and ActiveSite that may be required during the fiscal year ending June 30, 2026 and thereafter.

In addition to the clinical and regulatory milestone payments discussed above, upon the future commercialization of RZ358 and RZ402 we will be obligated to pay additional milestone payments and royalties based on the net sales of the related products sales-based and alternative indication regulatory approvals to XOMA and ActiveSite for an additional $202.5 million.

In addition to the clinical and regulatory milestone payments discussed above, upon the future commercialization of ersodetug and RZ402 we will be obligated to pay additional milestone payments and royalties based on the net sales of the related products and alternative indication regulatory approvals to XOMA and ActiveSite for up to an additional $202.5 million.

These future milestones include $185.0 million in potential payments to XOMA and $17.5 million to ActiveSite for various sales-based milestones and alternative indication regulatory approvals.

No assurance can be provided that commercialization will ever be achieved for either of RZ358 and RZ402, whereby none of these future payments may ever be required.

No assurance can be provided that commercialization will ever be achieved for either ersodetug or RZ402, whereby none of these future payments may ever be required.

In addition to our licensing obligations, we also have long-term contractual obligations under existing operating lease agreements ranging between approximately $0.2 million to $0.8 million for each of the fiscal years ending June 30, 2026 through 2028.

Based on our current forecast, we expect that our existing cash and cash equivalents will be sufficient to fund our contractual obligations and conduct all planned activities to advance our clinical trials at least through the third quarter of calendar year 2025.

Based on our current forecast, we expect that our existing capital resources will be sufficient to fund our contractual obligations and conduct all planned activities to advance our clinical trials at least through the second quarter of calendar year 2026.

Therefore, we will need to obtain additional equity or debt financing in order to fund all of our long-term liquidity requirements.

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XOMA License Agreement

In December 2017, we entered into a license agreement (“XOMA License Agreement”) with XOMA through its wholly-owned subsidiary, XOMA (U.S.) LLC, pursuant to which XOMA granted an exclusive global license to develop and commercialize XOMA 358 (formerly X358, now RZ358) for all indications.

In January 2019, the XOMA License Agreement was amended with an updated payment schedule, as well as revised the amount we were required to expend on development of RZ358 and related licensed products, and revised provisions with respect to our diligence efforts in conducting clinical studies.

In January 2019, the XOMA License Agreement was amended with an updated payment schedule, as well as revisions to the amount we were required to expend on development of ersodetug and related licensed products, and revised provisions with respect to our diligence efforts in conducting clinical studies.

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 was triggered upon enrollment of the last patient in our ongoing phase 2 clinical study in January 2022.

The next milestone payment of $5.0 million will be due upon the enrollment of the first patient in a Phase 3 study, which we believe will occur in the next twelve months.

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.

Milestone payments made to date include a $2.0 million payment in January 2022 for the enrollment of the last patient of the Phase 2 clinical study and $5.0 million paid in May 2024 related to the first patient enrollment in a Phase 3 study.

We record a liability for milestone payments in our financial statements on the date that we achieve the milestone event.

The next milestone payment of $5.0 million will be due upon the enrollment of the last patient in a Phase 3 study, which we believe will occur in the next twelve months.

Additionally, upon the future commercialization of ersodetug, 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 ersodetug exceed targets ranging from $100.0 million to $1.0 billion.

Through June 30, 2024, no events have occurred that would result in the requirement to make additional milestone payments, and no royalties have been incurred.

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The first milestone payment for $1.0 million was paid in December 2020 after completion of preclinical work and submission of an IND to the FDA for RZ402.

The second milestone payment for $3.0 million became due upon dosing of the first patient

in a Phase 2 study in February 2023.

The second milestone payment for $3.0 million became due upon dosing of the first patient in a Phase 2 study in February 2023.

Remaining milestone payments under the ActiveSite License Agreement for various clinical and regulatory milestones amount to $25.0 million and milestones after commercial success or alternative indication approvals amount to $17.5 million.

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Non-cash expenses

Non-cash gains, net

Prepayment premium

Accretion of discounts and amortization of premiums on marketable debt securities, net

Changes in operating assets and liabilities, net

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For further discussion about changes in our operating results for the fiscal years ended June 30, 2024 and 2023, please refer to Results of Operations above.

For the fiscal year ended June 30, 2024, our non-cash expenses of $10.8 million primarily consisted of share-based compensation expense of $7.4 million, a loss from change in the fair value of the warrant derivative liability of $2.9 million, and non-cash lease expense of $0.5 million.

For the fiscal year ended June 30, 2023, our non-cash expenses of $7.7 million primarily consisted of share-based compensation expense of $7.3 million and non-cash lease expense of $0.4 million.

For the fiscal year ended June 30, 2022, our non-cash expenses of $8.3 million primarily consisted of share-based compensation expense of $3.7 million, a discount on the issuance of the Class B PFWs derivate liability of $2.5 million, a loss on extinguishment of debt of $1.5 million, accretion of debt discount and issuance costs of $0.4 million, and non-cash lease expense of $0.2 million.

For the fiscal year ended June 30, 2023, non-cash gains consisted of discount accretion on investments in marketable debt securities of $1.4 million.

For the fiscal year ended June 30, 2022, non-cash gains consisted of a gain of $6.5 million attributable to changes in fair value of the Class B PFW derivative liability related to a deficiency in our authorized shares that existed from May 4, 2022 until June 16, 2022.

For the fiscal year ended June 30, 2022, we paid a prepayment premium of $0.3 million in connection with the termination of the loan agreement.

The cash payment for this amount is included as a financing cash outflow and as a component of our net loss.

Accordingly, an adjustment is required to remove this amount from our operating cash outflows.

A similar charge was not incurred for the fiscal year ended June 30, 2023.

For the fiscal year ended June 30, 2023, net changes in operating assets and liabilities increased operating cash flow by $1.0 million, primarily driven by an increase accounts payable and other accrued liabilities of $2.3 million, partially offset by an increase in prepaid expenses and other assets of $1.3 million that associated with prepayments for clinical trials and

manufacturing activities.

For the fiscal year ended June 30, 2022, net changes in operating assets and liabilities reduced operating cash flow by $0.6 million, primarily driven by an increase in prepaid expenses and other assets of $0.9 million that was associated with to prepayments for clinical trials and manufacturing activities, partially offset by a decrease in other accrued liabilities of $0.2 million

Cash Flows Used in Investing Activities

For the fiscal year ended June 30, 2023, our net cash utilized in investing activities amounted to $101.5 million, primarily related to the purchase of $107.3 million of marketable debt securities offset by cash inflows provided by $6.0 million of marketable debt securities.

Additionally, our investing activities used $0.2 million for the purchase of furniture and equipment primarily for use in our new office location in Redwood City, California .

We did not have any cash flows from investing activities for the fiscal years ended June 30, 2022.

For the fiscal year ended June 30, 2024, non-cash gains consisted of the net impact of accreting discounts and amortizing premiums on investments in marketable debt securities of $2.8 million.

For the fiscal year ended June 30, 2023, non-cash gains consisted of the net impact of accreting discounts and amortizing premiums on investments in marketable debt securities of $1.4 million.

For the fiscal year ended June 30, 2024, net changes in operating assets and liabilities increased operating cash flow by $3.1 million, primarily driven by an increase accounts payable and other accrued liabilities of $3.2 million, partially offset by an increase in prepaid expenses and other assets of $0.1 million associated with prepayments for clinical trials and manufacturing activities.

For the fiscal year ended June 30, 2023, net changes in operating assets and liabilities increased operating cash flow by $1.0 million, primarily driven by an increase accounts payable and other accrued liabilities of $2.3 million, partially offset by an increase in prepaid expenses and other assets of $1.3 million associated with prepayments for clinical trials and manufacturing activities.

Cash Flows Provided by (Used in) Investing Activities

For the fiscal year ended June 30, 2024, net cash provided by investing activities amounted to $48.7 million, primarily related to the proceeds from maturities of marketable debt securities of $115.1 million, partially offset by cash outflows used in to purchase marketable debt securities of $66.4 million.

For the fiscal year ended June 30, 2023, our net cash utilized in investing activities amounted to $101.5 million, primarily related to the purchase of $107.3 million of marketable debt securities, partially offset by cash proceeds of $6.0 million of resulting from maturities of marketable debt securities.

Additionally, for the fiscal year ended June 30, 2023, our investing activities used $0.2 million for the purchase of furniture and equipment primarily for use in our new office location in Redwood City, California.

Cash Flows Provided by Financing Activities

Net cash provided by financing activities for the fiscal year ended June 30, 2024 amounted to $63.0 million.

This amount consisted of proceeds of $12.3 million from the 2022 Private Placement.

The total proceeds from the 2022 Private Placement of $12.3 million were partially offset by payments of $0.8 million for underwriting commissions and other costs related to this offering.

This amount consisted of proceeds of $67.1 million from the 2024 Underwritten Offering.

The total proceeds from the 2024 Public Underwritten Offering of $67.1 million were partially offset by underwriter discounts of $4.0 million related to this offering and other offering costs of $0.3 million.

For the fiscal year ended June 30, 2024, we also received proceeds of $0.2 million from the exercise of employee stock options to purchase approximately 82,000 shares of common stock.

Net cash provided by financing activities for the fiscal year ended June 30, 2023 amounted to $11.6 million.

This amount included (i) $50.7 million received from an underwritten offering of Units in October 2021 for the issuance of approximately 6.8 million shares of common stock at a purchase price of $6.50 per share and issuance of 1.7 million of PFWs at a purchase price of $6.49 per share, (ii) $5.0 million received from a registered direct offering related to the issuance of common stock in October 2021 for the purchase of approximately 0.8 million shares at a purchase price of $6.50 per share, (iii) $110.5 million of proceeds after underwriter discounts from the 2022 RDO in May 2022 for the purchase of approximately 18.0 million shares of common stock at a purchase price of $3.80 per share and purchase of an aggregate of approximately 12.9 Class A PFWs and Class B PFWs at a purchase price of $3.799 per share, and (iv) $2.7 million in gross proceeds for the issuance of common stock under the a purchase agreement and an agent equity distribution agreement.

The total proceeds from equity financing activities amounted to $168.9 million and were partially offset by payments of $3.7 million related to financial advisory fees and other costs of equity financings, resulting in net cash proceeds from equity financing activities of $165.2 million.

For the fiscal year ended June 30, 2022, we used cash of $16.3 million related to our debt financing activities.

Debt financing payments consisted of $0.3 million for payment of additional debt discount and issuance costs under our loan agreement, and $16.0 million for contractual payments required to terminate the loan agreement on June 30, 2022.

The contractual payments included (i) repayment of the principal balance of the loan for $15.0 million, (ii) a prepayment fee equal to 2.00% of the outstanding principal balance for a total of $0.3 million, and (iii) a final fee equal to 4.75% of the aggregate amount of the term loan funded for a total of $0.7 million.

The security interests and liens granted in April 2021 when we entered into the loan agreement were released on June 30, 2022.

This amount consisted of gross proceeds of $12.3 million received from the 2022 Private Placement.

The total proceeds from the 2022 Private Placement of $12.3 million were received in July 2022 and were partially offset by payments of $0.8 million for underwriting commissions and other costs related to this offering.

Off-Balance Sheet Arrangements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis