UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

For the quarterly period ended September 30, 2019

OR

For the transition period from              to

Commission file number: 000-54495

REZOLUTE, INC.

(Exact Name of Registrant as Specified in its Charter)

(650) 206-4507

(Registrant’s Telephone Number, including Area Code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.x Yes¨ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files.).x Yes¨ No

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, and an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 17(a)(2)(B) of the Securities Act. ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)¨ Yesx No

The registrant had 293,320,8918,351,911 shares of its $0.001 par value common stock outstanding as of November 11, 2019.9, 2020.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (“Report”) contains statements reflecting assumptions, expectations, projections, intentions or beliefs about future events that are intended as “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995.  All statements included or incorporated by reference in this Report, other than statements of historical fact, that address activities, events or developments that we expect, believe or anticipate will or may occur in the future are forward-looking statements. These statements appear in a number of places, including, but not limited to “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements represent our reasonable judgment of the future based on various factors and using numerous assumptions and are subject to known and unknown risks, uncertainties and other factors that could cause our actual results and financial position to differ materially from those contemplated by the statements. You can identify these statements by the fact that they do not relate strictly to historical or current facts, and use words such as “anticipate,” “believe,” “estimate,” “expect,” “forecast,” “may,” “should,” “plan,” “project” and other words of similar meaning. In particular, these include, but are not limited to, statements relating to the following:

Any or all of our forward-looking statements may turn out to be wrong. They can be affected by inaccurate assumptions or by known or unknown risks, uncertainties and other factors including, but not limited to, the risks described in“Risk “Risk Factors” in Part I, Item 1A of our Annual Report on Form 10-K for the fiscal year ended June 30, 20192020 (the “2019“2020 Form 10-K”), filed with the Securities and Exchange Commission (“SEC”) on September 10, 2019.October 13, 2020.

In addition, there may be other factors that could cause our actual results to be materially different from the results referenced in the forward-looking statements, some of which are included elsewhere in this Report, including “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Many of these factors will be important in determining our actual future results. Consequently, no forward-looking statement can be guaranteed. Our actual future results may vary materially from those expressed or implied in any forward-looking statements. All forward-looking statements contained in this Report are qualified in their entirety by this cautionary statement. Forward-looking statements speak only as of the date they are made, and we disclaim any obligation to update any forward-looking statements to reflect events or circumstances after the date of this Report, except as otherwise required by applicable law.

Special Note About COVID-19

We have been actively monitoring the COVID-19 situation and its impact. Our primary objectives have remained the same throughout the pandemic: to support the safety of our team members and their families and continue to support our preclinical studies and clinical trials. While our financial results for the three months ended September 30, 2020 and the fiscal year ended June 30, 2020 were not significantly impacted by COVID-19, we cannot predict the impact of the progression of the COVID-19 pandemic on future results due to a variety of factors, including the continued good health of our employees, the ability of us to maintain operations, access to healthcare facilities and patient willingness to participate in our clinical trials, any further government and/or public actions taken in response to the pandemic and ultimately the length of the pandemic. The ultimate impact of the COVID-19 pandemic on our business operations, our ability to raise capital, as well as our preclinical studies and clinical trials remains uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. Any prolonged material disruption of our employees, suppliers, or manufacturing may negatively impact our consolidated financial position, results of operations and cash flows. We will continue to monitor the situation closely.

PART I - FINANCIAL INFORMATION

ITEM ITEM 1. FINANCIAL STATEMENTS.

Rezolute, Inc.

Unaudited Condensed Consolidated Balance Sheets

(in thousands, except per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Rezolute, Inc.

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Operations

(in thousands, except per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Stockholders’ Equity (Deficit)

(in thousands, except per share amounts)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Rezolute, Inc.

Rezolute, Inc.

Unaudited Condensed Consolidated Statements of Cash Flows

(in thousands)

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Rezolute, Inc.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 1—NATURE OF OPERATIONS AND SUMMARY OF SIGNFICANT ACCOUNTING POLICIES

Nature of Operations

Rezolute, Inc. (the “Company”) is a clinical stage biopharmaceutical company incorporated in Delaware in 2010.

Reverse Stock Split

In August 2019, the Company’s Board of Directors approved a reverse stock split that was subject to stockholder approval at a special meeting that was concluded on October 28, 2019. Stockholders approved the proposal whereby the Board of Directors had the ability at any time on or before October 23, 2020 to execute a reverse stock split and set an exchange ratio between 20 and 100 shares of the Company’s outstanding Common Stock, $0.001 par value per share, into one issued and outstanding share of Common Stock, without any change in the par value per share or the number of shares of Common Stock authorized. On October 7, 2020, the Board of Directors approved a one share for 50 shares reverse stock split of the Company’s $0.001 par value Common Stock (the “Reverse Stock Split”), resulting in the filing with the Delaware Secretary of State of a Certificate of Amendment (the “Amendment”) to the Company’s Articles of Incorporation. The Amendment was effective on October 9, 2020.

In connection with the Reverse Stock Split, proportionate adjustments were made to increase the per share exercise prices and decrease the number of shares of Common Stock issuable upon exercise of stock options and warrants whereby approximately the same aggregate price is required to be paid for such securities upon exercise as had been payable immediately preceding the Reverse Stock Split. In addition, any fractional shares that would otherwise be issued as a result of the Reverse Stock Split were rounded up to the nearest whole share. All references in the accompanying unaudited condensed consolidated financial statements to the number of shares of Common Stock and per share amounts have been retroactively adjusted to give effect to the Reverse Stock Split.

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 (“GAAP”) and the rules and regulations of the SEC for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X.

The condensed consolidated balance sheet as of June 30, 2019,2020, has been derived from the Company’s audited consolidated financial statements. The unaudited interim financial statements should be read in conjunction with the Company’s 20192020 Form 10-K, which contains the Company’s 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, 2019.2020.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted, pursuant to the rules and regulations of the SEC for interim financial reporting. Accordingly, they do not include all the information and footnote disclosures necessary for a comprehensive presentation of financial position, results of operations, and 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 three months ended September 30, 20192020 are not necessarily indicative of the financial condition and results of operations that may be expected for any future interim period or for the fiscal year ending June 30, 2020.2021. 

Comprehensive income (loss)

Comprehensive income (loss) is defined as net income (loss) plus other comprehensive income (loss). Other comprehensive income (loss) is comprised of revenues, expenses, gains, and losses that under GAAP are reported as separate components of stockholders’ equity (deficit) instead of net income (loss). For the three months ended September 30, 2019 and 2018, the only component of comprehensive loss was the Company’s net loss.

Segment Information

The Company’s Chief Executive Officer also serves as the Company’s chief operating decision maker (the “CODM”) for purposes of allocating resources and assessing performance based on financial information of the Company. Since its inception, the Company has determined that its activities as a clinical stage biopharmaceutical company are classified as a single reportable operating segment.

Reclassifications

Certain amounts in the previously issued comparative interim financial statements for the three months ended September 30, 20182019 have been reclassified to conform to the current interim financial statement presentation. These reclassifications had no effect on the previously reported net loss, working capital, cash flows and stockholders’ equity (deficit).equity.

Consolidation

The Company has three wholly owned subsidiaries consisting of AntriaBio Delaware, Inc., Rezolute (Bio) Ireland Limited, and Rezolute Bio UK, Ltd. The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its three wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make judgments, estimates and assumptions that affect the reported amounts in the condensed consolidated financial statements and the accompanying notes. The Company bases its estimates and assumptions on current facts, historical experience, and various other factors that it believes are reasonable under the circumstances, to determine the carrying values of assets and liabilities that are not readily apparent from other sources. The Company’s significant accounting estimates include, but are not necessarily limited to, fair value of share-based payments and warrants, management’s assessment of going concern, clinical trial accrued liabilities, 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 risks and uncertainties including financial, operational, regulatory and other risks associated with a clinical stage company, including the potential risk of business failure as discussed further in Note 2.2, and the future impact of COVID-19 as discussed in Note 7.

Research and Development Costs

Research and development costs are expensed as incurred. Intangible assets for in-licensing costs incurred under license agreements with third parties are charged to expense, unless the licensing rights have separate economic value in alternative future research and development projects or otherwise.

Clinical Trial AccrualsSignificant Accounting Policies

Clinical trial costs are a component of research and development expenses. The Company accrues and expenses clinical trial activities performed by third parties based upon estimates ofDuring the percentage of work completed overthree months ended September 30, 2020, there have been no changes in our significant accounting policies as described in our Annual Report on Form 10-K for the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determines the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.

Nonrefundable advance payments for goods and services that will be used or rendered in future research and development activities, are deferred and recognized as expense in the period that the related goods are delivered, or services are performed.

Stock Options with Market, Performance and Service Conditions

The Company grants certain stock options with vesting that is dependent on achieving market, performance and service criteria. For purposes of recognizing compensation cost, the Company determines the requisite service period as the longest of the explicit, implicit and derived vesting periods for each of the market, performance and service conditions, respectively. The derived vesting period for market conditions will be based on a valuation performed using a Monte Carlo model. Compensation cost will be recognized beginning on such date that achievement of the performance criterion is considered probable and continuing through the end of the requisite service period.

If the stock options do not ultimately vest as a result of failure to achieve the service criterion, any previously recognized compensation cost will be reversed for options that never vest. However, if the service and performance criteria are achieved, compensation cost will not be reversed even if the market condition is never achieved.

Leases

The Company determines if an arrangement includes a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, accrued and other current liabilities and other non-current liabilities on the Company's Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses the incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. The operating lease ROU asset also excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has elected not to apply the recognition requirements for short-term leases. For lease agreements with lease and non-lease components, the Company generally accounts for them separately.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statementsfiscal year ended June 30, 2020.

Recent Accounting Pronouncements

Recently Adopted Standards. The following accounting standards were adopted during the three months ended September 30, 2019:

In February 2016, the FASB issued ASU 2016-02,Leases (Topic 842). This ASU requires the Company to recognize right-of-use assets and operating lease liabilities on the balance sheet and also disclose key information about leasing arrangements. On July 1, 2019, the Company adopted this new standard using the modified retrospective approach in accordance with Leases - Targeted Improvements (ASU No. 2018-11). The Company elected the package of practical expedients permitted under the transition guidance within ASU No. 2018-11, which among other things, allowed the Company to carry forward the historical lease classification of those leases in place as of July 1, 2019. The impact of adoption resulted in the recognition of right-of-use assets and operating lease liabilities for the discounted present value of the future lease payments on leases that were in effect on July 1, 2019, as follows (in thousands):

StandardStandards Required to be Adopted in Future Years. The following accounting standard isstandards are not yet effective; management has not completed its evaluation to determine the impact that adoption of this standard will have on the Company’s consolidated financial statements.

In June 2016, the FASBFinancial Accounting Standards Board (“FASB”) issued ASUAccounting Standards Update (“ASU”) 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 amends the guidance on the impairment of financial instruments. This update adds an impairment model (known as the current expected credit losses model) that is based on expected losses rather than incurred losses. Under the new guidance, an entity recognizes, as an allowance, its estimate of expected credit losses.  In November 2018,2019, ASU 2016-13 was amended by ASU 2018-19,2019-10, Codification Improvements to Topic 326, Financial Instruments –Instruments- Credit Losses.Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) ASU 2018-19 changeswhereby the effective date of the credit loss standards (ASU 2016-13) tofor ASU 2016-13 for smaller reporting companies is now required for fiscal years beginning after December 15, 2021,2022, including interim periods within those fiscal years. Further,The Company does not expect the adoption of this accounting guidance will have a material impact on its consolidated financial statements.

In August 2020, the FASB issued ASU clarifies2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity). ASU 2020-06 reduces the number of accounting models for convertible debt instruments and convertible preferred stock, which results in fewer embedded conversion features being separately recognized from the host contract as compared with current GAAP. Additionally, ASU 2020-06 affects the diluted earnings per share calculation for instruments that operating lease receivables aremay be settled in cash or shares and for convertible instruments and requires enhanced disclosures about the terms of convertible instruments and contracts in an entity’s own equity. ASU 2020-06 allows entities to use a modified or full retrospective transition method and is effective for smaller reporting companies for fiscal years beginning after December 15, 2023, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those fiscal years. Management has not withincompleted its evaluation to determine the scopeimpact that adoption of ASC 326-20 and should instead be accounted for underthis standard will have on the new leasing standard, ASC 842. Company’s consolidated financial statements.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Other accounting standards that have been issued or proposed by the FASB or other standards-setting bodies that do not require adoption until a future date are not currently expected to have a material impact on ourthe Company’s financial statements upon adoption.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 2—Liquidity

The Company is in the clinical stage and has not yet generated any revenues. For the fiscal year ended June 30, 2019,2020, the Company incurred a net loss of $30.4$20.3 million and net cash used in operating activities amounted to $15.3$24.2 million. For the three months ended September 30, 2019,2020, the Company incurred a net loss of $5.1$3.6 million and net cash used in operating activities amounted to $8.9$3.6 million. As of September 30, 2019,2020, the Company had an accumulated deficit of $132.0 million. As of September 30, 2019, the Company had$150.9 million, cash and cash equivalents and restricted cash of $25.2$6.4 million and total liabilities of $6.0$3.0 million. 

As discussed in Note 5, in July and August 201912, on October 9, 2020 the Company received aggregate netgross proceeds from investors in a private placement of approximately $22.6$41.0 million from the issuance of units that consisted of approximately 82.92.5 million shares of Common Stock to investors in a private placement.and warrants for the purchase of approximately 0.8 million shares of Common Stock. Management believes the Company’s existing cash and cash equivalents and restricted cash balance plus the net proceeds from the private placement of $25.2approximately $37.5 million iswill be adequate to carry out currently planned activities at least through November 2020. The Company’s contractual obligations and other planned spending through November 2020 includes (i) licensing obligations to Xoma Corporationuntil the second half of $3.6 million as discussed in Note 4, (ii) research and development spending on RZ358, RZ402, and AB101 for a total of approximately $10.5 million, and (iii) an aggregate of approximately $8.9 million for spending on compensation, benefits, rent, and public company costs for auditing and professional fees. The Company expects to continue pursuing equity and/or debt financings to provide funding for planned activities for the fiscal year ending June 30, 20212022.

As discussed in Note 7, COVID-19 has resulted in an economic environment that is unfavorable for many businesses to conduct operations and beyond. Topursue new debt and equity financings. The U.S. economy has been largely shut down by mass quarantines and government mandated stay-in-place orders to halt the extent that additional funding is obtained during the remainderspread of the current fiscal year,virus. While these orders are being lifted gradually, there is considerable uncertainty surrounding the recovery period for the U.S. economy. The long-term effects on the Company plansare expected to accelerate timingresult in higher costs in order to comply with safeguards to protect patients and staff engaged in clinical activities, and extended periods of time may be required to complete clinical trialstrials. The current economic environment and other research and development activities which would result in increased spending. However,financial market volatility is expected to make it more challenging for the Company has the flexibility to delayobtain funding for its clinical programs to ensure that adequate capital resources are available.

Therein the future. Even if an economic recovery occurs faster and more robustly than currently expected, there are no assurances that the Company will be able to obtain additional financing through other sources, such as equity offerings and bankdebt financings inthat will be necessary to fund ongoing operations after the future. Evenfiscal year ending June 30, 2022. In addition, even if these other financing sources are available, they may be on terms that are not acceptable to management and the Company’s Board of Directors and stockholders.

Note 3—RIGHT-OF-USE ASSETSOPERATING LEASES

As discussed in Note 1, the Company adopted ASU 2016-02,Leases (Topic 842) effective July 1, 2019. As of July 1, 2019, the Company had two leases in effect, consisting of (i) a lease for its headquarters location in Redwood City, California that was entered into on January 25, 2019, that provides for monthly rent of approximately $21,000 through the expiration date in March 2022, and (ii) a lease for office space in Bend, Oregon entered into on February 7, 2019, that provides for monthly rent of approximately $2,700 through the expiration date in February 2021. The impact of adoption of ASU 2016-02 resulted in the recognition of right-of-use ("ROU") assets for $0.6 million and operating lease liabilities for the discounted present value of the future lease payments on these leases of approximately $0.6 million. For the three months ended September 30, 2019, the Company had operating lease expense of approximately $68,000 under ASC 842. For the three months ended September 30, 2018, the Company had operating lease expense of approximately $152,000 under the previous lease accounting standard.

The Company determined the operating lease liability of approximately $633,000 based upon a discount rate of 10.0% and assuming that the Company will not exercise its option to extend the lease for an additional three years. The discount rate represents the Company’s estimated incremental borrowing rate for collateralized debt with a payment structure and term similar to the underlying operating lease terms.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Balance Sheet Presentation

As of September 30, 2019 and on the adoption date of July 1, 2019, the carrying value of ROU assets and operating lease liabilities are as follows (in thousands):

As of September 30, 2019,2020, the weighted average remaining lease term under operating leases was 2.31.4 years, and the weighted average discount rate for operating lease liabilities was 10.0%. For the three months ended September 30, 2020 and 2019, cash paid for amounts included in the measurement of operating lease liabilities amounted to $69,000 and $68,000, respectively. These cash payments were included in the determination of net cash used in operating activities in the condensed consolidated statements of cash flows.

Future Lease Payments

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Future payments under operating lease agreements as of September 30, 20192020 are as follows (in thousands):

Note 4—License Agreements

Xoma License Agreement

OnIn December 6, 2017, the Company entered into a license agreement (“License Agreement”) with XOMA Corporation (“Xoma”), through its wholly-owned subsidiary, XOMA (US) LLC, pursuant to which Xoma granted an exclusive global license to the Company to develop and commercialize Xoma 358 (formerly X358, now RZ358) for all indications. OnIn January 7, 2019, the License Agreement was amended whereby the Company was required to make five cash payments to Xoma totaling $8.5 million on or before specified staggered future dates (the “Future Cash Payments”).  The Future Cash Payments are due for $1.5 million by September 30, 2019, $1.0 million by December 31, 2019, $2.0 million by September 30, 2020, $2.0 million by June 30, 2020, and $2.0 million by September 30, 2020. As a result of this amendment to the License Agreement, the Company recognized a liability in January 2019 for the entire $8.5 million of Future Cash Payments.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

The amended License Agreement provides that if future qualified financings occur before the Future Cash Payments are fully paid, the Company is required to pay Xoma 15% of the net proceeds from such financings (“Early Payments”) to be credited against the remaining unpaid Future Cash Payments in the reverse order of their futureamended. with an updated payment date.  Obligations to make the Future Cash Payments following a qualified financing and the obligations to make Early Payments shall end when the Future Cash Payments are fully paid for the total of $8.5 million.  As discussed in Note 5, the Company completed equity financings for net proceeds of approximately $22.6 million in July and August 2019, which resulted in the obligation to make Early Payments of approximately $3.4 million. Presented below is a summary of the amounts payable under the amended License Agreement along with cash payments made for the three months ended September 30, 2019 (in thousands):

The amendment to the License Agreement also revisedschedule, as well as revising the amount the Company iswas required to expend on development of RZ358 and related licensed products, and revised provisions with respect to the Company’s diligence efforts in conducting clinical studies. Additionally, upon

On March 31, 2020, the future commercializationparties entered into Amendment No. 3 to the License Agreement to extend the payment schedule for the remaining balance of RZ358,approximately $2.6 million. The revised payment schedule provided for seven quarterly payments to be paid from March 31, 2020 through September 30, 2021. For the three months ended September 30, 2020, presented below is a summary of activity related to the remaining payment obligations under the amended License Agreement (in thousands):

As discussed in Note 12, the Company would be required to pay royalties to Xoma based on the net salescompleted a private placement of equity securities for gross proceeds of $41.0 million in October 2020, which resulted in acceleration of the related products.entire obligation. On October 23, 2020, the Company paid the outstanding balance of $1.4 million.

In addition to the License Agreement entered between the Company and Xoma in December 2017, both parties also entered into a stock purchase agreement (“Stock Purchase Agreement”). As of September 30, 2019,2020, Xoma owns approximately 8.1 million162,000 shares of the Company’s Common Stock. The LicenseStock Purchase Agreement provides Xoma with the right and option to require the Company to use its best efforts to facilitate orderly sales of the shares to a third party or purchase the shares (the “Put Option”). Under the amended License Agreement,Xoma was permitted to exercise the Put Option becomes effective if the Company fails to list its shares of Common Stock on the Nasdaq Stock Market or a similar national exchange prior to December 31, 2019. Xoma may exercise the Put option for up to a total of 2.5 million50,000 shares of Common Stock for the fiscalcalendar year ending December 31, 2020, and up to an additional 2.5 million50,000 shares thereafter. IfOn November 3, 2020, the Company’s shares of Common Stock were approved for listing on the Nasdaq Capital Market. Accordingly, the Put Option becomes exercisable, the Company may be required to pay a price per share equalterminated pursuant to the averageterms of the closing bid and asked prices of the Common Stock on the date the Put Option is exercised.Purchase Agreement.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

ActiveSite License Agreement

On August 4, 2017, the Company entered into a Development and License Agreement with ActiveSite Pharmaceuticals, Inc.  (“ActiveSite”) pursuant to which the Company acquired the rights to ActiveSite’s Plasma Kallikrein Inhibitor program (“PKI Program”Portfolio”).  The Company desires to useis initially using the PKI ProgramPortfolio to develop file, manufacture, market and sell productsan oral PKI therapeutic for diabetic macular edema (RZ402) and may use the PKI Portfolio to develop other human therapeutictherapeutics for different indications. The ActiveSite License Agreement requires various milestone payments ranging from $1.0 million to $10.0 million when milestone events occur, up to $36.0 million of aggregate milestone payments.$46.5 million. The first milestone payment for $1.0 million is due after completion of the preclinical work and submissionacceptance of an Initial Drug Application, or IND, application tofiled with the FDA.U.S. Food and Drug Administration (“FDA”). The Company is also required to pay royalties equal to 2.0% of any sales of products that use the PKI Program, up to a maximum of $10.0 million in total royalty payments.Portfolio. Through September 30, 2019,2020, no events occurred that would result in the requirement to make milestone payments and no royalties have been incurred.

Note 5—STOCKHOLDERS’ EQUITY

Equity OfferingsFiscal 2020 Private Placement

In connection with a Series AA Preferred Stock financing in January 2019, the Company closed an equity offering with two new investors (the “New Investors”) that resulted in cash proceeds of $25.0 milliongranted call options to Handok, Inc. and the issuance of an aggregate of approximately 113.6 million shares of the Company’s Common Stock in April 2019.

The Company granted each of the New Investors a call optionGenexine, Inc. (collectively, “H&G”) whereby upon the earlier of (i) December 31, 2020 and (ii) such date that the Company requests the New Investorsrequested H&G to provide additional financing, each New Investorinvestor was entitled to purchase up to $10.0 million of Common Stock at a purchase price equal to the greater of (i) $0.29$14.50 per share or (ii) 75% of the volume weighted average closing price (“VWAP”) of the Company’s Common Stock during the thirty consecutive trading days prior to the date of the notice.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

InOn June 19, 2019, the Company entered into a financial advisory agreement to undertake a private placement (the “Fiscal 2020 Private Placement”) of (i) the shares of Common Stock issuable under the H&G call option issued to the New Investorsoptions for a total of $20.0 million, plus (ii) between approximately $20 million and $30up to $10.0 million of equity or equity equivalent securities to be issued to other investors. On July 23, 2019, the Company entered into a purchase agreementagreements whereby the New InvestorsH&G exercised their call optionoptions to purchase an aggregate of approximately 69.01.4 million shares of Common Stock for gross cash proceeds of $20.0 million. Since VWAP for the previous thirty consecutive trading days was $0.20 per share, the New Investors exercised the call optionmillion at a purchase price of $0.29$14.50 per share. In addition, during July and August 2019 other investors purchased an aggregate of approximately 14.0 million279,000 shares of Common Stock at a purchase price of $0.29$14.50 per share for gross cash proceeds of $4.1 million. Pursuant to the financial advisory agreement, the Company agreed to paypaid a fee of 6.0% of the gross proceeds received from these private placements.the Fiscal 2020 Private Placement. The total advisory fees and other offering costs related to these issuances in July and August 2019 amounted to approximately $1.5 million, resulting in net proceeds of $22.6 million for the three months ended September 30, 2019. As discussed in Note 4, the completion of these financings resulted in the obligation to make Early Payments of approximately $3.4 million under the License Agreement with Xoma.

Restricted Cash

In connection with the private placement discussed above, oneOne of the investors in the Fiscal 2020 Private Placement purchased approximately 13.1 million262,000 shares of Common Stock for gross proceeds of $3.8 million. The Company agreed to spend the proceeds for certain research and development of RZ358 oractivities and for the Company’sa planned uplisting of itsthe Company’s Common Stock to a national stock exchange.the Nasdaq Capital Market. For the three months ended September 30, 2019, the Company made qualified expenditures of $0.7 million leaving a restricted cash balance of $3.1 million. The Company expended the remainder of the restricted cash proceeds on qualified activities by March 31, 2020, whereby there were no restrictions on cash balances after that date.

Reverse Stock Split

In August 2019, the Company’s Board of Directors approved a reverse stock split (the “Reverse Stock Split”) that was subject

Rezolute, Inc.

Notes to stockholder approval at a special meeting that was concluded on October 28, 2019. As discussed in Note 13, stockholders approved the proposal whereby the Board of Directors have the ability at any time on or before October 23, 2020 to execute the Reverse Stock Split and set the exchange ratio between 20 and 100 shares of the Company’s outstanding Common Stock, $0.001 par value per share, into one issued and outstanding share of Common Stock, without any change in the par value per share or the number of shares of common stock authorized. If the Reverse Stock Split is subsequently implemented, the number of shares subject to outstanding stock options and warrants will also be adjusted with a corresponding increase in the related exercise prices.Unaudited Condensed Consolidated Financial Statements

Note 6—STOCK-BASED COMPENSATION AND WARRANTS

Stock Option Plans

The Company currently has threetwo active stock option plans consisting of the 2015 Non-Qualified Stock Option Plan (the “2015 Plan”), the 2016 Non-Qualified Stock Option Plan, as amended (the “2016 Plan”), and the 2019 Non Qualified Stock Option Plan (the “2019 Plan”). On July 31, 2019, the 2019 Plan was adopted by the Board of Directors and provides authority to grant non-qualified stock options for up to 15.0 million300,000 shares of the Company’s Common Stock. The Company also has stock options outstanding to purchase up to approximately 2.2 million44,000 shares of Common Stock under the 2014 Stock and Incentive Plan (the “2014 Plan”) that terminated on March 21, 2019.2019 and approximately 88,000 shares of Common Stock under the 2015 Stock and Incentive Plan (the “2015 Plan”) that terminated on February 23, 2020. Stock options outstanding under the 2014 Plan and the 2015 Plan expire pursuant to their contractual provisions on various dates in 2021.through 2029. Presented below is a summary as of September 30, 2020 of the number of shares authorized, outstanding, and available for future grants under each of the Company’s stock option plans (in thousands):

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

July 2019 Grants

On July 31, 2019, the Board of Directors granted stock options for an aggregate of approximately 34.0 million shares of Common Stock to certain officers and employees at an exercise price of $0.29 per share. The closing price of the Company’s shares of Common Stock on the date of grant was approximately $0.21 per share. The option grants were designated for approximately 19.0 million shares under the 2016 Plan and 15.0 million shares under the 2019 Plan. As of July 31, 2019, the number of shares subject to stock options, the related fair value and compensation that was immediately recognized for vested options are as follows (in thousands):

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Stock Options Outstanding

The following table sets forth a summary of the combined stock option activity for options with time-based vesting and hybrid vesting granted under all of the Company’s stock option plans for the three months ended September 30, 20192020 (shares in thousands):

Stock-based compensation expense for the three months ended September 30, 2020 and 2019 is included in compensation and benefits under the following captions in the unaudited condensed consolidated statements of operations (in thousands):

Unrecognized stock-based compensation expense related to stock options that provide solely for time-based vesting is approximately $2.6 million as of September 30, 2019 is approximately $5.3 million.2020. This amount is expected to be recognized over a remaining weighted average period of 2.41.7 years. The

In July 2019, the Company has not completed its Monte Carlo valuation ofgranted employee stock options with hybridfor approximately 0.2 million shares that commence vesting criteria soupon the related unrecognized compensation has not yet been determined. The three-year vesting period for these stock options commences upon achievement of all three of the market, performance and service conditions discussed above. If(‘Hybrid Options”). The Hybrid Options will vest ratably over a period of 36 months beginning on the market condition is not achieveddate that all of the following have occurred: (i) the option recipient has been employed by the Company for at least one year, (ii) the Company’s shares of Common Stock have been listed for trading on a national stock exchange, and (iii) such date no later than July 31, 2023, when the Company’s closing stock price exceeds $29.00 per share for 20 trading days in any consecutive 30 day period. The Company has not recognized any expense related to these stock options will expire. Unrecognized compensation related to stock options with hybrid vesting criteria will be based on a derived service period and is expected to be recognized starting whenthrough September 30, 2020, since it is consideredwas not probable that the performance criterion willcondition to obtain a listing on a national stock exchange would be achieved.

For On November 3, 2020, the three months ended September 30, 2019, the aggregate fair value of stock options granted for approximately 22.7 millionCompany achieved this performance condition whereby its shares of Common Stock that provide solelywere approved for time-based vesting, amounted to $4.1 million or approximately $0.18 per share as oflisting on the grant date. Fair value was computed using the Black-Scholes-Merton (“BSM”) option-pricing model and will result in the recognition ofNasdaq Capital Market. Accordingly, unrecognized compensation cost, ratably overnet of estimated forfeitures, for the expected vesting periodHybrid Options of the stock options. Forapproximately $1.9 million will be recognized beginning in November 2020 when compensation cost of approximately $0.5 million will be recorded for the three months ended September 30, 2019,ending December 31, 2020, and the fair valueremainder of each time-based option was estimatedapproximately $1.4 million will be recognized on a straight-line basis through July 2024 when the date of grant using the BSM option-pricing model, with the following weighted-average assumptions:Hybrid options are expected to be fully vested.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Warrants

The Company has issued warrants in conjunction with various debt and equity financings and for services. As of September 30, 2020, the Company had warrants outstanding for approximately 0.6 million shares with a weighted average exercise price of $57.46. The weighted average remaining contractual term until the warrants expire is approximately 2.0 years. For the three months ended September 30, 2019,2020, no warrants were granted, expired or exercised. Presented below is a summary of warrant activity for the three months ended September 30, 2019 (shares in thousands):

Note 7—COMMITMENTS AND CONTINGENCIES

Employment AgreementsCommitments

AsPlease refer to Note 4 for further discussion of September 30, 2019, the Company is subjectcommitments to employmentmake milestone payments and to pay royalties under license agreements with three executive officersXoma and two employees that provide for aggregate annual base salaries of approximately $1.8 million. In addition, the employment agreements provide for potential annual bonus compensation ranging from 25% to 60% of the officers’ base salaries. In the event the Company terminates employment of the executive officers without cause, severance benefits include (i) between six-months and three years of base salary which range from $280,000 to $490,000, (ii) up to 150% of annual target bonuses applicable to the terminated executive, and (iii) continuation of certain medical and dental benefits. In addition, vesting is generally accelerated for unvested stock options that would have otherwise vested during the period that the severance benefits are paid out.ActiveSite.

COVID-19

In December 2019, COVID-19 was reported to have surfaced in Wuhan, China, and by March 2020 the spread of the virus had resulted in a world-wide pandemic. The U.S. economy has been largely shut down by mass quarantines and government mandated stay-in-place orders to halt the spread of the virus. While these orders are being lifted gradually, a full recovery of the U.S. economy may not occur until 2021 or later. Federal and state governments in the U.S. have approved funding for many programs that may provide financial assistance to individuals and businesses. The Company intends to pursue all material types of government assistance that it may be entitled to. However, no assurance can be provided that the Company will qualify and realize any material benefits from such assistance.

COVID-19 has resulted in an economic environment that is unfavorable for many businesses to pursue new equity financings. Accordingly, the current economic environment is expected to present greater challenges for the Company to obtain additional funding for its clinical programs on terms that are acceptable to the Company’s Board of Directors.

In February 2020, Rezolute announced the initiation of its Phase 2b trial in Congenital Hyperinsulinism (“CHI”). New site initiation and enrollment is on hold, similar to many other clinical studies conducted by other companies throughout the world. There are no mitigation strategies we can employ to help avoid potential timeline delays should there be an extended enrollment pause due to COVID-19. The long-term effects of COVID-19 are expected to require additional safeguards to protect patients and staff engaged in clinical activities, and extended periods of time required to complete clinical trials, both of which are expected to result in higher overall costs. While the current business disruption is expected to be temporary, the long-term financial impact and the duration cannot be reasonably estimated at this time.

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 September 30, 2019,2020, there were no pending or threatened lawsuits that could reasonably be expected to have a material effect on the Company’s results of operations. At each reporting period, the Company evaluates known claims to determine whether or not a potential loss amount or a potential range of loss is probable and reasonably estimable under ASC 450,Contingencies. Legal fees are expensed as incurred.

Note 8—RELATED PARTY TRANSACTIONS

Related Party Licensing Agreement

On September 15, 2020, the Company entered into an exclusive license agreement with Handok (the “Handok License”) for the territory of the Republic of Korea. The Handok License relates to pharmaceutical products in final dosage form containing the pharmaceutical compounds developed or to be developed by the Company, including those related to RZ358 and RZ402. The Handok License is in effect for a period of 20 years after the first commercial sale of each product, and requires (i) milestone payments of $0.5 million upon approval of a New Drug Application (“NDA”) for each product in the territory, and (ii) the Company will sell products ordered by Handok at a transfer price equal to 70% of the net selling price of the products. To date, no milestone payments have been earned by the Company.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Equity Issuances

As discussed in Note 5, on July 23, 2019 the New InvestorsH&G agreed to purchase an aggregate of approximately 69.01.4 million shares of Common Stock at an issuance price of $0.29$14.50 per share for gross proceeds of $20.0 million. This purchase was made pursuant to the terms of the call optionoptions that was issued in connection with an equity offering in January 2019. The New Investors currently2019 that resulted in gross proceeds of $25.0 million. As of September 30, 2020, H&G own an aggregate of approximately 62%65% of the Company’s outstanding shares of Common Stock.

Master Services Agreement

Effective July 1, 2019, the Company entered into a Master Services Agreement (“MSA”) with the New InvestorsH&G whereby the Company agreed to assist the New InvestorsH&G in an evaluation of their long acting growth hormone program referred to as GX-H9. For the three months ended September 30, 2019, the Company charged the New InvestorsH&G for employee services of $103,000 and reimbursable expenses incurred with unrelated parties of $144,000, for a total of approximately $247,000. This amount is included in Receivables from Related Parties in the accompanying unaudited condensed consolidated balance sheet as of September 30, 2019. In October 2019, the Company collected $125,000 of these receivables. Amounts charged under the MSA for employee services are reflected as a reduction of research and development compensation costs in the accompanying unaudited condensed consolidated statement of operations for the three months ended September 30, 2019.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Note 99 —SUPPLEMENTAL FINANCIAL INFORMATION

Bonuses and Termination of Employment Agreement

On July 31, 2019, the Board of Directors approved cash bonus payments to three executive officers for past services totaling $448,000. The liability is included in accrued compensation and benefits in the consolidated balance sheet as of June 30, 2019. In August 2019, the Company paid the cash bonus payments to the three executive officers. On July 31, 2019, the Company also entered into an employment agreement with an executive officer that provided for an annual base salary of $265,000, which was subsequently terminated in August 2019.

Interest Expense

Between January 2018 and April 2018, the Company entered into convertible note agreements (the “Fiscal 2018 Notes”) for total borrowings of $5.3 million, with interest at 15.0% per annum that was payable at maturity. Debt discount and issuance costs amounted to an aggregate of $3.2 million that was accreted to interest expense using the effective interest method. The Fiscal 2018 Notes plus accrued interest were converted to equity in January 2019. For the three months ended September 30, 2019 and 2018, interest expense was solely attributable to the Fiscal 2018 Notes as follows (in thousands):

Depreciation and Amortization

Depreciation and amortization expense related to property and equipment amounted to approximately $3,000 and $25,000 for the three months ended September 30, 2019 and 2018, respectively. Amortization expense related to intangible assets amounted to approximately $2,000 for each of the three months ended September 30, 2019 and 2018.

Restructuring

In April 2018, the Company implemented a restructuring plan to discontinue manufacturing activities in Colorado. The restructuring plan consisted of a reduction in the Company’s workforce by 30 employees, the decision to sell substantially all laboratory equipment and other manufacturing assets, and the decision to begin efforts to terminate operating leases in Colorado. Through June 30, 2018, the Company sold a significant portion of the equipment for proceeds of approximately $1.6 million. For the three months ended September 30, 2018, the Company completed additional sales of furniture, fixtures, and laboratory equipment for proceeds of $187,000. These transactions resulted in a gain on sale of approximately $23,000 for the three months ended September 30, 2018. In December 2018, the Company entered into agreements that resulted in the termination of all operating leases and subleases for facilities in Colorado.

Note 10—INCOME TAXES

Income tax expense during interim periods is based on applying an estimated annual effective income tax rate to year-to-date operating results, 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 results 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.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

For the three months ended September 30, 2020 and 2019, the Company did not record any income tax benefit due to a full valuation allowance on its deferred tax assets. The Company did not have any material changes to its conclusions regarding valuation allowances for deferred income tax assets or uncertain tax positions for the three months ended September 30, 20192020 and 2018.2019. 

Note 1110 —EARNINGS PER SHARE

Basic net loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during the period. For the three months ended September 30, 20192020 and 2018,2019, basic and diluted net loss per share were the same since all common stock equivalents were anti-dilutive. As of September 30, 20192020 and 2018,2019, the following outstanding potential common stock equivalents outstanding were excluded from the computation of diluted net loss per share since the impact of inclusion was anti-dilutive (in thousands): 

Note 1211 —FINANCIAL INSTRUMENTS AND SIGNIFICANT CONCENTRATIONS

Fair Value Measurements

Fair value is defined as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. When determining fair value, the Company considers the principal or most advantageous market in which it transacts and considers assumptions that market participants would use when pricing the asset or liability. The Company applies the following fair value hierarchy, which prioritizes the inputs used to measure fair value into three levels and bases the categorization within the hierarchy upon the lowest level of input that is available and significant to the fair measurement:

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Level 1—Quoted prices in active markets for identical assets or liabilities accessible to the reporting entity at the measurement date.

Level 2—Other than quoted prices included in Level 1 that are observable for the asset and liability, either directly or indirectly through market collaboration,corroboration, for substantially the full term of the asset or liability.

Level 3—Unobservable inputs for the asset or liability used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any market activity for the asset or liability at the measurement date.

Due to the relatively short maturity of the respective instruments, the fair value of cash and cash equivalents, restricted cash, receivables from related parties, accounts payable and accrued liabilities approximated their carrying values as of September 30, 20192020 and June 30, 2019.2020. The Company did not have any assets and liabilities measured at fair value on a recurring basis as of September 30, 20192020 and June 30, 2019.2020. The Company’s policy is to recognize asset or liability transfers among Level 1, Level 2 and Level 3 as of the actual date of the events or change in circumstances that caused the transfer. During the three months ended September 30, 20192020 and 2018,2019, the Company did not have any transfers of its assets or liabilities between levels of the fair value hierarchy.

Significant Concentrations

Financial instruments that subject the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains its cash and cash equivalents at high-quality financial institutions. CashFor the three months ended September 30, 2020, cash deposits often exceedhave exceeded the amount of federal insurance provided on such deposits. As of September 30, 20192020 and June 30, 2019,2020, the Company had cash and cash equivalents and restricted cash with a single financial institution with an aggregate balance of $25.2$6.4 million and $11.6$10.0 million, respectively. The Company has never experienced any losses related to its investments in cash and cash equivalents.

Note 12 — Subsequent Events

Fiscal 2021 Financing

On September 15, 2020, the Company entered into financial advisory agreements to undertake a private placement of equity or equity equivalent securities (the “Fiscal 2021 Financing”). Pursuant to the financial advisory agreements, the Company agreed to pay transaction fees to the financial advisors for an aggregate of 6.0% of the gross proceeds plus out-of-pocket expenses. In addition, for any financing completed within 60 days of the closing of the Fiscal 2021 Financing, the financial advisors are entitled to additional transaction fees equal to 6.0% of the gross proceeds.

On October 9, 2020, the Company completed the Fiscal 2021 Financing through the sale of units (the “Units”) consisting of (i) approximately 2.5 million shares of Common stock, and (ii) warrants entitling the holders to purchase approximately 0.8 million shares of Common Stock (the “Warrants”). The Warrants are exercisable at $19.50 per share for a period of seven years and may be exercised on a cash or cashless basis at the election of the holders.

The Units were issued for a purchase price of $16.50 per Unit, resulting in gross proceeds of $41.0 million. Pursuant to the financial advisory agreements, the Company paid transaction fees of $2.5 million, and costs for professional fees and other offering costs are estimated at approximately $1.0 million. After deducting the financial advisory fees and other offering costs, the estimated net proceeds amounted to approximately $37.5 million. Pursuant to the terms of the Fiscal 2021 Financing, the Company executed the Reverse Stock Split of one share for 50 shares as discussed in Note 1, and agreed to enable trading of its Common Stock on the Nasdaq Capital Market, whereby the Company’s listing application was approved by Nasdaq on November 3, 2020. The Company also entered into a registration rights agreement (“RRA”), pursuant to which the Company agreed to use commercially reasonable efforts to register (i) the shares of Common Stock included in the Units, and (ii) the shares of Common Stock issuable upon exercise of the warrants. If the Company fails to register the shares pursuant to the terms of the RRA, liquidated damages up to a maximum of 6.0% of the gross proceeds of the Fiscal 2021 Financing may be assessed.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Early Payments to Xoma

Upon completion of a qualified financing of $20.0 million or more, the Company was obligated to repay the remaining outstanding balance due to Xoma within 15 days as discussed in Note 134. The completion of the Fiscal 2021 Financing resulted in acceleration of the remaining balance due to Xoma and the Company paid the outstanding balance of $1.4 million on October 23, 2020.

—SUBSEQUENT EVENTReverse Stock Split

TheAs discussed in Note 1, the Company heldeffected a special meeting of stockholders that concluded on October 28, 2019, whereby the stockholders approved an amendment to the Company’s Certificate of Incorporation to provide authorityone share for the Company’s Board of Directors to subsequently effect a50 shares Reverse Stock Split on October 9, 2020. All references in the accompanying consolidated financial statements to the number of the Company’s $0.001 par valueshares of Common Stock at a ratio ranging between 1-to-20 and 1-to-100. Please referper share amounts have been retroactively adjusted to Note 5 for additional information aboutgive effect to the Reverse Stock Split.

Bonuses for Certain Officers and Employees

In October 2020, the Company’s Board of Directors approved bonus payments for an aggregate of approximately $0.4 million to certain officers and employees upon completion of the Fiscal 2021 Financing discussed above. Accordingly, the Company paid these bonuses in October 2020 and will recognize the related bonus expense for the fiscal quarter ending December 31, 2020.

ActiveSite Milestone Payment

Pursuant to the license agreement with ActiveSite discussed in Note 4, the first milestone payment for $1.0 million is due upon effectiveness of an IND. On October 28, 2020, the Company submitted an IND to the FDA that is expected to trigger the first milestone payment upon completion of review and acceptance by the FDA.

Operating Lease

On October 28, 2020, the Company entered into an assignment, assumption and amendment of lease agreement for ancillary office space in Bend, Oregon. The lease space consists of approximately 5,000 square feet and provides for average monthly rent of approximately $8,700 through the expiration date in February 2024. The lease provides one option to renew the lease for an additional three years at market rates. The Company has not yet determined the amount of the ROU asset and the related operating lease liabilities that will be recognized at inception of this lease.

Rezolute, Inc.

Notes to Unaudited Condensed Consolidated Financial Statements

Unaudited Pro Forma Disclosure

Presented below is an unaudited pro forma balance sheet that gives effect to the Fiscal 2021 Financing and the Early Payments to Xoma, as if these events had occurred on September 30, 2020 (in thousands, except per share amount):

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Certain figures, such as interest rates and other percentages included in this section have been rounded for ease of presentation. Percentage figures included in this section have not in all cases been calculated on the basis of such rounded figures but on the basis of such amounts prior to rounding. For this reason, percentage amounts in this section may vary slightly from those obtained by performing the same calculations using the figures in our unaudited condensed consolidated financial statements or in the associated text. Certain other amounts that appear in this section may similarly not sum due to rounding.

Recent Developments

Presented below isOn October 9, 2020, we completed a summaryprivate placement of Recent Developments. For additional details, reference is made to the footnotes to our unaudited condensed consolidated financial statements includedequity securities that resulted in Part I, Item 1net proceeds of approximately $37.5 million. The completion of this Report. As discussed further in Note 13, onprivate placement triggered our obligations to Xoma with a remaining balance due of $1.4 million as of September 30, 2020. Effective October 28, 2019, our stockholders approved an amendment to our Certificate of Incorporation to provide authority9, 2020, we implemented a one share for the Board of Directors to subsequently effect a50 shares Reverse Stock Split of our $0.001 par value Common Stock at a ratio ranging between 1-to-20Stock. On November 3, 2020, we obtained approval from Nasdaq to have our shares of common stock listed on the Nasdaq Capital Market.

Please refer to our discussion under Liquidity below and 1-to-100. To date,in Notes 1, 4 and 12 to our Boardunaudited condensed consolidated financial statements for further discussion of Directors has not exercised its authoritythe private placement, Early Payments due to effectXoma, and the Reverse Stock Split.

As discussed further inSpecial Note 5, in July 2019About COVID-19

We have been actively monitoring the New Investors exercisedCOVID-19 situation and its impact. Our primary objectives have remained the same throughout the pandemic: to support the safety of our team members and their call options, resulting in the issuance of an aggregate of approximately 69.0 million shares of Common Stock at a purchase price of $0.29 per share for gross cash proceeds of $20.0 million. In addition, during Julyfamilies and August 2019 other investors purchased an aggregate of approximately 14.0 million shares of Common Stock at a purchase price of $0.29 per share for gross cash proceeds of approximately $4.1 million. Pursuantcontinue to asupport our preclinical studies and clinical trials. While our financial advisory agreement entered into in June 2019, we agreed to pay a fee of 6.0% of the gross proceeds received from these private placements. The total advisory fees and other offering costs related to these issuances in July and August 2019 amounted to approximately $1.5 million, resulting in net proceeds of $22.6 millionresults for the three months ended September 30, 2019.

As discussed further in Note 4,2020 and the financings completed in July and August 2019 resulted in our obligation to make Early Payments of approximately $3.4 million under the License Agreement with Xoma. The Early Payments were paid in August 2019 and eliminated the requirement to make Future Cash Payments that would have otherwise been due on September 30, 2020 for $2.0 million and onfiscal year ended June 30, 2020 for approximately $1.4 million.

As discussed further in Note 6, in July 2019were not significantly impacted by COVID-19, we adoptedcannot predict the impact of the progression of the COVID-19 pandemic on future results due to a new stock option plan that provides authority to grant 15.0 million sharesvariety of our Common Stock. We granted stock options for an aggregate of approximately 34.0 million shares of Common Stock to our officers and employees at an exercise price of $0.29 per share.

As discussed further in Note 8, we entered into a Master Services Agreement withfactors, including the New Investors in July 2019, whereby certaincontinued good health of our employees, are providing services on behalfthe ability of us to maintain operations, access to healthcare facilities and patient willingness to participate in our clinical trials, any further government and/or public actions taken in response to the pandemic and ultimately the length of the New Investors. Under this agreement,pandemic. The ultimate impact of the New Investors owe us a totalCOVID-19 pandemic on our business operations, our ability to raise capital, as well as our preclinical studies and clinical trials remains uncertain and subject to change and will depend on future developments, which cannot be accurately predicted. Any prolonged material disruption of approximately $247,000 for servicesour employees, suppliers, or manufacturing may negatively impact our consolidated financial position, results of operations and reimbursable expenses incurred through September 30, 2019.cash flows. We will continue to monitor the situation closely.

For our fiscal year ending June 30,Summary of Clinical Assets

Our lead clinical asset, RZ358, is an antibody therapy in Phase 2b development as a potential treatment for congenital hyperinsulinism (“CHI”), an ultra-rare pediatric genetic disorder. In February 2020, we have the following objectives to advance our development strategy: (i) initiate the Phase 2b clinical study for RZ358 in the US and/or Europe, (ii) complete the necessary toxicology studies for RZ402 to enable the filing of an IND andannounced the initiation of clinical studies thereafter, and (iii)the RZ358-606 Phase 2b study (“RIZE”) globally at multiple study centers. Prior to COVID-19, we had planned to complete the Phase 1RIZE study for AB101 and explore partnership opportunities.by the middle of calendar year 2021. In March 2020, we paused the RIZE study as a result of the COVID-19 pandemic. As the COVID-19 pandemic abates in different regions, we are resuming clinical activities including trial site initiations. We are also proceeding with our effortsbelieve that patient enrollment will recommence by the end of calendar year 2020. Further, if we can begin enrolling patients on this timeframe, we believe we will be able to uplist our Common Stock to a national stock exchange during our fiscalcomplete the RIZE study in the second half of calendar year 2020.2021.

In addition, in the first half of calendar year 2020, we had positive interactions with the U.S. Food and Drug Administration (“FDA”). In June 2020, we announced that FDA granted us Rare Pediatric Disease (“RPD”) designation for RZ358, which qualifies us to receive a priority review voucher upon marketing approval of the drug in CHI. Such a voucher could be redeemed to receive a priority review of a subsequent marketing application for any drug candidate in any disease indication. Further, we submitted the RIZE protocol to FDA which allows us to expand the study to clinical sites in the United States. We believe that patient enrollment may commence in the United States in the first quarter of calendar year 2021.

Our next program, RZ402, is an oral therapy, targeting diabetic macular edema (“DME”). On October 28, 2020, we submitted an IND to the FDA that will require us to make the first milestone payment of $1.0 million within 15 days after acceptance of the IND by the FDA. Assuming the FDA accepts our IND filing by November 2020, we anticipate initiation of a Phase 1 clinical trial for RZ402 prior to the end of the first quarter of calendar year 2021.

RZ358

CHI is an ultra-rare pediatric genetic disorder characterized by excessive production of insulin by the pancreas. CHI is caused by mutations in about a dozen known genes associated with pancreatic beta cells and their secretion of insulin. If untreated, it can lead to dangerously low blood sugar levels. Rezolute’s lead candidate, RZ358, is an antibody in Phase 2b development that is designed to prevent severe, persistent low blood sugar in patients with CHI.

RZ358 is an intravenously administered human monoclonal antibody that binds to a unique site on the insulin receptor found across effector cells throughout the body in the liver, fat, and muscle. This action allows RZ358 to counteract the effects of elevated insulin in the body. Its unique allosteric mechanism of action is reversible, depends on both insulin levels and blood sugar levels in a dose-dependent manner, and enables patients to achieve normal levels of insulin and glucose. Therefore, we believe that RZ358 is ideally suited as a potential therapy for conditions characterized by excessive insulin production and it is being developed to treat hyperinsulinemia and prevent low blood sugar for diseases such as CHI. As RZ358 acts downstream from the beta cells, across effector cells in the liver, fat, and muscle, it may be universally effective at treating CHI caused by any of the underlying genetic defects.

The RIZE study is a multi-center, open-label, repeat-dose Phase 2b study of RZ358 in four sequential dosing cohorts of patients with CHI who are at least two years old and have residual low blood sugar (<70 mg/dL) that is inadequately controlled on existing therapies. In addition to safety and pharmacokinetic evaluations, continuous glucose monitoring (“CGM”) and self-monitored blood glucose will be utilized to evaluate several glycemic efficacy endpoints. The primary endpoint is the time within a glucose target range of 70-180 mg/dL by CGM during weeks 4 and 8 of treatment compared to baseline.

RZ402

DME is a severe complication of diabetes marked by progressive vision loss and blindness. Consistently high blood sugar levels can cause diabetic retinopathy, a complication characterized by damage to the blood vessels in the eye and fluid leakage into the light-sensitive tissue known as the retina. The accumulation of fluid may lead to DME, or swelling of the macula, the part of the retina responsible for sharp, straight-ahead vision. Currently available treatments for DME involve frequent burdensome injections into the eye or invasive laser surgery.

Rezolute is developing RZ402, a small molecule plasma kallikrein inhibitor (“PKI”) for use in DME. As a once-daily oral investigational therapy, RZ402 is designed to improve compliance and treatment outcomes for patients with DME. Elevated plasma levels of the enzyme kallikrein have been associated with increased inflammation, vessel leakage and excess blood vessel growth in the eyes of patients with DME. Genetic and pharmacologic knockout of plasma kallikrein have been shown to protect against vascular endothelial growth factor (“VEGF”) induced retinal blood vessel leakage in murine models without damaging long-term effects.

RZ402 is a bioavailable small molecule inhibitor of plasma kallikrein that has shown the potential to prevent the onset of and reverse vascular leakage in a dose-dependent manner in multiple rodent models of whole body and retinal vascular leakage. Target plasma concentrations were exceeded for 24 hours following oral dosing of RZ402 in monkeys and dogs, supporting the potential for once daily dosing in humans. We have completed toxicology studies and we filed an IND with the FDA on October 28, 2020.

Factors impactingImpacting our Results Operations

We have not generated any revenues since our inception in March 2010. Since inception, we have engaged in organizational activities, conducted private placements to raise additional capital, built out a manufacturing suite and produced material for our lead product candidate under good laboratory practices (“GLP”), conducted studies using the GLP material, subsequently changed our strategy to a licensing model that resulted in disposal of our manufacturing assets, and conducted other research and development activities on our pipeline product candidates.

Due to the time required to conduct clinical trials and obtain regulatory approval for any of our product candidates, we anticipate it will be some time before we generate substantial revenues, if ever. We expect to generate operating losses for the foreseeable future; therefore we expect to continue efforts to raise additional capital to maintain our current operating plans beyond the next year. We cannot assure you that we will secure such financing or that it will be adequate for the long-term execution of our business strategy. Even if we obtain additional financing, it may be costly and may require us to agree to covenants or other provisions that will favor new investors over our existing stockholders.

Our stated strategy has been to build a metabolic focused biotechnology company by in-licensing compelling compounds that we believe clearly target different diseases where there is an unmet need. In December 2017,2019, we completed the latest phase of this strategy by in-licensing RZ358 from Xoma Corporation. RZ358 is a fully human monoclonal antibody that is currentlyreceived top-line results in Phase 2b clinical development. RZ358 is being developed to treat congenital hyperinsulinism, a devastating ultra-orphan pediatric disease.

We believe that RZ358 complements our two other metabolic pipeline opportunities including: (i) our plasma kallikrein inhibitor, RZ402, which is a late stage preclinical program that offers the potential of an oral therapy to treat diabetic macular edema, the leading cause of blindness in adults in the US, and (ii) our super-long-acting basal insulin, AB101, which is currently in Phase 1 clinical study related to AB101 where we determined that additional formulation adjustments are required before further clinical studies can be undertaken. As a portfolio management decision, we have decided not to take the program further in development and expect that future expenditures related to assess the safety and tolerability, pharmacokinetics and pharmacodynamics of AB101 in patients with diabetes mellitus.program will be insignificant.

Key Components of Consolidated Statements of Operations

Research and development expenses. Research and development expenses (“R&D”) consist primarily of material manufacturing costs,compensation and benefits for our personnel engaged in R&D activities, clinical trial costs, and in-licensing costs.consultants and outside services. Our research and development expenses alsocompensation and consulting costs include (i) an allocable portion of our cash and stock-based compensation, employee benefits, and consulting costs related to personnel engaged in the design and development of product candidates and other scientific research projects, and (ii) an allocableprojects. We also allocate a portion of our facilities and overhead costs relatedbased on the personnel and other resources devoted to such personnel.R&D activities.

General and administrative expenses. General and administrative expenses (“G&A”) consist primarily of (i) an allocable portion of our cash and stock-based compensation, employee benefits and consulting costs related to personnel engaged in our administrative, finance, accounting, and executive functions, and (ii) an allocable portion of our facilities and overhead costs related to such personnel. General and administrativeG&A expenses also include travel, legal, auditing, investor relations and other costs primarily related to our status as a public company.

Interest expense.  The components of interest expense include the amount of interest payable in cash at the stated interest rate, and accretion of debt discounts and issuance costs (“DDIC”) using the effective interest method. DDIC arises from the issuance of debt instruments at a discount to the original principal balance, the fair value of warrants issued in connection with a debt instrument, and incremental and direct costs incurred to consummate the financing.

Interest and other income. Interest and other income consist primarily of interest income earned on temporary cash investment, rental income related to subleases that were in effect until December 2018, and gains on changes in the fair value of embedded derivatives that were terminated in January 2019.investments.

Critical Accounting Policies and Significant Judgments and Estimates

Overview

Our management’sThe discussion and analysis of financial condition and results of operationsherein is based on our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these unaudited condensed consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported revenue and expenses during the reporting periods. These items are monitored and analyzed for changes in facts and circumstances, and material changes in these estimates could occur in the future. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Changes in estimates are reflected in reported results for the period in which they become known. Actual results may differ from these estimates under different assumptions or conditions.

With respect to our significant accounting policies that are described in Note 1 to our consolidated financial statements included in Item 8 of our 20192020 Form 10-K, and in Note 1 of this Report, we believe that the following accounting policies involve a greater degree of judgment and complexity. Accordingly, these are the policies we believe are the most critical to aid in fully understanding and evaluating our unaudited condensed consolidated financial condition and results of operations. 

Research and Development

Research and developmentR&D costs are expensed as incurred. Intangible assets related to in-licensing costs under license agreements with third parties are charged to expense unless we are able to determine that the licensing rights have an alternative future use in other research and developmentR&D projects or otherwise.

Clinical Trial Accruals

Clinical trial costs are a component of researchR&D expenses. We accrue and development expenses. The Company accrues andrecognize expenses for clinical trial activities performed by third parties based upon estimates of the percentage of work completed over the life of the individual study in accordance with agreements established with clinical research organizations and clinical trial sites. The Company determinesWe determine the estimates through discussions with internal clinical personnel and external service providers as to the progress or stage of completion of trials or services and the agreed-upon fee to be paid for such services.

Nonrefundable advance payments for goods and services that will be used or rendered in future research and developmentR&D activities, are deferred and recognized as expense in the period that the related goods are delivered, or services are performed.

Stock Options with Market, Performance and Service ConditionsStock-Based Compensation Expense

From time to time, we grant stock options with vesting that is dependent on achieving certain market, performance and service criteria. For purposes of recognizing compensation cost, we determine the requisite service period as the longest of the explicit, implicit and derived vesting periods for each of the market, performance and service conditions, respectively. The derived vesting period for market conditions and the estimated fair value of the related stock options will be based on a valuation performed using a Monte Carlo model. Compensation cost is recognized beginning on such date that achievement of the performance criterion is considered probable and continuing through the end of the requisite service period.

If the stock options do not ultimately vest as a result of failure to achieve the service criterion, any previously recognized compensation cost will be reversed for options that never vest. However, if the service and performance criteria are achieved, compensation cost will not be reversed even if the market condition is never achieved.

Valuation of Stock Options and Warrants

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 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 granted which contain a graded vesting schedule, and the only condition for vesting is a service condition, compensation cost is recognized on a straight-line basis over the requisite service period as if the award was, in substance, a single award. We recognize the impact of forfeitures in the period that the forfeiture occurs, rather than estimating the number of awards that are not expected to vest in accounting for stock-based compensation.

Debt

DDIC incurred to obtain new debt financing or modify existing debt financing consistsWe have granted stock options with vesting that is dependent on achieving certain market, performance and service conditions (“Hybrid Options”). For purposes of incremental direct costs incurred for professional fees and due diligence services, and the fair value of warrants issued in connection with the financing. DDIC is accreted to interest expense using the effective interest method.

If we amend our debt arrangements, we evaluate the terms to determine if the amendment should be accounted for as a troubled debt restructuring (“TDR”), a modification or an extinguishment. Ifrecognizing compensation cost, we determine that the lender has provided a concession and we are experiencing financial difficulties, we would generally recognize a TDR gain. If we conclude that accountingrequisite service period as a modification is required, then any costs incurred on behalfthe longest of the lendersderived, implicit and explicit vesting periods for each of the market, performance and service conditions, respectively. Compensation cost will be recognized beginning on such date that achievement of the performance condition is accounted for as additional DDIC. If we conclude that accounting as an extinguishment is required, we measureconsidered probable and continuing through the extinguishment chargeend of the requisite service period. Determination of the requisite service period of the Hybrid Options will be based on the date ofthat the amendment basedperformance condition is considered probable. Unrecognized compensation cost for the Hybrid Options, calculated using the BSM pricing model, will be recognized beginning on the amount by whichdate that the performance condition is considered probable using the grant date fair valuevalue. If the Hybrid Options do not ultimately become exercisable as a result of failure to achieve the new debt instrument exceeds the net carrying value of the original debt instrument, and allrequisite service period, any previously unaccreted issuance costs are charged to expense.

recognized compensation cost will be reversed.

Leases

The Company determines if an arrangement includes a lease at inception. Operating leases are included in operating lease right-of-use (ROU) assets, accrued and other current liabilities and other non-current liabilities on the Company's Condensed Consolidated Balance Sheets. Operating lease ROU assets and operating lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. The Company uses the incremental borrowing rate based on the information available at lease commencement date in determining the present value of future payments. The operating lease ROU asset also excludes lease incentives. The Company's lease terms may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise any such options. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term. The Company has elected not to apply the recognition requirements for short-term leases. For lease agreements with lease and non-lease components, the Company generally accounts for them separately.

Results of Operations

Three Months Endedmonths ended September 30, 20192020 and 20182019

Results of operations for the three months ended September 30, 20192020 and 20182019 reflect net losses of approximately $5.1$3.6 million and $3.4$5.1 million, respectively. Our unaudited condensed consolidated statements of operations for the three months ended September 30, 20192020 and 2018,2019, along with the changes between periods, are presented below (in(dollars in thousands):