Notes to Consolidated Financial Statements
March 31, 2018
(Unaudited)
Note 1 Nature of Operations
These financial statements represent the
consolidated financial statements of Rezolute, Inc. (“Rezolute”), and its wholly owned operating subsidiary AntriaBio
Delaware, Inc. (“Antria Delaware”). Rezolute and Antria Delaware are collectively referred to herein as the “Company”.
The Company is a clinical stage biopharmaceutical company.
Note 2 Summary of Significant Accounting
Policies
Basis of Presentation
The accompanying unaudited interim financial
statements have been prepared in accordance with accounting principles generally accepted in the United States of America and the
rules and regulations of the United States Securities and Exchange Commission for interim financial information and with the instructions
to Form 10-Q and Article 8 of Regulation S-X.
The unaudited interim financial statements
should be read in conjunction with the Company’s Annual Report on Form 10-K filed on September 22, 2017, which contains the
audited financial statements and notes thereto, together with the Management’s Discussion and Analysis of Financial Condition
and Results of Operations, for the year ended June 30, 2017.
Certain information or footnote disclosures
normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States
of America have been condensed or omitted, pursuant to the rules and regulations of the Securities and Exchange Commission for
interim financial reporting. Accordingly, they do not include all the information and footnotes necessary for a comprehensive presentation
of financial position, results of operations, or cash flows. It is management's opinion, however, that all material adjustments
(consisting of normal recurring adjustments) have been made which are necessary for a fair financial statement presentation. The
interim results for the period ended March 31, 2018 are not necessarily indicative of results for the full fiscal year.
Use of Estimates
The preparation of financial statements
in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect
the reported amounts in the financial statements and the accompanying notes. Such estimates and assumptions impact, among others,
the following: estimated useful lives and impairment of depreciable assets, the fair value of share-based payments and warrants,
fair value of derivative instruments, estimates of the probability and potential magnitude of contingent liabilities and the valuation
allowance for deferred tax assets due to continuing and expected future operating losses. Actual results could differ from those
estimates.
Risks and Uncertainties
The Company's operations may be subject
to significant risk and uncertainties including financial, operational, regulatory and other risks associated with a clinical stage
company, including the potential risk of business failure. See Note 3 regarding going concern matters.
Fixed Assets
Fixed assets are carried at cost less accumulated
depreciation. Depreciation is computed using the straight-line method over the estimated useful lives.
Research and Development Costs
Research and development costs are expensed
as incurred and include salaries, benefits and other staff-related costs; consultants and outside costs; material manufacturing
costs, clinical trial costs; and facilities and other costs. These costs relate to research and development costs without an allocation
of general and administrative expenses.
Fair Value of Financial Instruments
Fair value is defined as the exchange price
that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market
for the asset or liability in an orderly transaction between market participants on the measurement date. An entity is required
to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard describes
three levels of inputs that may be used to measure fair value are as follows:
|
·
|
Level 1: Quoted prices for identical assets and liabilities in active markets;
|
|
·
|
Level 2: Quoted prices for similar assets and liabilities in active markets; quoted prices for
identical or similar assets and liabilities in markets that are not active; and model-derived valuations in which all significant
inputs and significant value drivers are observable in active markets; and
|
|
·
|
Level 3: Valuations derived from valuation techniques in which one or more significant inputs or
significant value drivers are unobservable.
|
The carrying amounts of financial
instruments including cash and accounts payable and accrued expenses approximated fair value as
of March 31, 2018 and June 30, 2017 due to the relatively short maturity of the respective instruments.
The warrant derivative liability recorded
as of March 31, 2018 and June 30, 2017 is recorded at an estimated fair value based on a Black-Scholes pricing model. The warrant
derivative liability is a level 3 fair value measurement with the entire change in the balance recorded through earnings. See significant
assumptions in Note 8. The following table sets forth a reconciliation of changes in the fair value of financial instruments classified
as level 3 in the fair value hierarchy:
Balance as of June 30, 2017
|
|
$
|
(588
|
)
|
Total unrealized gains (losses):
|
|
|
|
|
Included in earnings
|
|
|
588
|
|
Balance as of March 31, 2018
|
|
$
|
-
|
|
The embedded derivative liability
recorded as of issuance and March 31, 2018 is recorded at an estimated fair value based on the put value payment if
exercised. The embedded derivative liability is a level 3 fair value measurement with the entire change in the balance
recorded through earnings. The significant inputs to the calculation are a term of one year and a probability of 95%.
The following table sets forth a reconciliation of changes in the fair value of financial instruments classified as level 3
in the fair value hierarchy:
Value Recorded at issuance
|
|
|
(100,000
|
)
|
Total unrealized gains (losses):
|
|
|
|
|
Included in earnings
|
|
|
7,397
|
|
Balance as of March 31, 2018
|
|
$
|
(92,603
|
)
|
Recent Accounting Pronouncements
In January 2016, the FASB issued ASU
2016-01,
Financial Instruments – Overall
:
Recognition and Measurement of Financial Assets and Financial
Liabilities
, which addresses certain aspects of recognition, measurement, presentation, and disclosure of financial
instruments. ASU 2016-01 will be effective for us starting on July 1, 2018, and early adoption is not permitted. We do not
expect the adoption to have a material impact on our consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
. This update requires organizations to recognize lease assets and lease liabilities on the balance sheet
and also disclose key information about leasing arrangements. This ASU is effective for annual reporting periods beginning on or
after December 15, 2018, and interim periods within those annual periods. Earlier application is permitted for all entities as
of the beginning of an interim or annual period. We will be required to adopt ASU 2016-02 starting on July 1, 2019. We are currently
evaluating the impact the adoption of this ASU will have on our consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09.
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.
The update
will affect all entities that issue share-based payment awards to their employees and is effective for annual periods beginning
after December 15, 2016 for public entities. The areas for simplification in ASU 2016-09 involve several aspects of the accounting
for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities,
and classification on the statement of cash flows. We adopted the ASU starting on July 1, 2017 and there was a minimal impact on
our consolidated financial statements.
In May 2017, the FASB issued ASU 2017-9.
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting.
The update includes guidance on what
changes to share-based payment awards would require modification accounting and is effective for annual periods after December
15, 2017. We expect to adopt the ASU 2017-9 on July 1, 2018. We do not expect the adoption of the new provisions to have a material
impact on our financial condition or results of operations.
Note 3 Going Concern
As reflected in the accompanying financial
statements, the Company has a net loss of $17,371,037 and net cash used in operations of $10,230,103 for the nine months ended
March 31, 2018, working deficit of $3,925,070 and stockholders’ equity of $532,930 and an accumulated deficit of $81,692,999
at March 31, 2018. In addition, the Company is in the clinical stage and has not yet generated any revenues. These factors
raise substantial doubt about the Company’s ability to continue as a going concern.
The Company expects that its current cash
resources as well as expected lack of operating cash flows will not be sufficient to sustain operations for a period greater than
one year. The ability of the Company to continue its operations is dependent on Management's plans, which include continuing to
raise capital through equity or debt based financings. There can be no assurances that such capital will be available to us on
acceptable terms, or at all.
The accompanying financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the
normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets
or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
Note 4 Fixed Assets
The following is a summary of fixed assets
and accumulated depreciation:
|
|
Useful
|
|
|
|
|
|
|
|
|
|
Life
|
|
|
March 31, 2018
|
|
|
June 30, 2017
|
|
Furniture and fixtures
|
|
|
5 - 7 years
|
|
|
$
|
118,450
|
|
|
$
|
118,450
|
|
Lab equipment
|
|
|
3 - 15 years
|
|
|
|
3,951,855
|
|
|
|
3,946,040
|
|
Leasehold Improvements
|
|
|
5 - 7 years
|
|
|
|
3,247,038
|
|
|
|
3,247,038
|
|
|
|
|
|
|
|
|
7,317,343
|
|
|
|
7,311,528
|
|
Less: accumulated depreciation and amortization
|
|
|
|
|
|
|
(2,786,300
|
)
|
|
|
(1,986,127
|
)
|
|
|
|
|
|
|
$
|
4,531,043
|
|
|
$
|
5,325,401
|
|
Depreciation expense was $266,781 and $282,829
for the three months ended March 31, 2018 and 2017, respectively and was $800,174 and $829,258 for the nine months ended March
31, 2018 and 2017, respectively
Note 5 Related Party Transactions
During the three and nine months ended
March 31, 2018, the Company incurred investor relations expense of none and $33,322 and general and administrative expenses of
$288 and $67,726 for services performed by related parties of the Company and were included in the statement of operations. During
the three and nine months ended March 31, 2017, the Company incurred investor relations expense of $33,878 and $90,803 and general
and administrative expenses of none and $13,928 for services performed by related parties of the Company and were included in the
statement of operations. As of March 31, 2018, and June 30, 2017, there were $288 and $25,200, respectively, related party expenses
recorded in accounts payable and accrued expenses.
Note 6 Convertible Notes Payable
As of March 31, 2018, and June 30, 2017,
the Company had an original convertible note outstanding balance was $10,000 and $10,000, respectively. As of March 31, 2018, the
outstanding convertible note has matured and payment is due. The convertible note which has not been repaid or converted continues
to accrue interest at a rate of 8%.
During the quarter ended March 31,
2018, the Company issued two secured convertible promissory notes for gross proceeds of $700,000. The notes bear interest at
a rate of 12% per annum and expire one year from issuance or 10 days after the closing of a financing of at least $10
million. The notes contain an optional conversion feature in which if the Company raises $20 million then, at the
investor’s option, the notes would convert into the financing at a 20% discount of the financing terms. This conversion
feature is a contingent beneficial conversion feature that is not calculated as a separate derivative until the contingent
event has occurred. With the promissory note, the investor also received warrants to purchase 350,000 shares of common stock
equal to one-half of the principal amount of the note. The warrants have an exercise price of $1.00 per share and are
exercisable for five years from date of issuance.
The value of the proceeds of the notes
were allocated to the warrants as discussed in Note 8 at an allocated fair value method. The discount on the notes is being amortized
into interest expense over the life of the note. As of March 31, 2018, the outstanding balance of the secured convertible promissory
note was $700,000 with a current discount outstanding of $89,783.
During the quarter ended March 31,
2018, the Company issued a secured convertible promissory note for gross proceeds of $500,000. The note bears interest at a
rate of 15% per annum and expires one year from issuance. The notes contain an optional conversion feature in which if the
Company raises $10 million then, at the investor’s option, the notes would convert into the financing at a 20% discount
of the financing terms. With the promissory note, the investor also received warrants to purchase 500,000 shares of common
stock which expire five years from date of issuance. The exercise price is to be determined to be 120% of the conversion
price of the convertible note if a financing occurs or 120% of the average closing stock price of the Company for 10 days
prior to July 1, 2018. The note also contains an embedded liability derivative for the acceleration of the maturity date
as discussed in Note 2.
The value of the proceeds of the note was
allocated to the warrant as discussed in Note 8 at an allocated fair value method. The value of the embedded derivative liability was then taken as a discount to the allocated value of the note. The discount on the note is being amortized into interest expense
over the life of the note. As of March 31, 2018, the outstanding balance of the secured convertible promissory note was $500,000
with a current discount outstanding of $195,520.
On April 3, 2018 and April 11, 2018, the Company closed on a
series of notes with gross proceeds of $4.1 million. The notes also include warrants to purchase common stock with the number of
shares and exercise price to be determined at the time of the next financing. The notes bear interest at 12% per annum and matures
one year from issuance. The notes are secured by a perfected security interest in the tangible assets of the Company. With the
closing of these notes, the two notes for $700,000 and related warrants issued above were amended into the terms of this note financing.
Note 7 Shareholders’ Equity
During the year ended June 30, 2017, the Company closed private
placement transactions in which the Company issued 5,783,184 units to accredited investors. Each investor was issued either Class
A Units or Class B units of the Company. Each Class A Unit received one share of common stock and one-half of one common share
purchase warrant. If the investor had previously invested in the Company they were eligible for a Class B Unit which received one
share of common stock and one common share purchase warrant. Each common share purchase warrant is exercisable at $1.65 per share
and will expire 60 months following the issuance. As of June 30, 2017, the Company received net proceeds of approximately $5.2
million after the placement agent compensation and issuance costs paid of $683,194 and $516,550 of warrant expense recorded as
issuance costs.
The Company also entered into a private placement transaction
in which the Company issued common stock to accredited investors at an offering price of $1.00 per share. As of June 30, 2017,
the Company received net proceeds of approximately $8.1 million after the placement agent compensation of $186,671 of warrant expense
recorded as issuance costs, as there was no placement agent cash compensation.
During the nine months ended
March 31, 2018, the Company closed an additional private placement transaction in which the Company issued 4,500,000 shares
of common stock to accredited investors at an offering price of $1.00 per share. The Company received net proceeds of $4.44
million after the placement agent compensation of $60,000.
Lincoln Park Transaction
–
On December 22, 2017, we entered into the Lincoln Park Purchase Agreement pursuant to which Lincoln Park has agreed to purchase
from us up to an aggregate of $10.0 million of the Company’s common stock (subject to certain limitations) from time to time
over the 36-month term of the agreement. We also entered into a registration rights agreement with Lincoln Park pursuant to which
the Company filed with the Securities and Exchange Commission (the “SEC”) the registration statement to register for
resale under the Securities Act of 1933, as amended, or the Securities Act, the shares of common stock that have been or may be
issued to Lincoln Park under the Purchase Agreement.
As a result, on December 22, 2017, 344,669
newly issued shares of the Company’s common stock, equal to three percent of the $10 million availability, were issued to
Lincoln Park as consideration for Lincoln Park’s commitment to purchase shares of the Company’s common stock under
the agreement.
Under the terms and subject to the conditions
of the Lincoln Park Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln
Park is obligated to purchase up to $10.0 million worth of shares of the Company’s common stock. Such future sales of common
stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s option,
over the 36-month term of the agreement.
As contemplated by the Lincoln Park Purchase
Agreement, and so long as the closing price of the Company’s common stock exceeds $0.40 per share, then the Company may direct
Lincoln Park, at its sole discretion to purchase up to 65,000 shares of its common stock on any business day, provided that five
business day has passed since the most recent purchase. The price per share for such purchases will be equal to the lower of: (i)
the lowest sale price on the applicable purchase date and (ii) the arithmetic average of the three (3) lowest closing sale prices
for the Company’s common stock during the twelve (12) consecutive business days ending on the business day immediately preceding
such purchase date (in each case, to be appropriately adjusted for any reorganization, recapitalization, non-cash dividend, stock
split or other similar transaction that occurs on or after the date of the purchase agreement). The maximum amount of shares subject
to any single regular purchase increases as the Company’s share price increases, subject to a maximum of $500,000.
In addition to regular purchases, the Company
may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional purchases if the closing sale
price of the common stock exceeds certain threshold prices as set forth in the purchase agreement. In all instances, the Company
may not sell shares of its common stock to Lincoln Park under the purchase agreement if it would result in Lincoln Park beneficially
owning more than 9.99% of its common stock. There are no trading volume requirements or restrictions under the purchase agreement
nor any upper limits on the price per share that Lincoln Park must pay for shares of common stock.
The Lincoln Park Purchase Agreement and
the registration rights agreement contain customary representations, warranties, agreements and conditions to completing future
sale transactions, indemnification rights and obligations of the parties. The Company has the right to terminate the purchase agreement
at any time, at no cost or penalty. During any “event of default” under the purchase agreement, all of which are outside
of Lincoln Park’s control, Lincoln Park does not have the right to terminate the purchase agreement; however, the Company
may not initiate any regular or other purchase of shares by Lincoln Park, until such event of default is cured. In addition, in
the event of bankruptcy proceedings by or against the Company, the purchase agreement will automatically terminate.
Actual sales of shares of common stock
to Lincoln Park under the purchase agreement will depend on a variety of factors to be determined by the Company from time to time,
including, among others, market conditions, the trading price of the common stock and determinations by the Company as to the appropriate
sources of funding for the Company and its operations. Lincoln Park has no right to require any sales by the Company, but is obligated
to make purchases from the Company as it directs in accordance with the purchase agreement. Lincoln Park has covenanted not to
cause or engage in any manner whatsoever, any direct or indirect short selling or hedging of the Company’s shares.
The Company has not declared or paid any
dividends or returned any capital to common stockholders as of March 31, 2018.
Note 8 Stock-Based
Compensation
Options -
On March 26, 2014, the
Company adopted the AntriaBio, Inc. 2014 Stock and Incentive Plan which allows the Company to issue up to 3,750,000 of common stock
in the form of stock options, incentive options or common stock. The Company had granted 3,295,000 of these shares to current employees
and directors of the Company as of June 30, 2017 and no additional grants as of March 31, 2018. The options have an exercise price
from $1.29 to $3.44 per share. The options vest monthly over four years, with some options subject to a one year cliff before options
begin to vest monthly.
On February 23, 2015, the Company adopted
the AntriaBio, Inc. 2015 Non Qualified Stock Option Plan which allows the Company to issue up to 6,850,000 of common stock in the
form of stock options. The Company had granted 4,487,000 of these shares to current employees and directors of the Company as of
June 30, 2017 and no additional grants as of March 31, 2018. The options have an exercise price of from $1.00 to $2.06 per share.
The options vest monthly over 4 years with some options subject to a one year cliff before options begin to vest monthly.
On October 31, 2016, the Board adopted the AntriaBio, Inc. 2016
Non Qualified Stock Option Plan which allows the Company to issue up to 35,000,000 shares of common stock in the form of stock
options. The 2016 Non Qualified Stock Option Plan was amended on August 21, 2017 to reduce the number of shares to be issued to
15,000,000 shares of common stock in the form of stock options. The Board had issued options to purchase 28,995,000 of these shares
to current employees and directors as of June 30, 2017, of which 4,360,000 were cancelled before their terms were established and
11,090,000 were additionally cancelled by the Board during the year ended June 30, 2017. The Company had 1,550,000 of the cancelled
stock options that had begun vesting prior to the cancellation and with the cancellation the Company recorded $1,199,847 of unrecognized
stock compensation expense. The Company had granted 255,000 of these shares to current employees and directors of the Company as
of March 31, 2018. The options have an exercise price from $1.00 to $1.20 per share. The options expire no later than ten years
from the date of the grant. The options vest on a monthly basis over 48 months, except for 75,000 of the options which do not begin
to vest until specific events have occurred and then begin to vest over 48 months and 60,000 of the options that all vest at the
end of the consulting contract. Some options are subject to a one year cliff and all options have an exercise price based on the
fair value of the common stock on the date of grant.
The Company has computed the fair value
of all options granted that have begun vesting using the Black-Scholes option pricing model. In order to calculate the fair value of
the options, certain assumptions are made regarding components of the model, including the estimated fair value of the underlying
common stock, risk-free interest rate, volatility, expected dividend yield and expected option life. Changes to the assumptions
could cause significant adjustments to valuation. The Company estimated a volatility factor utilizing comparable published volatility
of several peer companies. Due to the small number of option holders, the Company has estimated a forfeiture rate of zero as the
value of each option holder is calculated individually. The Company estimates the expected term based on the average of the vesting
term and the contractual term of the options. The risk-free interest rate is based on the U.S. Treasury yield in effect at the
time of the grant for treasury securities of similar maturity.
The Company has computed the fair value
of all options granted during the nine months ended March 31, 2018 using the following assumptions:
Expected volatility
|
|
|
84
|
%
|
Risk free interest rate
|
|
|
2.0 - 2.21
|
%
|
Expected term (years)
|
|
|
7
|
|
Dividend yield
|
|
|
0
|
%
|
Stock option activity is as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Options
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
Outstanding, June 30, 2017
|
|
|
21,290,751
|
|
|
$
|
1.65
|
|
|
|
7.7
|
|
Granted
|
|
|
255,000
|
|
|
$
|
1.08
|
|
|
|
|
|
Forfeited
|
|
|
(486,167
|
)
|
|
$
|
1.62
|
|
|
|
|
|
Expired
|
|
|
(250,000
|
)
|
|
$
|
4.50
|
|
|
|
|
|
Outstanding, March 31, 2018
|
|
|
20,809,584
|
|
|
$
|
1.61
|
|
|
|
7.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 31, 2018
|
|
|
10,310,626
|
|
|
$
|
1.97
|
|
|
|
6.5
|
|
Stock-based compensation expense related
to the fair value of stock options was included in the statement of operations as research and development – compensation
and benefits expense of $289,645 and $515,821 and as general and administrative – compensation and benefits expense of $1,184,070
and $896,176 for the three months ended March 31, 2018 and 2017, respectively. Stock-based compensation expense related to the
fair value of stock options was included in the statement of operations as research and development – compensation and benefits
expense of $870,464 and $1,265,591 and as general and administrative – compensation and benefits expense of $3,305,029 and
$2,272,372 for the nine months ended March 31, 2018 and 2017, respectively. The unrecognized stock-based compensation expense at
March 31, 2018 is $7,140,039. The Company determined the fair value as of the date of grant using the Black-Scholes option pricing
method and expenses the fair value ratably over the vesting period.
Warrants
-
The Company issued
warrants to agents in conjunction with the closing of various financings and issued warrants in private placements as follows:
|
|
|
|
|
Weighted
|
|
|
Weighted Average
|
|
|
|
Number of
|
|
|
Average
|
|
|
Remaining
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Contractual Life
|
|
Outstanding, June 30, 2017
|
|
|
32,796,448
|
|
|
$
|
1.71
|
|
|
|
3.7
|
|
Warrants issued for consulting services
|
|
|
650,000
|
|
|
$
|
1.03
|
|
|
|
|
|
Warrants issued in debt financing
|
|
|
850,000
|
|
|
$
|
1.00
|
|
|
|
|
|
Warrants expired
|
|
|
(285,407
|
)
|
|
$
|
2.43
|
|
|
|
|
|
Outstanding, March 31, 2018
|
|
|
34,011,041
|
|
|
$
|
1.67
|
|
|
|
3.0
|
|
For the Nine Months Ended March
31, 2018:
The Company issued warrants to purchase 100,000 shares of common stock at a price of $1.00 per share in
connection with a consulting agreement. The Company also issued warrants to purchase 50,000 shares of common stock at a price
of $1.00 per share in connection with investor services. The Company issued warrants to purchase 500,000 shares of common
stock at a price of $1.04 per share in connection with a consulting agreement. The Company issued warrants to purchase
350,000 shares of common stock at a price of $1.00 per share in connection with the issuance of convertible notes. The
Company issued warrants to purchase 500,000 shares of common stock at a price to be determined at a future date in connection
with the issuance of convertible notes.
In 2014, the Company issued warrants to
purchase 16,667 shares of common stock which were accounted for under liability accounting. The fair value as of March 31, 2018
and June 30, 2017 were none and $588, respectively which is reflected as a liability with the fair value adjustment recorded as
derivative gains or losses on the consolidated statements of operations.
The warrants exercisable for the 250,000
shares of common stock are accounted for under the equity method of accounting and are fair valued monthly at the date that the
warrants vest. As of June 30, 2017, warrants to purchase 15,624 shares of common stock had vested and $12,564 had been recorded
into equity and investor relations expense. As of March 31, 2018, warrants to purchase an additional 46,872 shares of common stock
had vested and $35,936 had been recorded into equity and investor relations expense.
The warrants exercisable for 100,000 shares were accounted for
under equity treatment and were fair valued as of the date of issuance. The fair value of the warrants was valued at $66,643 and
recorded as additional paid-in-capital and as general and administrative expenses. The warrants exercisable for 50,000 shares were
accounted for under equity treatment and were fair valued as of the date of issuance. The fair value of the warrants was valued
at $33,322 and recorded as additional paid-in-capital and as investor relations expense. The warrants exercisable for 500,000 shares
were accounted for under equity treatment and were fair valued as of the date of issuance. The fair value of the warrants was valued
at $407,605 and recorded as additional paid-in-capital and license costs. The warrants exercisable for 350,000 shares of common
stock are accounted for under equity treatment and were recorded at the allocated fair value as of the date of issuance. The estimated
fair value of the warrants was $126,914 and the allocated fair value of $107,000 was recorded as additional paid-in capital. The
warrants exercisable for 500,000 shares of common stock are accounted for under equity treatment and were recorded at the allocated
fair value as of the date of issuance. The estimated fair value of the warrants was $140,150 and the allocated fair value of $110,000
was recorded as additional paid-in capital.
The warrants were valued using the Black-Scholes
option pricing model on the date of issuance except the warrants to purchase 500,000 shares of common stock which were valued using
the Lattice pricing model. In order to calculate the fair value of the warrants in both models, certain assumptions were made regarding
components of the model, including the closing price of the underlying common stock, risk-free interest rate, volatility, expected
dividend yield, and warrant term. Changes to the assumptions could cause significant adjustments to valuation. Rezolute estimated
a volatility factor utilizing comparable published volatilities of several peer companies. The risk-free interest rate is based
on the U.S. Treasury yield in effect at the time of the grant for treasury securities of similar maturity.
The Black-Scholes valuation methodology
was used because that model embodies all of the relevant assumptions that address the features underlying these instruments. Significant
assumptions for the warrant values calculated for the nine months ended March 31, 2018 were as follows:
Expected volatility
|
|
|
40% - 96
|
%
|
Risk free interest rate
|
|
|
1.47% - 2.80
|
%
|
Warrant term (years)
|
|
|
1 - 10
|
|
Dividend yield
|
|
|
0
|
%
|
The Lattice pricing model was used to determine
the fair value of the warrants to purchase 500,000 shares of common stock on the day they were issued. The Lattice model accommodates
the probability of changes in the exercise price as outlined in the warrant agreement. Under the terms of the warrant agreement,
the exercise price of the warrant will be 120% of the share price of a qualified financing if it occurs prior to July 1, 2018 or
the exercise price will be 120% of the average closing price of the Company’s share price for the ten trading days prior
to July 1, 2018. The estimated fair value was derived using the lattice model with the following assumptions:
Expected volatility
|
|
|
65
|
%
|
Risk free interest rate
|
|
|
2.62
|
%
|
Warrant term (years)
|
|
|
5
|
|
Dividend yield
|
|
|
0
|
%
|
Note 9 Income Taxes
Income tax expense during interim periods
is based on applying an estimated annual effective income tax rate to year-to-date income, plus any significant unusual or infrequently
occurring items which are recorded in the interim period. The computation of the annual estimated effective tax rate at each interim
period requires certain estimates and significant judgment including, but not limited to, the expected operating income for the
year, projections of the proportion of income earned and taxed in various jurisdictions, permanent and temporary differences, and
the likelihood of recovering deferred tax assets generated in the current year. The accounting estimates used to compute the provision
for income taxes may change as new events occur, more experience is obtained, additional information becomes known or as the tax
environment changes. In connection with the New Tax Cuts and Jobs Act, all gross deferred tax assets and liabilities have been
remeasured at the 21% Federal statutory rate. There was no change to the net deferred tax asset recorded as the valuation allowance
was also adjusted offsetting these changes.
In the three and nine months ended March
31, 2018, the Company did not record any income tax provision due to expected future losses and full valuation allowance on its
deferred tax assets.
Note 10 Commitments and Contingencies
Lease Commitments –
In May
2014, the Company entered into a lease of approximately 27,000 square feet of office, laboratory and clean room space to be leased
for seventy-two months. The lease requires monthly payments of $28,939 adjusted annually by approximately 3% plus triple net expenses
monthly of $34,381 adjusted annually. The Company also made a security deposit of $750,000 which is held by the landlord, of which
$562,500 has been returned to the Company and the remaining balance will be returned over the next year.
On March 17, 2017, the Company entered
into a lease of approximately 20,000 square feet of office space to be leased for eighty-two months. The lease requires monthly
payments of $28,425 adjusted annually plus triple net expenses monthly of $28,410 adjusted annually. The Company also made a security
deposit of $56,851 which will be returned at the end of the lease.
On March 17, 2017, the Company sub-leased
their original approximately 10,000 square feet of office space to another company. The sublease is for eighty-two months unless
the Company is unable to extend our current lease then the sub-lease will expire on March 31, 2020. The Company is to receive monthly
payments of $12,523 adjusted annually plus triple net expenses monthly of $12,828 adjusted annually. The Company also received
a security deposit of $25,046 which will be returned at the end of the lease.
As of March 31, 2018, the minimum rental
commitment under the leases are as follows:
|
|
Operating Leases
|
|
|
Sub-lease Income
|
|
|
Total
|
|
Year Ending June 30,
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
|
184,662
|
|
|
|
(38,865
|
)
|
|
|
145,797
|
|
2019
|
|
|
747,953
|
|
|
|
(157,187
|
)
|
|
|
590,766
|
|
2020
|
|
|
688,892
|
|
|
|
(148,551
|
)
|
|
|
540,341
|
|
2021
|
|
|
338,392
|
|
|
|
-
|
|
|
|
338,392
|
|
2022
|
|
|
347,836
|
|
|
|
-
|
|
|
|
347,836
|
|
Thereafter
|
|
|
569,364
|
|
|
|
-
|
|
|
|
569,364
|
|
|
|
$
|
2,877,099
|
|
|
$
|
(344,603
|
)
|
|
$
|
2,532,496
|
|
License Agreements:
On August 4,
2017, the Company entered into a Development and License Agreement (“
License Agreement
”) with ActiveSite Pharmaceuticals,
Inc. (“
ActiveSite
”) pursuant to which the Company acquired the rights to ActiveSite’s Plasma Kallikrein
Inhibitor program (“
PKI Program
”). The Company desires to use the PKI Program to develop, file, manufacture,
market and sell products for diabetic macular edema and other human therapeutic indications. The Company was required to
make an upfront payment of $750,000 payable within five (5) days of the date of the parties executed the License Agreement. The
Company is required to pay up to an additional aggregate of $36.5 million in development and regulatory milestone payments if certain
clinical study objectives and regulatory filings, acceptances and approvals are achieved. In addition, we are required to pay up
to an aggregate of $10.0 million in sales milestone payments if certain annual sales targets are achieved.
On December 6, 2017, the Company entered into a License Agreement
and Common Stock Purchase Agreement (collectively “
Transaction Documents
“) with XOMA LLC (“
XOMA
”)
pursuant to which the Company acquired the exclusive rights to develop and commercialize XOMA 358 (now RZ358) for an orphan indication,
Congenital Hyperinsulinism. The Company is responsible for all development, regulatory, manufacturing and commercialization activities
associated with RZ358. Pursuant to the Transaction Documents, the Company is required to pay XOMA $6 million and to issue XOMA
$12 million of the Company’s common stock based upon the Company’s financing activities in 2018. The Company would
be required to issue additional shares and a put option to XOMA if certain financing activities did not occur in 2018, as more
fully described in the agreements. The Company also has a required development spend every year related to RZ358. The Company is
also required to make certain clinical, regulatory and annual net sales milestone payments of up to $222 million in the aggregate.
The Company is also obliged to pay XOMA royalties ranging from the high single digits to the mid-teens based upon annual net sales
of RZ358. Finally, under the terms of the License Agreement, the Company is required to pay XOMA a low single digit royalty on
sales of the Company’s other products.
On March 30, 2018, the Company amended the License Agreement
and Common Stock Purchase Agreement. The License Agreement was amended to add terms specifying the financial responsibility for
certain tasks related to the technology transfer. The Purchase Agreement was amended as follows: (1) adjusted the total shares
due upon the Initial Closing (as defined in the Purchase Agreement) from $5 million in value to 7,000,000 shares; (2) increase
the shares due upon a Qualified Financing (as defined in the Purchase Agreement) from $7 million in value to $8.5 million in value;
and (3) increase the shares due upon the 2019 Closing (as defined in the Purchase Agreement) from $7 million in value to $8.5 million
in value.
On April 3, 2018, the Company closed
on a debt financing which was considered the initial closing for the Common Stock Purchase Agreement and the initial seven
million shares were issued to XOMA as well as approximately 1.1 million interim financing shares which reduce the shares to
be issued upon a Qualified Financing.
Legal
Matters
- From time to time, the Company may be involved in litigation relating to claims arising out of operations in the
normal course of business. As of March 31, 2018, there were no pending or threatened lawsuits that could reasonably be expected
to have a material effect on the results of our operations. There are no proceedings in which any of our directors, officers or
affiliates, or any registered or beneficial shareholders, is an adverse party or has a material interest adverse to our interest.
Reduction
in Force
– On April 5, 2018, the Company did a reduction of the workforce based on the changing needs of the
Company. The Company reduced its workforce by 30 employees and recorded a liability on that date for the severance payouts of
approximately $575,000 that were due to all employees that were impacted.