urov-10q_20180930.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from           to

Commission File Number: 001-38667

 

Urovant Sciences Ltd.

(Exact Name of Registrant as Specified in its Charter)

 

 

Bermuda

Not Applicable

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)

 

 

Suite 1, 3rd Floor

11-12 St. James’s Square

London SW1Y 4LB, United Kingdom

Not Applicable

(Address of principal executive offices)

(Zip Code)

Registrant’s telephone number, including area code: +44 (203) 318-9709

 

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.     Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted posted 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).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or 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.

 

Large accelerated filer

 

  

Accelerated filer

 

 

 

 

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

 

 

 

 

 

 

 

Emerging growth company

 

 

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 13(a) of the Exchange Act. 

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

As of November 12, 2018, the registrant had 30,322,911 common shares, $0.000037453 par value per share, outstanding.

 

 


Table of Contents

 

 

 

Page

PART I.

FINANCIAL INFORMATION

 

Item 1.

Financial Statements (Unaudited)

2

 

Condensed Consolidated Balance Sheets as of September 30, 2018 and March 31, 2018

2

 

Condensed Consolidated Statements of Operations for the Three and Six Months Ended September 30, 2018 and 2017

3

 

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended September 30, 2018 and 2017

4

 

Condensed Consolidated Statement of Shareholder’s Equity (Deficit) for the Six Months Ended September 30, 2018

5

 

Condensed Consolidated Statements of Cash Flows for the Six Months Ended September 30, 2018 and 2017

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

16

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

23

Item 4.

Controls and Procedures

23

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

24

Item 1A.

Risk Factors

24

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

61

Item 3.

Defaults Upon Senior Securities

62

Item 4.

Mine Safety Disclosures

62

Item 5.

Other Information

62

Item 6.

Exhibits

63

Signatures

65

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)

 

UROVANT SCIENCES LTD.

Condensed Consolidated Balance Sheets

(unaudited; in thousands, except share and per share data)

 

 

 

September 30, 2018

 

 

March 31, 2018

 

Assets

 

 

 

 

 

(Note 2)

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

1,659

 

 

$

7,194

 

Prepaid expenses and other current assets

 

 

11,757

 

 

 

5,196

 

Deferred initial public offering costs

 

 

2,201

 

 

 

 

Total current assets

 

 

15,617

 

 

 

12,390

 

Property and equipment, net

 

 

587

 

 

 

510

 

Other assets

 

 

84

 

 

 

84

 

Total assets

 

$

16,288

 

 

$

12,984

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholder's (Deficit) Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

5,084

 

 

$

833

 

Accrued expenses

 

 

9,875

 

 

 

3,595

 

Due to Roivant Sciences Ltd.

 

 

8,056

 

 

 

1,482

 

Total liabilities

 

 

23,015

 

 

 

5,910

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 8)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholder's (deficit) equity

 

 

 

 

 

 

 

 

Common shares, par value $0.000037453 per share, 267,001,308 shares authorized, 20,025,098 issued and outstanding at September 30, 2018 and March 31, 2018, respectively

 

 

1

 

 

 

1

 

Common shares subscribed

 

 

(1

)

 

 

(1

)

Shareholder receivable

 

 

(1,310

)

 

 

(1,310

)

Accumulated other comprehensive income

 

 

104

 

 

 

7

 

Additional paid-in capital

 

 

114,601

 

 

 

72,562

 

Accumulated deficit

 

 

(120,122

)

 

 

(64,185

)

Total shareholder's (deficit) equity

 

 

(6,727

)

 

 

7,074

 

Total liabilities and shareholder's (deficit) equity

 

$

16,288

 

 

$

12,984

 

 

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

2


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Operations

(unaudited; in thousands, except share and per share data)

 

 

 

Three Months Ended September 30,

 

 

Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development(1)

 

$

20,664

 

 

$

4,751

 

 

$

48,009

 

 

$

7,883

 

General and administrative(2)

 

 

3,664

 

 

 

219

 

 

 

7,788

 

 

 

553

 

Total operating expenses

 

 

24,328

 

 

 

4,970

 

 

 

55,797

 

 

 

8,436

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense)

 

 

(309

)

 

 

59

 

 

 

(80

)

 

 

(88

)

Loss before provision for income taxes

 

 

(24,637

)

 

 

(4,911

)

 

 

(55,877

)

 

 

(8,524

)

Provision for income taxes

 

 

5

 

 

 

2

 

 

 

60

 

 

 

4

 

Net loss

 

$

(24,642

)

 

$

(4,913

)

 

$

(55,937

)

 

$

(8,528

)

Net loss per common share—basic and diluted

 

$

(1.23

)

 

$

(0.25

)

 

$

(2.79

)

 

$

(0.60

)

Weighted average common shares outstanding—basic and diluted

 

 

20,025,098

 

 

 

20,025,098

 

 

 

20,025,098

 

 

 

14,240,070

 

 

(1)

Includes $48 and $2,230 and $2,094 and $4,381 of costs allocated from RSL during the three and six months ended September 30, 2018 and 2017, respectively. Also includes share-based compensation expense (see Note 7).

(2)

Includes $537 and $1,679 and $149 and $370 of costs allocated from RSL during the three and six months ended September 30, 2018 and 2017, respectively. Also includes share-based compensation expense (see Note 7).

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

3


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited; in thousands)

 

 

 

Three Months Ended September 30,

 

 

Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

 

2018

 

 

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$

(24,642

)

 

$

(4,913

)

 

$

(55,937

)

 

$

(8,528

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

317

 

 

 

(63

)

 

 

97

 

 

 

81

 

Total other comprehensive income (loss)

 

 

317

 

 

 

(63

)

 

 

97

 

 

 

81

 

Comprehensive loss

 

$

(24,325

)

 

$

(4,976

)

 

$

(55,840

)

 

$

(8,447

)

 

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

4


UROVANT SCIENCES LTD.

Condensed Consolidated Statement of Shareholder’s Equity (Deficit)

(unaudited; in thousands, except share data)

 

 

 

Common Shares

 

 

Common

Shares

 

 

Shareholder

 

 

Additional

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholder’s

Equity

 

 

 

Shares

 

 

Amount

 

 

Subscribed

 

 

Receivable

 

 

Paid-in Capital

 

 

Deficit

 

 

Income (Loss)

 

 

(Deficit)

 

Balance at March 31, 2018

 

 

20,025,098

 

 

$

1

 

 

$

(1

)

 

$

(1,310

)

 

$

72,562

 

 

$

(64,185

)

 

$

7

 

 

$

7,074

 

Capital contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

40,244

 

 

 

 

 

 

 

 

 

40,244

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,215

 

 

 

 

 

 

 

 

 

1,215

 

Capital contribution – share-based

   compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

580

 

 

 

 

 

 

 

 

580

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

97

 

 

 

97

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(55,937

)

 

 

 

 

 

(55,937

)

Balance at September 30, 2018

 

 

20,025,098

 

 

$

1

 

 

$

(1

)

 

$

(1,310

)

 

$

114,601

 

 

$

(120,122

)

 

$

104

 

 

$

(6,727

)

 

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

 

5


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Cash Flows

(unaudited; in thousands)

 

 

 

Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(55,937

)

 

$

(8,528

)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

85

 

 

 

 

Share-based compensation expense

 

 

1,795

 

 

 

1,771

 

Unrealized foreign currency translation adjustment

 

 

97

 

 

 

81

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(6,561

)

 

 

4

 

Due to Roivant Sciences Ltd.

 

 

6,574

 

 

 

169

 

Accounts payable

 

 

3,801

 

 

 

18

 

Accrued expenses

 

 

5,802

 

 

 

1,322

 

Net cash used in operating activities

 

 

(44,344

)

 

 

(5,163

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(162

)

 

 

 

Net cash used in investing activities

 

 

(162

)

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from capital contributions from Roivant Sciences Ltd.

 

 

40,244

 

 

 

5,035

 

Initial public offering costs paid

 

 

(1,273

)

 

 

 

Net cash provided by financing activities

 

 

38,971

 

 

 

5,035

 

Net change in cash

 

 

(5,535

)

 

 

(128

)

Cash—beginning of period

 

 

7,194

 

 

 

4,767

 

Cash—end of period

 

$

1,659

 

 

$

4,639

 

Non-cash financing activities:

 

 

 

 

 

 

 

 

Shareholder receivable for the sale of intellectual property rights in China recorded as a deemed capital contribution (see Note 5[B])

 

$

 

 

$

1,310

 

Unpaid initial public offering costs included in accounts payable and accrued expenses

 

$

928

 

 

$

 

Supplemental disclosure of cash paid:

 

 

 

 

 

 

 

 

Income taxes

 

$

155

 

 

$

 

 

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

 

6


 

UROVANT SCIENCES LTD.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Note 1—Description of business and liquidity

[A] Description of business:

Urovant Sciences Ltd. and its subsidiaries (collectively, the “Company”) is a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapies for urologic conditions. The Company’s lead product candidate, vibegron, is an oral, once-daily, small molecule beta-3 agonist. The Company is currently developing vibegron for the treatment of overactive bladder, or OAB. The Company is also developing vibegron for the treatment of two additional potential indications: OAB in men with benign prostatic hyperplasia and pain associated with irritable bowel syndrome. The Company’s second product candidate, hMaxi-K, is a novel gene therapy that the Company is developing for patients with OAB who have failed oral pharmacological therapy. There are no currently available FDA-approved gene therapy treatments for OAB. The Company was founded on January 27, 2016 as a Bermuda Exempted Limited Company and a wholly owned subsidiary of Roivant Sciences Ltd. In November 2016, the Company incorporated as its wholly owned subsidiaries (1) Urovant Holdings Ltd. (“UHL”), a private limited company incorporated under the laws of England and Wales, (2) Urovant Sciences GmbH (“USG”), a company with limited liability formed under the laws of Switzerland and the Company’s principal operating subsidiary and (3) Urovant Sciences, Inc. (“USI”), a Delaware corporation based in the United States of America.

Since its inception, the Company has devoted substantially all of its efforts to organizing and staffing the Company, acquiring its product candidates, vibegron and hMaxi-K, and preparing for and advancing vibegron into clinical development. Vibegron was licensed from Merck Sharp & Dohme Corp. (“Merck”), a subsidiary of Merck & Co., in February 2017. hMaxi-K was licensed from Ion Channel Innovations, LLC (“ICI”) in August 2018. The Company has determined that it has one operating and reporting segment as it allocates resources and assesses financial performance on a consolidated basis.

[B] Liquidity:

The Company has not historically been capitalized with sufficient funding to conduct its operations. Certain other costs of conducting the Company’s operations through September 30, 2018 were paid by Roivant Sciences Ltd., inclusive of its wholly owned subsidiaries (“RSL”), and will be reimbursed by the Company including amounts pursuant to services agreements with Roivant Sciences, Inc. (“RSI”) and Roivant Sciences GmbH (“RSG”).

The Company has incurred and expects to continue to incur significant and increasing operating losses and negative cash flows for at least the next several years. To date, the Company has not generated any revenues and does not anticipate generating any revenues unless and until it successfully completes development and obtains regulatory approval for one of its product candidates. The Company currently believes its existing cash, together with the net cash proceeds received from the closing of its initial public offering on October 1, 2018 of $131.8 million (see Note 9), will be sufficient to fund its operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of these consolidated financial statements, and to enable it to announce top-line data from the Phase 3 clinical trial of vibegron for the treatment of OAB. This estimate is based on the Company’s current assumptions, including assumptions relating to its ability to manage its’ spend, and the Company could use its available capital resources sooner than currently expected. These funds will not be sufficient to enable the Company to complete all necessary development activities and commercially launch vibegron or hMaxi-K. Accordingly, the Company will seek to obtain additional capital through equity financings, the sale of debt or other arrangements. However, there can be no assurance that the Company will be able to raise additional capital when needed or under acceptable terms, if at all. The sale of additional equity may dilute existing shareholders and newly issued shares may contain senior rights and preferences compared to currently outstanding common shares. Issued debt securities may contain covenants and limit the Company’s ability to pay dividends or make other distributions to shareholders. If the Company is unable to obtain such additional financing, operations would need to be scaled back or discontinued.

The Company’s future operations are highly dependent on a combination of factors, including (1) the timely and successful completion of any additional financing; (2) the success of its research and development programs; (3) the development of competitive therapies by other biotechnology and pharmaceutical companies, (4) the Company’s ability to manage growth of the organization; (5) the Company’s ability to protect its technology and products; and, ultimately (6) regulatory approval and market acceptance of vibegron, hMaxi-K or any future product candidate.

7


 

Note 2—Summary of significant accounting policies

[A] Basis of presentation:

The Company’s fiscal year ends on March 31. The accompanying interim condensed consolidated balance sheet as of September 30, 2018, the condensed consolidated statements of operations and comprehensive loss for the three and six months ended September 30, 2018 and 2017, the condensed consolidated statements of cash flows for the six months ended September 30, 2018 and 2017 and the condensed consolidated statement of shareholder’s equity (deficit) for the six months ended September 30, 2018 are unaudited. The accompanying interim unaudited consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and disclosures required by U.S. GAAP for complete financial statements as certain footnotes or other financial information that are normally required by U.S. GAAP can be condensed or omitted. These interim unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto for the fiscal year ended March 31, 2018 and unaudited condensed consolidated financial statements and notes thereto for the three months ended June 30, 2018, included in the Company’s final prospectus dated September 26, 2018 filed with the Securities and Exchange Commission (“SEC”) on September 27, 2018.

The condensed consolidated balance sheet at March 31, 2018 has been derived from the audited consolidated financial statements at that date. In the opinion of management, the interim consolidated financial statements include all adjustments, consisting of normal recurring adjustments, necessary for the fair presentation of the Company’s consolidated financial position and its results of operations and cash flows for the interim periods presented. The results for the three and six months ended September 30, 2018 are not necessarily indicative of the results to be expected for the year ending March 31, 2019 or for any future period.

Any reference in these notes to applicable guidance is meant to refer to the authoritative U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”). The consolidated financial statements include the accounts of USL and UHL, USG, and USI, USL’s wholly owned subsidiaries. USL has no unconsolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

On September 11, 2018, the Company’s board of directors approved a 1-for-3.7453 reverse share split of the Company’s authorized and issued and outstanding common shares. The reverse share split increased par value to $0.000037453. The reverse split became effective on September 13, 2018. The accompanying unaudited condensed consolidated financial statements and notes to the condensed consolidated financial statements give retroactive effect to the reverse share split for all periods presented.

There have been no significant changes in the Company's accounting policies from those disclosed in its final prospectus filed with the SEC on September 27, 2018.      

[B] Use of estimates:

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the condensed consolidated financial statements and accompanying notes. The Company regularly evaluates estimates and assumptions related to assets, liabilities, costs, expenses and compensation expense allocated to the Company under its services agreements with RSI and RSG, as well as share-based compensation, research and development costs and income taxes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.

[C] Financial instruments:

The Company applies a fair value framework in order to measure and disclose its financial assets and liabilities. 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. The fair value hierarchy requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:

 

Level 1 - Quoted prices in active markets for identical assets or liabilities.

 

Level 2 - Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Fair values are determined by utilizing quoted prices for similar assets and liabilities in active markets or other market observable inputs such as interest rates and yield curves.

 

Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.  

8


 

To the extent the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument's level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

The Company’s financial instruments consist of cash, accounts payable, accrued expenses and amounts due to and from RSL. These financial instruments are stated at their respective historical carrying amounts, which approximates fair value due to their short-term nature.

[D] Deferred initial public offering costs:

Deferred offering costs, which consisted of direct costs related to the Company’s initial public offering of its common shares, were capitalized in other current assets until the consummation of the initial public offering. These offering costs were reclassified to additional paid-in capital upon the closing of the Company’s initial public offering on October 1, 2018.

[E] Net loss per common share:

Basic net loss per common share is computed by dividing net loss applicable to common shareholder by the weighted-average number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss applicable to common shareholder by the diluted weighted-average number of common shares outstanding during the period calculated in accordance with the treasury stock method. For the three and six months ended September 30, 2018 and 2017, there were 2,554,875 and 1,201,504 options to purchase common shares, respectively, that were not included in the calculation of diluted weighted-average number of common shares outstanding because they were anti-dilutive given the net loss of the Company.

[F] Recently issued accounting pronouncements:

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”), which is a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. The core principle of ASU No. 2016-02 will require lessees to present the assets and liabilities that arise from leases on their consolidated balance sheets. ASU No. 2016-02 is effective for annual periods beginning after December 15, 2018, and interim periods within fiscal years beginning after December 15, 2018. Early adoption is permitted. The Company is currently evaluating the new standard and its impact on the Company's consolidated financial position, results of operations and related disclosures.

In February 2018, the FASB issued ASU No. 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income (“ASU No. 2018-02”). ASU No. 2018-02 allows companies to reclassify stranded tax effects resulting from the Tax Cuts and Jobs Act, from accumulated other comprehensive (loss) income to retained earnings. ASU No. 2018-02 is effective for interim and annual reporting periods beginning after December 15, 2017 and early adoption is permitted. The adoption of ASU 2018-02 on April 1, 2018 did not have a material impact on the Company's condensed consolidated financial position, results of operations and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Compensation-Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment Accounting (“ASU No. 2018-07”).  ASU No. 2018-07 expands the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  ASU No. 2018-07 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. Entities must apply the guidance retrospectively with a cumulative effect adjustment to retained earnings as of the beginning of the period of adoption. The Company is currently evaluating the new standard and its impact on the Company's consolidated financial position, results of operations and related disclosures.

In July 2018, the FASB issued ASU No. 2018-09, Codification Improvements (“ASU No. 201-09”), to make changes to a variety of topics to clarify, correct errors in, or make minor improvements to the ASC. Certain items of the amendments in ASU No. 2018-09 will be effective for the Company in annual periods beginning after December 15, 2018. The Company is currently evaluating the new standard and its impact on the Company’s consolidated financial position, results of operations and related disclosures.

In August 2018, the SEC adopted the final rule under SEC Release No. 33-10532, Disclosure Update and Simplification, amending certain disclosure requirements that were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements on the analysis of shareholders' equity for interim financial statements. Under the amendments, an analysis of changes in each caption of shareholders' equity presented in the consolidated balance sheet must be provided in a note or separate statement. The analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of comprehensive income is required to be filed. This final rule is effective on November 5, 2018. On September 25, 2018, the SEC released guidance advising it will not object to a registrant adopting the requirement to include changes in shareholders’ equity in the Form 10-Q for the first quarter beginning after the effective date of the rule. The Company does not expect the adoption of SEC Release No. 33-10532 to have a material impact on its consolidated financial position, results of operations and related disclosures.  The Company anticipates adopting SEC Release No. 33-10532 in its Form 10-Q filing as of and for the three and nine months ending December 31, 2018.

 

 

 

9


 

Note 3—License agreement

 

On August 24, 2018, the Company’s wholly owned subsidiary, USG, entered into an exclusive license agreement with ICI (the “ICI Agreement”) for the development and commercialization of hMaxi-K in exchange for the following consideration:

 

 

An initial one-time, non-refundable, non-creditable payment of $0.25 million;

 

 

Up to an aggregate of $35.0 million upon the achievement of certain development and regulatory milestones;

 

 

Up to an aggregate of $60.0 million upon the achievement of certain annual sales-based milestones; and

 

 

An escalating mid-to-high single-digit royalty on annual net sales of licensed products made by the Company, its affiliates or its sublicensees, subject to certain reductions as set forth in the ICI Agreement. The Company’s royalty obligations apply on a product-by-product and country-by-country basis and end upon the date on which the last valid claim of the licensed patents expires with respect to a given product in a given country.

 

The exclusive license under the ICI Agreement extends to all countries and territories worldwide.

 

For the consideration above, the Company received certain research and development historical records. The Company did not receive any material inventory of hMaxi-K, did not hire, or receive, any ICI employees working on hMaxi-K, and did not receive any research, clinical or manufacturing equipment. Additionally, the Company did not assume from ICI any contracts, licenses or agreements between ICI and any third party with respect to hMaxi-K. The Company will need to develop independently all clinical processes and procedures for its clinical trials through the use of internal and external resources once appropriate and acceptable resources have been identified and obtained.

 

The Company has evaluated the in-license agreement of hMaxi-K from ICI based on the applicable guidance in ASC No. 805, Business Combinations, and has determined that the in-process research and development asset (“IPR&D”) licensed did not meet the definition of a business and thus the transaction was not considered a business combination. The Company then evaluated, pursuant to ASC No. 730, Research and Development, whether the IPR&D asset had an alternative future use and concluded it did not. As a result, the Company recorded the initial payment under the license agreement of $0.25 million as research and development expense in the accompanying condensed consolidated statement of operations for the three and six months ended September 30, 2018.

Note 4—Accrued expenses

Accrued expenses at September 30, 2018 and March 31, 2018 consist of the following (in thousands):

 

 

 

September 30, 2018

 

 

March 31, 2018

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

$

7,751

 

 

$

2,482

 

General and administrative expenses

 

 

616

 

 

 

429

 

Bonuses and other compensation expenses

 

 

1,150

 

 

 

549

 

Professional services expenses

 

 

287

 

 

 

90

 

Other expenses

 

 

71

 

 

 

45

 

Total accrued expenses

 

$

9,875

 

 

$

3,595

 

 

Note 5—Related party transactions

[A] Services agreements:

In May 2017, the Company entered into a formal services agreement with RSI effective January 17, 2017, as amended and restated on July 9, 2018, under which RSI agreed to provide certain administrative and research and development services to the Company during its formative period. Under this services agreement, the Company will pay or reimburse RSI for any expenses it, or third parties acting on its behalf, incurs for the Company. For any general and administrative and research and development activities performed by RSI employees, RSI will charge back the employee compensation expense plus a pre-determined markup. RSI also provided such services prior to the formalization of this services agreement, and such costs have been recognized by the Company in the period in which the services were rendered. Employee compensation expense, inclusive of base salary and fringe benefits, is determined based upon the relative percentage of time utilized on Company matters. All other costs will be billed back at cost.  The condensed consolidated financial statements also include third-party expenses that have been paid by RSI and RSL since the inception of the Company.

During the three and six months ended September 30, 2018 and 2017, RSL and RSI provided certain administrative and research and development services on behalf of the Company. Total compensation expense, inclusive of base salary, fringe benefits and share-based compensation, is proportionately allocated to the Company based upon the relative percentage of time utilized on the Company’s matters. A

10


 

significant component of total compensation expense allocated back to the Company relates to the RSL common share awards and RSL options issued by RSL to RSL and RSI employees. The term of the RSI services agreement will continue until terminated upon 90 days’ written notice by RSI or by either USI or USG with respect to the services either such party receives thereunder.

In May 2017, USG entered into a separate services agreement with RSG effective as of January 17, 2017, as amended and restated on July 9, 2018, for the provision of services by RSG to USG in relation to the identification of potential product candidates and project management of clinical trials, as well as other services related to clinical development, administrative and financial activities. Under the terms of the services agreement, the Company is obligated to pay or reimburse RSG for the costs they, or third parties acting on their behalf, incur in providing services to USG, including administrative and support services, as well as research and development services. In addition, the Company is obligated to pay to RSG a pre-determined mark-up on the costs incurred directly by RSG in connection with any general and administrative and research and development services. The term of the RSG services agreement will continue until terminated by RSG or USG upon 90 days’ written notice.

Under the RSI and RSG services agreements, for the three and six months ended September 30, 2018 and 2017, the Company incurred expenses of $0.5 million and $3.3 million and $1.4 million and $3.0 million, respectively, inclusive of the mark-up. Based upon the service performed under the services agreements, amounts included in research and development expenses totaled $0.2 million and $2.1 million and $1.3 million and $2.7 million, and amounts included in general and administrative expenses totaled $0.3 million and $1.2 million and $0.1 million and $0.3 million during the three and six months ended September 30, 2018 and 2017, respectively.  

[B] China intellectual property purchase agreement:

On June 12, 2017, USG and RSG entered into an intellectual property purchase agreement, as amended on May 22, 2018, pursuant to which USG assigned to RSG all of its rights, titles, claims and interests in and to all intellectual property rights under the Merck license agreement, solely as it relates to USG’s rights and obligations in China. The assignment is subject to the terms of the Merck license agreement, and RSG is obligated to make royalty and milestone payments owed under the Merck license agreement to USG, to the extent such payment obligations arise from the development, regulatory approval or sales of any vibegron product in China. In connection with this assignment, the Company also entered into a separate collaboration agreement with RSG on June 1, 2018, setting forth the parties’ respective rights and obligations to each other in connection with the development of vibegron in their respective territories.

The consideration for the assignment of the rights to China under the Merck license agreement was $1.8 million plus applicable Swiss VAT and was determined based on an independent third-party valuation. Since the in-process research and development asset acquired from Merck was expensed during the year ended March 31, 2017, the carrying value of the intellectual property rights transferred to RSG was $0. Since the assignment of such intellectual property rights from USG to RSG were between entities under common control with no carrying value, the Company accounted for the consideration of $1.8 million as a deemed capital contribution from its parent, RSL.  In July 2017, the Company received payment of $0.5 million under such agreement and the remaining consideration due of $1.3 million was classified within equity as a shareholder receivable in the accompanying condensed consolidated balance sheets as of September 30, 2018 and March 31, 2018. The remaining consideration of $1.3 million was received in October 2018.

[C] Information sharing and cooperation agreement:

On July 9, 2018, the Company entered into an information sharing and cooperation agreement (the “Cooperation Agreement”) with RSL. The Cooperation Agreement, among other things: (1) obligates the Company to deliver to RSL periodic financial statements and other information upon reasonable request and to comply with other specified financial reporting requirements; (2) requires the Company to supply certain material information to RSL to assist it in preparing any future SEC filings; and (3) requires the Company to implement and observe certain policies and procedures related to applicable laws and regulations. The Company agreed to indemnify RSL and its affiliates and their respective officers, employees and directors against all losses arising out of, due to or in connection with RSL’s status as a shareholder under the Cooperation Agreement and the operations of or services provided by RSL or its affiliates or their respective officers, employees or directors to the Company or any of the Company’s subsidiaries, subject to certain limitations set forth in the Cooperation Agreement. No amounts have been paid or received under this agreement; however, the Company believes this agreement is material to its business and operations.

11


 

[D] Data sharing agreement:

On May 22, 2018, USG entered into a data sharing agreement (the “Data Sharing Agreement”) with Datavant, Inc. (“Datavant”), a subsidiary of the Company’s parent company, RSL. Pursuant to this Data Sharing Agreement, USG granted to Datavant a royalty-free, worldwide (excluding jurisdictions prohibited by the United States government), non-exclusive, irrevocable license to all data, subject to certain exceptions set forth in the Data Sharing Agreement, collected as part of clinical trials (but not prior to completion of such clinical trials and the publication or presentation of the data generated in connection with such clinical trials) or other patient-level data that is owned or licensed by USG and all other data mutually agreed by USG and Datavant, solely for Datavant to (1) use such data to develop its data or other analytics products (the “Datavant Products”), or (2) provide such data to third parties, subject to the limitations and conditions set forth in the Data Sharing Agreement, including limitations on providing such data to any third party that competes with USG. Pursuant to the Data Sharing Agreement, Datavant granted to USG a royalty-free, worldwide (excluding jurisdictions prohibited by the United States government), nonexclusive, irrevocable license to use all data, subject to certain exceptions set forth in the Data Sharing Agreement, owned or licensed by Datavant and applicable Datavant Products for such specified purposes as set forth in the Data Sharing Agreement. The Data Sharing Agreement has an initial term of two years and will automatically renew annually thereafter, subject to 30 days’ written notice of termination by either party. In addition, either party may terminate (1) upon a change of control of either party upon 60 days’ written notice or (2) upon 90 days’ written notice for an uncured material breach by the other party. No amounts have been paid or received under this agreement, however, the Company believes this agreement is material to its business and operations.

Note 6—Shareholder's equity (deficit)

For the three and six months ended September 30, 2018 and 2017, RSL made cash capital contributions of $21.7 million and $40.2 million and $4.5 million and $4.5 million, respectively. No additional common shares of the Company were issued in connection with these capital contributions as RSL owned 100% of the shares issued and outstanding.

In connection with the China intellectual property purchase agreement with RSG, USG assigned all of its rights, titles, claims and interests in and to all intellectual property rights under the Merck license agreement, solely as it relates to USG’s rights and obligations in China to RSG for cash consideration of $1.8 million. As RSG and USG are under common control, the consideration was recorded as a capital contribution from the Company’s parent, RSL (see Note 5[B]).

Note 7—Share-based compensation

Equity Incentive Plan:

On June 1, 2017, the Company adopted its 2017 Equity Incentive Plan (the “2017 Plan”), under which 2,002,509 common shares are reserved for grant.  On June 15, 2018, the Board of Directors approved an increase in the common shares reserved for grant under the 2017 Plan of 1,068,006 common shares. The 2017 Plan was approved by the Company’s shareholders in September 2018. In connection with the Company’s initial public offering, the 2017 Plan was amended effective upon the execution of the underwriting agreement related to the offering.  All references herein to our 2017 Plan will be deemed to refer to the 2017 Plan, as amended and restated, unless context otherwise requires.    

Share-based awards under the 2017 Plan are subject to terms and conditions established by the Compensation Committee of the Company’s Board of Directors. The 2017 Plan provides for the grant of incentive options within the meaning of Section 422 of the Internal Revenue Code to the Company’s employees and its parent and subsidiary corporations’ employees, and for the grant of nonstatutory options, restricted share awards, restricted share unit awards, share appreciation rights, performance share awards and other forms of share compensation to its employees, including officers, consultants and directors. The 2017 Plan also provides for the grant of performance cash awards to the Company’s employees, consultants and directors. The Company’s policy is to issue new common shares upon the exercise of stock options, conversion of share units or purchase of restricted shares.

Pursuant to the “evergreen” provision contained in the 2017 Plan, the number of common shares reserved for issuance under the 2017 Plan will automatically increase on November 1, 2018 by 4% of the total number of common shares outstanding on October 31, 2018, and annually thereafter, for a period of ten years, from November 1, 2019 continuing through November 1, 2028, by 4% of the total number of the Company’s common shares outstanding on the last day of the preceding month, or by a lesser number of common shares as may be determined by the Company’s Board of Directors prior to any such increase date.  On November 1, 2018, the number of common shares authorized for issuance increased automatically by 1,212,916 shares in accordance with the evergreen provision of the 2017 Plan.

At September 30, 2018, a total of 515,640 common shares were available for future issuance under the 2017 Plan.

12


 

Stock options:

The Company estimated the fair value of each stock option on the date of grant using the Black-Scholes option pricing model applying the range of assumptions in the following table:

 

 

 

Three Months

Ended

September 30, 2018

 

 

Three Months

Ended

September 30, 2017

 

 

Six Months

Ended

September 30, 2018

 

Six Months

Ended

September 30, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Risk-free interest rate

 

2.77% - 2.99%

 

 

2.01%

 

 

2.73% - 2.99%

 

2.01%

 

Expected term, in years

 

 

6.11

 

 

 

6.25

 

 

6.00 - 6.25

 

 

6.25

 

Expected volatility

 

67.2% - 67.9%

 

 

69.9%

 

 

67.2% - 68.4%

 

69.9%

 

Expected dividend yield

 

—%

 

 

—%

 

 

—%

 

—%

 

 

The following table presents a summary of stock option activity and data under the Company’s 2017 Plan through September 30, 2018 (in thousands, except share and per share data):

 

 

 

Number of

Options

 

 

Weighted

Average

Exercise

Price

 

 

Weighted

Average

Grant Date

Fair Value

 

 

Weighted

Average

Remaining

Contractual

Life

 

 

Aggregate

Intrinsic

Value

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding at March 31, 2018

 

 

1,737,838

 

 

$

3.84

 

 

$

2.46

 

 

 

 

 

$

 

Granted

 

 

817,571

 

 

$

7.73

 

 

$

5.24

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(534

)

 

$

4.01

 

 

$

2.48

 

 

 

 

 

 

 

 

 

Options outstanding at September 30, 2018

 

 

2,554,875

 

 

$

5.08

 

 

$

3.35

 

 

 

9.27

 

 

$

17,767

 

Options exercisable at September 30, 2018

 

 

250,314

 

 

$

3.86

 

 

$

2.47

 

 

 

8.98

 

 

$

2,038

 

 

The aggregate intrinsic value is calculated as the difference between the exercise price of all outstanding and exercisable stock options and the quoted market price of our common shares at September 30, 2018. At September 30, 2018, there were 250,314 vested or exercisable options outstanding.

 

Share-based compensation was as follows (in thousands):

 

 

 

Three Months

Ended

September 30, 2018

 

 

Three Months

Ended

September 30, 2017

 

 

Six Months

Ended

September 30, 2018

 

 

Six Months

Ended

September 30, 2017

 

Share-based compensation recognized as:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

293

 

 

$

854

 

 

$

565

 

 

$

1,693

 

General and administrative

 

 

696

 

 

 

33

 

 

 

1,230

 

 

 

78

 

Total

 

$

989

 

 

$

887

 

 

$

1,795

 

 

$

1,771

 

 

Share-based compensation expense is included in research and development and general and administrative expenses in the accompanying interim condensed consolidated statements of operations consistent with the grantee’s salary classification. Share-based compensation expense presented in the table above includes share-based compensation expense allocated to the Company by RSL as described below in Note 7[B].

 

Of the total share-based compensation expense, amounts recognized for options granted to non-employees were immaterial for all periods presented.

 

In connection with the Company’s initial public offering, the Company reassessed the fair value of: (1) 88,096 common shares underlying stock options granted in July 2018; and (2) 5,340 common shares underlying stock options granted in August 2018 to the Company’s employees with a weighted-average exercise price of $10.61 per common share. As a result, the Company determined that the reassessed fair value of the common shares underlying the stock options granted in July and August 2018 was $14.00 per common share, which was the initial public offering price of the Company’s common shares. Management believes the initial public offering price was a better reflection of the fair value of the common shares underlying these stock options based on market participants. The use of this higher fair value per common share increased the weighted-average fair value of the stock options granted in July and August 2018 to $9.58 per common share. Prior to the initial public offering, the fair value of the common shares underlying the Company’s stock options was estimated on each grant date by the Board of Directors. In order to determine the fair value of the Company’s common shares underlying granted stock options, the Board of Directors considered, among other things, timely valuations of the common shares prepared by an unrelated independent third-party valuation firm in

13


 

accordance with the guidance provided by the American Institute of Certified Public Accountants Practice Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation. The use of this higher share price increased both recognized and unrecognized share-based compensation expense and thus the total fair value of the stock options granted in July and August 2018 increased by $0.3 million. During the three and six months ended September 30, 2018, the incremental fair value recognized was approximately $18,000.

 

Total unrecognized share-based compensation expense was approximately $7.3 million at September 30, 2018 and is expected to be recognized over a weighted-average period of 3.34 years.

 

[A] Stock options granted to employees and non-employees:

During the three and six months ended September 30, 2018, the Company granted options to purchase 133,251 common shares and 817,571 common shares, respectively, to certain employees and directors of the Company with a weighted-average exercise price of $11.62 and $7.73, respectively, under the 2017 Plan.

For the three and six months ended September 30, 2018 and 2017, the Company recorded share-based compensation expense related to stock options issued to employees, directors and consultants of $0.9 million and $1.2 million and approximately $7,000 and $7,000, respectively. This share-based compensation expense is included in general and administrative expenses and research and development expenses in the accompanying condensed consolidated statements of operations.

[B] Share-based compensation allocated to the Company by RSL: 

In relation to the RSL common share awards and options issued by RSL to RSL, RSI and RSG employees, the Company recorded share-based compensation expense of $0.1 million and $0.6 million and $0.9 million and $1.8 million for the three and six months ended September 30, 2018 and 2017, respectively.

Share-based compensation expense is allocated to the Company by RSL based upon the relative percentage of time utilized by RSL, RSI and RSG employees on Company matters.

The RSL common share awards and RSL options are valued at fair value on the date of grant and that fair value is recognized over the requisite service period. Significant judgment and estimates were used to estimate the fair value of these RSL awards and RSL options, as they are not publicly traded. RSL common share awards and RSL options are subject to specified vesting schedules and requirements (a mix of time-based and performance-based events). The fair value of each RSL common share award is based on various corporate event-based considerations, including targets for RSL’s post-IPO market capitalization and future financing events. The fair value of each RSL option on the date of grant is estimated using the Black-Scholes option-pricing model.

Compensation expense will be allocated to the Company over the required service period over which these RSL common share awards and RSL options would vest and is based upon the relative percentage of time utilized by RSL, RSI and RSG employees on Company matters.

RSL restricted stock unit (“RSUs”):

In connection with his employment agreement, the Company’s Principal Executive Officer was granted 66,845 RSUs of the Company’s parent company, RSL, during the year ended March 31, 2018. The RSUs have a requisite service period of eight years and have no dividend rights. The RSUs will vest upon the achievement of both a performance and liquidity condition, if both are achieved within the requisite service period. As of September 30, 2018, the performance condition had not been met and was deemed not probable of being met.

For the three and six months ended September 30, 2018 and 2017, the Company recorded no share-based compensation expense related to the RSUs that were issued. At September 30, 2018, there was $0.9 million of unrecognized compensation expense related to non-vested RSUs. The Company will recognize the expense upon the probable achievement of the performance condition through the requisite service period.

14


 

Note 8—Commitments and contingencies

The Company entered into certain commitments under the Merck license agreement, the ICI license agreement (see Note 3), the Codexis enzyme supply agreement, the Kyorin information sharing collaboration agreement, and the services agreements with RSI and RSG (see Note 5[A]). In addition, the Company has entered into services agreements with third parties for pharmaceutical research and development and manufacturing activities and has a lease agreement for office space located in Irvine, California that expires in February 2020. Expenditures to contract research organizations, or CROs, and contract manufacturing organizations, or CMOs, represent significant costs in the Company’s clinical development of its product candidates. Subject to required notice periods, a nominal early termination fee, in certain cases, and the Company’s remaining obligations under binding purchase orders, the Company can elect to discontinue the work under these agreements at any time. The Company expects to enter into additional commitments as the business further develops. As of September 30, 2018, the Company did not have any additional ongoing material financial commitments.

The Company may be, from time to time, a party to various disputes and claims arising from normal business activities. The Company accrues for loss contingencies when available information indicates that it is probable that a liability has been incurred and the amount of such liability can be reasonably estimated. In the cases where the Company believes that a reasonably possible loss exists, the Company discloses the facts and circumstances of the loss contingency, including an estimable range, if possible.

During the three and six months ended September 30, 2018, there were no other material changes outside the ordinary course of business to the specified contractual obligations set forth in the commitments and contingencies footnote disclosure in the Company’s audited consolidated financial statements for the year ended March 31, 2018 included in the Company’s final prospectus dated September 26, 2018 filed with the SEC on September 27, 2018.

Note 9—Subsequent events

The Company has evaluated subsequent events through November 13, 2018, the date that the unaudited condensed consolidated financial statements were available to be issued and determined that no subsequent events have occurred that would require recognition in the condensed consolidated financial statements or disclosures in the notes thereto other than as disclosed in the accompanying notes to the condensed consolidated financial statements.

[A] Initial public offering:

On September 26, 2018, the Company’s registration statement on Form S-1 relating to its initial public offering of its common shares was declared effective by the SEC.  In the initial public offering, which closed on October 1, 2018, the Company issued and sold 10,000,000 common shares at a price to the public of $14.00 per share. On October 18, 2018, the Company issued and sold an additional 297,813 common shares at the public offering price of $14.00 per share pursuant to the partial exercise of the underwriters’ over-allotment option in the initial public offering. Our sole shareholder prior to the initial public offering, RSL, purchased 2,678,571 shares in the initial public offering at the public offering price of $14.00. The aggregate net proceeds to the Company from the initial public offering, inclusive of the proceeds from the partial over-allotment exercise, were $131.8 million after deducting underwriting discounts and commissions of $10.1 million and offering related expenses of approximately $2.3 million.    

[B] Share-based compensation:

In October 2018, the Company granted options to purchase 130,967 common shares to certain employees of the Company, with a weighted-average exercise price of $13.65 under the 2017 Plan.

15


 

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion and analysis of our financial condition, results of operations and cash flows should be read in conjunction with (1) the unaudited condensed consolidated financial statements and the related notes thereto included elsewhere in this Quarterly Report on Form 10-Q, and (2) the audited consolidated financial statements and notes thereto and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended March 31, 2018 and the unaudited interim condensed consolidated financial statements for the three months ended June 30, 2018 included in our final prospectus, filed with the United States Securities and Exchange Commission, or the SEC, on September 27, 2018 pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act. Unless the context requires otherwise, references in this Quarterly Report on Form 10-Q to “Urovant,” the “Company,” “we,” “us,” and “our” refer to Urovant Sciences Ltd. and its wholly owned subsidiaries.

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. These statements are often identified by the use of words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “likely,” “may,” “might,” “objective,” “ongoing,” “plan,” “potential,” “predict,” “project,” “should,” “to be,” “will,” “would,” or the negative or plural of these words, or similar expressions or variations, although not all forward-looking statements contain these words. We cannot assure you that the events and circumstances reflected in the forward-looking statements will be achieved or occur and actual results could differ materially from those expressed or implied by these forward-looking statements.

Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors” set forth in Part II. Item 1A. of this Quarterly Report on Form 10-Q and in our other filings with the SEC. These risks are not exhaustive. New risk factors emerge from time to time and it is not possible for our management to predict all risk factors, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements. In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report on Form 10-Q, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapies for urologic conditions. Our lead product candidate, vibegron, is an oral, once-daily, small molecule that was observed to be highly selective for the human beta-3 adrenergic receptor in in vitro assays. We are currently evaluating vibegron in our 1,500+ patient, international pivotal Phase 3 clinical trial for the treatment of overactive bladder, or OAB. We have completed enrollment and expect to report top-line results from this clinical trial by the end of March 2019 and, if the results are positive, we plan to submit a new drug application, or NDA, to the U.S. Food and Drug Administration, or FDA, in early 2020. OAB is a highly prevalent condition, with more than 30 million Americans over the age of 40 suffering from bothersome symptoms. In large, randomized, placebo-controlled, international Phase 2b and Japanese Phase 3 clinical trials in a total of over 2,600 OAB patients, vibegron 50 mg and 100 mg met all primary and secondary efficacy endpoints compared to placebo at week 8 and week 12, respectively. Our ongoing Phase 3 clinical trial has a design similar to these clinical trials. We believe vibegron, if successful in meeting the efficacy endpoints in our pivotal Phase 3 EMPOWUR trial, and if approved by the FDA, may offer a differentiated profile compared to current OAB therapies, including the potential for broader efficacy claims if the FDA approves the inclusion of urgency data, rapid onset of action data, and a single convenient once-daily dose in the label. Vibegron has been well tolerated in all clinical trials to date, has not been associated with clinically relevant drug-drug interactions, such as the inhibition of CYP2D6, and has not demonstrated a QTc signal at any of the human doses tested.

In addition to OAB, we are developing vibegron for two potential additional indications, the treatment of pain associated with irritable bowel syndrome, or IBS, and the treatment of OAB in men with benign prostatic hyperplasia, or BPH. Our investigational new drug application, or IND, was recently cleared by the FDA for a Phase 2a clinical trial for pain associated with IBS and we expect to commence this study in approximately 200 female patients by the end of 2018. The primary endpoint will be a 30% reduction in abdominal pain intensity, while secondary endpoints will include a global rating scale and safety. We also expect to commence an approximately 1,000 patient Phase 3 clinical trial for OAB in men with BPH in the first quarter of 2019, testing 75 mg of vibegron versus placebo, the same dose studied in our Phase 3 EMPOWUR trial, subject to alignment with the FDA.

Our second product candidate, hMaxi-K, is a novel gene therapy that we are developing for patients with OAB who have failed oral pharmacological therapy. There are no currently available FDA-approved gene therapy treatments for OAB. We plan to initiate a proof-of-concept Phase 2a clinical trial in the second half of 2019 to evaluate the safety and efficacy of hMaxi-K in approximately 50 to 80 patients. Prior to initiation of this trial, we plan to discuss the nonclinical and clinical development program for hMaxi-K for the treatment of OAB with the FDA, including our Phase 2a clinical trial design and proposed efficacy endpoints of micturition frequency, urinary incontinence and urgency.

16


 

Our development programs and upcoming milestones are summarized in the following figure:

 

 

 

1.

Subject to alignment with the FDA on our Phase 3 clinical protocol.

 

2.

We plan to discuss the nonclinical and clinical development program for hMaxi-K for the treatment of OAB with the FDA, including our Phase 2a clinical trial design and proposed efficacy endpoints.

We intend to continue to expand our pipeline with the goal of creating a leading urology company by developing, commercializing and acquiring innovative therapies.

We were incorporated in January 2016, and our operations to date have been limited to organizing and staffing our company, acquiring the rights to vibegron and hMaxi-K, and conducting our pivotal Phase 3 EMPOWUR trial of vibegron in patients with OAB. We have not generated any revenue and have incurred significant operating losses since inception. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of vibegron, hMaxi-K and any future product candidates.

In October 2018, we completed our initial public offering, or IPO, in which we sold 10,297,813 common shares, including the partial exercise of the underwriters’ over-allotment option to purchase additional shares, at a public offering price of $14.00 per common share. The net proceeds to us were approximately $131.8 million, after deducting $10.1 million in underwriting discounts and commissions and $2.3 million in estimated offering expenses. We intend to use these proceeds to complete our international Phase 3 EMPOWUR trial for vibegron in patients with OAB and advance through completion of site activation and initiation of patient enrollment our planned Phase 3 clinical trial for vibegron for the treatment of OAB in men with BPH, our planned Phase 2a clinical trial for vibegron in patients with IBS-associated pain and our planned Phase 2a clinical trial for hMaxi-K for the treatment of OAB in patients who have not responded to oral pharmacological therapies. As of September 30, 2018, we had an accumulated deficit of $120.1 million. For the three and six months ended September 30, 2018, we recorded net losses of $24.6 million and $55.9 million, respectively.

Our Key Agreements

License and Collaboration Agreements

We received an exclusive license to develop, manufacture and commercialize vibegron worldwide, excluding Japan and certain other Asian territories, pursuant to our license agreement with Merck Sharp & Dohme Corp., or Merck, which we entered into in February 2017. Pursuant to this agreement, we made an upfront payment of $25.0 million to Merck during the year ended March 31, 2017. Additionally, we agreed to pay Merck up to an aggregate of $44.0 million upon the achievement of certain regulatory milestone events and up to an aggregate of $80.0 million upon the achievement of certain sales milestone events. Further, we agreed to pay Merck tiered royalties in the sub-teen double-digits on net sales of licensed products made by us, our affiliates or our sublicensees, subject to standard offsets and reductions as set forth in the agreement.

In June 2017, we entered into an intellectual property purchase agreement with RSG, a wholly owned subsidiary of our parent company, RSL, as amended on May 22, 2018, pursuant to which we assigned all of our rights, titles, claims and interests in and to all intellectual property rights under our license agreement with Merck to RSG, solely as it relates to any of our rights or obligations in China. In connection with this assignment, we also entered into a separate collaboration agreement with RSG in June 2018, setting forth the parties’ respective rights and obligations to each other in connection with the development of vibegron in their respective territories.

Vibegron is also being developed by Kyorin Pharmaceutical Co., Ltd., or Kyorin, for the treatment of OAB in Japan and certain other Asian territories. We entered into a collaboration agreement with Kyorin in August 2017. Pursuant to this agreement, our maximum obligation to Kyorin is $11.5 million, of which $1.0 million was paid during the year ended March 31, 2018. The remaining obligations under this agreement

17


 

will be due upon the achievement of certain regulatory milestones by Kyorin in Japan and us in the United States, subject to certain conditions. In September 2018, Kyorin received marketing approval from Japan’s Ministry of Health, Labour and Welfare for vibegron for the treatment of adults with OAB.

We received an exclusive license to develop, manufacture and commercialize hMaxi-K worldwide, pursuant to our license agreement with Ion Channel Innovations, LLC, or ICI, which we entered into in August 2018. Pursuant to this agreement, we made an upfront payment of $250,000 to ICI during the three and six months ended September 30, 2018. Additionally, we agreed to pay ICI up to an aggregate of $35.0 million upon the achievement of certain development and regulatory milestone events and up to an aggregate of $60.0 million upon the achievement of certain sales milestone events. Further, we agreed to pay ICI tiered royalties in the mid-to-high single digits on net sales of licensed products made by us, our affiliates or our sublicensees, subject to certain reductions.

Services Agreements

Our operations are supported, in part, by our affiliates, Roivant Sciences, Inc., or RSI, and Roivant Sciences GmbH, or RSG, each a wholly owned subsidiary of our parent company, Roivant Sciences Ltd., or RSL. RSI provides us with certain administrative, financial and research and development services, and RSG provides us with services in relation to the identification of potential product candidates, assistance with clinical trials and other development, administrative and financial activities, in each case, pursuant to the amended and restated services agreements entered into in July 2018, or the Services Agreements. Under the terms of the Services Agreements, we are obligated to pay or reimburse RSI and RSG for the costs they, or third parties acting on their behalf, incur in providing services to us. In addition, we are obligated to pay to RSI and RSG a pre-determined markup on costs incurred by them in connection with any general and administrative and support services as well as research and development services. We expect that our reliance on RSI and RSG will decrease over time as we, our wholly owned subsidiary, Urovant Sciences, Inc., or USI, and any other future subsidiary of ours, continue to hire the necessary personnel to manage the development and potential commercialization of vibegron, hMaxi-K and any future product candidates.

Financial Operations Overview

Revenue

We currently do not have any products approved for sale and have not generated any revenue since inception. If we are able to successfully develop, receive regulatory approval for and commercialize vibegron, hMaxi-K or any future product candidate alone or in collaboration with third parties, we may generate revenue from vibegron, hMaxi-K or any such future product candidate.

Research and Development Expenses

Our research and development expenses to date have been attributed to the license of the rights to vibegron and hMaxi-K and the continued development of vibegron for OAB. We expect to increase the number of our research and development programs while maintaining our current research and development spend as we finish out our ongoing Phase 3 EMPOWUR trial for the treatment of OAB, and initiate and advance our planned Phase 3 clinical trial of vibegron for the treatment of OAB in men with BPH, our planned Phase 2a clinical trial of vibegron for the treatment of IBS-associated pain and our planned Phase 2a clinical trial for hMaxi-K for the treatment of OAB in patients who have not responded to oral pharmacological therapies. Research and development expenses will include:

 

employee-related expenses, such as salaries, share-based compensation, benefits and travel expense for our research and development personnel;

 

direct third-party costs (as well as third-party pass-through costs from RSL) such as expenses incurred under agreements with clinical research organizations, or CROs, and contract manufacturing organizations, or CMOs, the cost of consultants who assist with the development of vibegron on a program-specific basis, investigator grants, sponsored research, manufacturing costs in connection with producing materials for use in conducting nonclinical studies and clinical trials, and other third-party expenses directly attributable to the development of our product candidates;

 

other expenses, which include the costs of consultants who assist with research and development activities not specific to a program; and

 

depreciation expense for assets used in research and development activities.

Research and development activities will continue to be central to our business model. Product candidates in later stages of clinical development, such as vibegron, generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We expect our research and development expenses to be significant over the next several years as we advance the clinical development of vibegron and prepare to seek regulatory approval. It is difficult to determine with certainty the duration and completion costs of any clinical trial we may conduct.

The duration, costs and timing of clinical trials of our current and future product candidates will depend on a variety of factors that include, but are not limited to: the number of trials required for approval; the per patient trial costs; the number of patients that participate in the trials; the number of sites included in the trials; the countries in which the trial is conducted; the length of time required to enroll eligible patients; the number of doses that patients receive; the drop-out or discontinuation rates of patients; the potential additional safety monitoring or other studies requested by

18


 

regulatory agencies; the duration of patient follow-up; the timing and receipt of regulatory approvals; the costs of clinical trial material; and the efficacy and safety profile of the product candidate.

General and Administrative Expense

General and administrative expenses consist primarily of legal and accounting fees relating to our formation and corporate matters, consulting services, services received under the Services Agreements with RSI and RSG, and employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for general and administrative personnel.

We anticipate that our general and administrative expenses will increase in the future to support our continued research and development activities, potential commercialization efforts and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses. Additionally, we anticipate increased costs associated with being a public company, including expenses related to services associated with maintaining compliance with the requirements of The Nasdaq Global Select Market, or Nasdaq, and the SEC, insurance and investor relations costs. If any of our current or future product candidates obtains U.S. regulatory approval, we expect that we would incur significantly increased expenses associated with building a sales and marketing team.

Results of Operations

Comparison of the Three Months Ended September 30, 2018 and 2017

The following table sets forth our results of operations for the three months ended September 30, 2018 and 2017 (in thousands):

 

 

 

Three Months Ended September 30,

 

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

20,664

 

 

$

4,751

 

General and administrative

 

 

3,664

 

 

 

219

 

Total operating expenses

 

 

24,328

 

 

 

4,970

 

Other (expense) income

 

 

(309

)

 

 

59

 

Loss before provision for income taxes

 

 

(24,637

)

 

 

(4,911

)

Provision for income taxes

 

 

5

 

 

 

2

 

Net loss

 

$

(24,642

)

 

$

(4,913

)

 

Research and Development Expenses

Research and development expenses increased by $15.9 million, to $20.7 million, for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily due to increases in expenses for the advancement of our Phase 3 EMPOWUR trial for the treatment of OAB, as well as employee-related expenses due to our increased headcount to support our clinical operations. Research and development expenses for the three months ended September 30, 2018 primarily consisted of program-specific research and development costs for vibegron of $18.4 million, which included CRO costs of $14.2 million, chemistry, manufacturing and controls costs of $2.9 million, and other third-party research and development costs of $1.3 million. The remainder consisted primarily of in-process research and development expenses of $0.3 million under our license agreement with ICI, unallocated personnel-related costs of $1.5 million, share-based compensation expense for stock options granted to employees of $0.4 million, and costs of $0.2 million billed to us under the Services Agreements, including personnel and third-party costs.

Research and development expenses were $4.8 million for the three months ended September 30, 2017 and consisted primarily of program-specific research and development costs for vibegron of $2.7 million, which includes CRO costs of $1.5 million and chemistry, manufacturing and controls costs of $0.7 million, and other third-party research and development costs of $0.5 million. The remainder consisted primarily of unallocated share-based compensation expense of $0.9 million allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters, and costs of $1.3 million billed to us under the Services Agreements, including personnel and third-party costs.

General and Administrative Expenses

General and administrative expenses increased by $3.5 million, to $3.7 million, for the three months ended September 30, 2018 compared to the three months ended September 30, 2017, primarily due to an increase in employee salaries and benefits resulting from increased headcount to support our operations, as well as an increase in legal and other professional fees. General and administrative expenses for the three months ended September 30, 2018 consisted primarily of personnel-related costs of $1.5 million, share-based compensation expense for stock options granted to employees, board members and consultants of $0.5 million, share-based compensation expense allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters of $0.2 million, legal and other professional and consulting fees of $0.9 million, and costs of $0.3 million billed to us under the Services Agreements, including personnel costs, overhead allocations and third-party costs. The remainder consisted primarily of general overhead expenses.

19


 

General and administrative expenses were $0.2 million for the three months ended September 30, 2017 and consisted primarily of share-based compensation expense allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters of approximately $30,000 and $0.1 million billed to us under the Services Agreements, including personnel costs, overhead allocations and third-party costs. The remainder consisted primarily of legal and other professional fees.

Comparison of the Six Months Ended September 30, 2018 and 2017

The following table sets forth our results of operations for the six months ended September 30, 2018 and 2017 (in thousands):

 

 

 

Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

48,009

 

 

$

7,883

 

General and administrative

 

 

7,788

 

 

 

553

 

Total operating expenses

 

 

55,797

 

 

 

8,436

 

Other expense

 

 

(80

)

 

 

(88

)

Loss before provision for income taxes

 

 

(55,877

)

 

 

(8,524

)

Provision for income taxes

 

 

60

 

 

 

4

 

Net loss

 

$

(55,937

)

 

$

(8,528

)

Research and Development Expenses

Research and development expenses increased by $40.1 million, to $48.0 million, for the six months ended September 30, 2018 compared to the six months ended September 30, 2017, primarily due to increases in expenses for the advancement of our Phase 3 EMPOWUR trial for the treatment of OAB, as well as employee-related expenses due to our increased headcount to support our clinical operations. Research and development expenses for the six months ended September 30, 2018 primarily consisted of program-specific research and development costs for vibegron of $42.8 million, which included CRO costs of $37.2 million, chemistry, manufacturing and controls costs of $3.5 million, and other third-party research and development costs of $2.1 million. The remainder consisted primarily of unallocated personnel-related costs of $2.2 million, share-based compensation expense for stock options granted to employees of $0.5 million, share-based compensation expense of $0.1 million allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters, costs of $2.1 million billed to us under the Services Agreements, including personnel and third-party costs, and in-process research and development expenses of $0.3 million under our license agreement with ICI.

Research and development expenses were $7.9 million for the six months ended September 30, 2017 and consisted primarily of program-specific research and development costs for vibegron of $3.5 million, which includes CRO costs of $1.8 million, chemistry, manufacturing and controls costs of $0.9 million, and other third-party research and development costs of $0.8 million. The remainder consisted primarily of unallocated share-based compensation expense of $1.7 million allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters, and costs of $2.7 million billed to us under the Services Agreements, including personnel and third-party costs.

General and Administrative Expenses

General and administrative expenses increased by $7.2 million, to $7.8 million, for the six months ended September 30, 2018 compared to the six months ended September 30, 2017, primarily due to an increase in employee salaries and benefits resulting from increased headcount to support our operations, as well as an increase in legal and other professional fees. General and administrative expenses for the six months ended September 30, 2018 consisted primarily of personnel-related costs of $2.8 million, share-based compensation expense for stock options granted to employees, board members and consultants of $0.7 million, share-based compensation expense allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters of $0.5 million, legal and other professional and consulting fees of $2.2 million, and costs of $1.2 million billed to us under the Services Agreements, including personnel costs, overhead allocations and third-party costs. The remainder consisted primarily of general overhead expenses.

General and administrative expenses were $0.6 million for the six months ended September 30, 2017 and consisted primarily of share-based compensation expense allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters of $0.1 million, and costs of $0.3 million billed to us under the Services Agreements, including personnel costs, overhead allocations and third-party costs. The remainder consisted primarily of legal and other professional and consulting fees.

Liquidity and Capital Resources

Overview

In October 2018, we completed our IPO, in which we sold 10,297,813 common shares, including the partial exercise of the underwriters’ over-allotment option to purchase additional shares, at a public offering price of $14.00 per common share. The net proceeds to us were approximately $131.8 million, after deducting $10.1 million in underwriting discounts and commissions and $2.3 million in estimated offering expenses.

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For the three and six months ended September 30, 2018, we had a net loss of $24.6 million and $55.9 million, respectively. As of September 30, 2018, we had an accumulated deficit of $120.1 million and a cash balance of $1.7 million and we have never generated any revenue. Prior to our IPO, all operations to date have been financed through capital contributions or short-term advances from RSL or its affiliates.

We expect to continue to incur significant and increasing operating losses at least for the next several years. We do not expect to generate product revenue until we successfully complete development and obtain regulatory approval for any of our current or future product candidates, which may never occur. Our net losses may fluctuate significantly from quarter-to-quarter and year-to-year, depending on the timing of our planned clinical trials, our expenditures on other research and development activities and our pre-commercialization efforts. We anticipate that our capital requirements will increase substantially as we:

 

advance and complete our Phase 3 EMPOWUR trial of vibegron for the treatment of OAB;

 

initiate and advance our planned Phase 3 trial of vibegron for the treatment of OAB in men with BPH;

 

initiate and advance our planned Phase 2a trial of vibegron for the treatment with IBS-associated pain;

 

initiate and advance our planned Phase 2a clinical trial for hMaxi-K for the treatment of OAB in patients who have not responded to oral pharmacological therapies;

 

seek to identify, acquire, develop and commercialize additional product candidates;

 

integrate acquired technologies into a comprehensive regulatory and product development strategy;

 

maintain, expand and protect our intellectual property portfolio;

 

hire scientific, clinical, quality control and administrative personnel;

 

add operational, financial and management information systems and personnel, including personnel to support our drug development efforts;

 

seek regulatory approvals for any product candidates that successfully complete clinical trials;

 

ultimately establish a sales, marketing and distribution infrastructure and scale up external manufacturing capabilities to commercialize any drug candidates for which we may obtain regulatory approval; and

 

operate as a public company.

Our primary use of cash is to fund the development of vibegron for the treatment of OAB, initiate and advance our planned Phase 3 clinical trial for vibegron for the treatment of OAB in men with BPH, initiate and advance our planned Phase 2a clinical trial for vibegron in patients with IBS-associated pain and initiate and advance our planned Phase 2a clinical trial for hMaxi-K for the treatment of OAB in patients who have not responded to oral pharmacological therapies. Based on anticipated spend and timing of expenditure assumptions, we currently believe that our existing cash, including the net proceeds from our recently completed IPO, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of these financial statements which includes the announcement of top-line data from our Phase 3 EMPOWUR trial which we expect to occur by the end of March 2019. We will need additional funding to complete the clinical development of, and seek regulatory approval for, vibegron in each of these indications, hMaxi-K, and commercially launch vibegron or hMaxi-K, if approved.

Until such time, if ever, as we can generate substantial product revenue from sales of vibegron, hMaxi-K or any future product candidate, we expect to finance our cash needs through a combination of equity offerings, debt financings and potential collaboration, license or development agreements. We do not currently have any committed external source of funds. To the extent that we raise additional capital through the sale of equity or convertible debt securities, your ownership interest will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect your rights as a common shareholder. Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may be required to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or to grant licenses on terms that may not be favorable to us. Adequate additional funding may not be available to us on acceptable terms, or at all. If we are unable to raise capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of vibegron or hMaxi-K, grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves or potentially discontinue operations.

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Cash Flows

The following table sets forth a summary of our cash flows for the six months ended September 30, 2018 and 2017 (in thousands):

 

 

 

Six Months Ended September 30,

 

 

 

2018

 

 

2017

 

Net cash used in operating activities

 

$

(44,344

)

 

$

(5,163

)

Net cash used in investing activities

 

 

(162

)

 

 

-

 

Net cash provided by financing activities

 

 

38,971

 

 

 

5,035

 

 

Operating Activities

For the six months ended September 30, 2018, $44.3 million of cash was used in operating activities. This was primarily attributable to a net loss of $55.9 million and an increase of $6.6 million in prepaid expenses and other current assets. These amounts were partially offset by an increase of $9.6 million in accounts payable and accrued expenses primarily due to the advancement of our Phase 3 EMPOWUR trial, $1.2 million in share-based compensation expense from stock options granted to employees, board members and consultants, $0.6 million in share-based compensation expense allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters, and an increase of $6.6 million in amounts due to RSL based on the allocation of personnel expenses associated with the development of our product pipeline and corporate matters.

For the six months ended September 30, 2017, $5.2 million of cash was used in operating activities. This was primarily attributable to a net loss of $8.5 million. This amount was partially offset primarily by an increase of $1.3 million in accounts payable and accrued expenses, $1.8 million in share-based compensation expense allocated to us by RSL based upon the relative percentage of time utilized by employees of RSL, RSG and RSI on our matters and an increase of $0.2 million in amounts due to RSL based on the allocation of personnel expenses associated with the formation of our company, development of our product pipeline and corporate matters.

Investing Activities

For the six months ended September 30, 2018, $0.2 million of cash was used in investing activities, all for the purchases of property and equipment.

For the six months ended September 30, 2017, there were no cash flows from investing activities.

Financing Activities

For the six months ended September 30, 2018, cash provided by financing activities of $39.0 million was primarily attributable to capital contributions from RSL of $40.2 million which was offset by payments for our IPO costs of $1.2 million.

For the six months ended September 30, 2017, cash provided by financing activities of $5.0 million was attributable to capital contributions from RSL.

Contractual Obligations and Commitments

During the six months ended September 30, 2018, there were no material changes outside of the ordinary course of business to the specified contractual obligations set forth in the contractual obligations table included in our final prospectus filed with the SEC on September 27, 2018 pursuant to Rule 424(b)(4) under the Securities Act, except that, during the six months ended September 30, 2018, we entered into a license agreement with ICI for the exclusive license to hMaxi-K. See Note 3, “License Agreement” to our unaudited condensed consolidated financial statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q for a further discussion of this agreement.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

Critical Accounting Policies and Significant Judgments and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America, or U.S. GAAP. The preparation of these financial statements requires us to make estimates, judgments and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the dates of the balance sheets and the reported amounts of expenses during the reporting periods. In accordance with U.S. GAAP, we evaluate our estimates and judgments on an ongoing basis. Significant estimates include assumptions used in the determination of some of our costs incurred under the Services Agreements with RSI and RSG and which costs are charged to research and development and general and administrative expense. 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. Actual results may differ from these estimates under different assumptions or conditions.

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During the six months ended September 30, 2018, there were no material changes to our critical accounting policies and use of estimates from those disclosed under the heading “Management’s discussion and analysis of financial condition and results of operations—Critical accounting policies and significant judgments and estimates” and in the footnotes to our audited consolidated financial statements for the year ended March 31, 2018 included in our final prospectus filed with the SEC on September 27, 2018 pursuant to Rule 424(b)(4) under the Securities Act.

Recent Accounting Pronouncements

For information regarding recently issued accounting pronouncements and the expected impact on our consolidated financial statements, see Note 2, “Summary of Significant Accounting Policies,” to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q.

JOBS Act

The JOBS Act was enacted in April 2017. Section 107(b) of the JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards. Thus, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected not to avail ourselves of this extended transition period, and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the potential loss arising from adverse changes in market rates and market prices such as interest rates, foreign currency rates and changes in the market value of equity instruments. As of September 30, 2018 and March 31, 2018, we had cash of $1.7 million and $7.2 million, respectively, consisting of non-interest-bearing deposits denominated in the U.S. dollar and Swiss franc. We do not believe we are currently exposed to any material market risk.

Item 4.Controls and Procedures.

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act), that are designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Disclosure controls and procedures include, without limitation, controls and procedures designed to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow for timely decisions regarding required disclosure.

Our management, with the participation of our Principal Executive Officer and our Principal Financial and Accounting Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2018, the end of the period covered by this Quarterly Report on Form 10-Q. Based on this evaluation, our Principal Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018 at the reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There was no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(f) and 15d-15(f) of the Exchange Act that occurred during the fiscal quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including our Principal Executive Officer and Principal Financial Officer, does not expect that our disclosure controls and procedures, or our internal controls, will prevent all error and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within Urovant Sciences Ltd. have been detected.

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PART II—OTHER INFORMATION

Item 1.Legal Proceedings.

From time to time, we may become involved in legal proceedings related to claims arising from the ordinary course of business. We are not currently a party to any material legal proceedings, and we are not aware of any pending or threatened legal proceedings against us that we believe could have a material adverse effect on our business, operating results, or financial condition.

Item 1A.   Risk Factors.

You should carefully consider the following risk factors, in addition to the other information contained in this Quarterly Report on Form 10-Q, including the section of this report titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our unaudited condensed consolidated financial statements and related notes. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business. If any of the events described in the following risk factors and the risks described elsewhere in this report occurs, our business, operating results and financial condition could be seriously harmed and the trading price of our common shares could decline. This Quarterly Report on Form 10-Q also contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of factors that are described below and elsewhere in this report.

Risks Related to Our Business, Financial Position and Capital Requirements

We have a limited operating history and have never generated any product revenue.

We are a clinical-stage biopharmaceutical company with a limited operating history. We were incorporated in January 2016, and our operations to date have been limited to organizing and staffing our company, acquiring rights to vibegron and hMaxi-K, and initiating our pivotal Phase 3 EMPOWUR trial of vibegron for the treatment of OAB. We have not yet demonstrated an ability to successfully complete a large-scale, pivotal clinical trial, obtain marketing approval, manufacture a commercial scale product, or arrange for a third party to do so on our behalf, or conduct sales and marketing activities necessary for successful product commercialization. Consequently, we have no meaningful operations upon which to evaluate our business and predictions about our future success or viability may not be as accurate as they could be if we had a longer operating history or a history of successfully developing and commercializing pharmaceutical products.

Our ability to generate product revenue and become profitable depends upon our ability to successfully complete the development of, and obtain the necessary regulatory approvals for, vibegron for the treatment of OAB or our other targeted indications, OAB in men with BPH and IBS-associated pain, as well as hMaxi-K for the treatment of OAB. We have never been profitable, have no products approved for commercial sale, and have not generated any product revenue.

Even if we receive regulatory approval for one of our product candidates, we do not know when or if it will generate product revenue. Our ability to generate product revenue depends on a number of factors, including, but not limited to, our ability to:

 

successfully complete clinical trials and obtain regulatory approval for the marketing of our product candidates;

 

add operational, financial and management information systems personnel, including personnel to support our clinical, manufacturing and planned future commercialization efforts and operations as a public company;

 

initiate and continue relationships with third-party manufacturers and have commercial quantities of our product candidates manufactured at acceptable cost and quality levels and in compliance with FDA and other regulatory requirements;

 

attract and retain experienced management and advisory teams;

 

launch commercial sales of our products, whether alone or in collaboration with others, including establishing sales, marketing and distribution systems for our product candidates;

 

set an acceptable price for our product candidates and obtain coverage and adequate reimbursement from third-party payors;

 

achieve broad market acceptance of our products in the medical community and with third-party payors and consumers; and

 

maintain, expand and protect our intellectual property portfolio.

Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses, or when or if, we will be able to achieve or maintain profitability. Our expenses could increase beyond expectations if we are required by the FDA or comparable non-U.S. regulatory authorities to perform studies or clinical trials in addition to those that we currently anticipate. Even if one of our product candidates is approved for commercial sale, we anticipate incurring significant costs associated with its commercial launch. If we cannot successfully execute any one of the foregoing, our business may not succeed.

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We expect to incur significant losses for the foreseeable future and may never achieve or maintain profitability.

Investment in biopharmaceutical product development is highly speculative because it entails substantial upfront capital expenditures and significant risk that a product candidate will fail to gain regulatory approval or fail to become commercially viable. We have never generated any product revenue, and we cannot estimate with precision the extent of our future losses. We do not currently have any products that are available for commercial sale and we may never generate product revenue or achieve profitability. Our net loss was $24.6 million and $55.9 million for the three and six months ended September 30, 2018, respectively. As of September 30, 2018, we had an accumulated deficit of $120.1 million.

We expect to continue to incur substantial and increasing losses through the commercialization of our product candidates, if approved. Our product candidates have not been approved for marketing anywhere in the world, and they may never receive such approval. As a result, we are uncertain when or if we will achieve profitability and, if so, whether we will be able to sustain it. Our ability to generate product revenue and achieve profitability is dependent on our ability to complete the development of, obtain necessary regulatory approvals for, and manufacture and successfully market our product candidates alone or in collaboration with others. We cannot assure you that we will be profitable even if we successfully commercialize our product candidates. If we do successfully obtain regulatory approval to market our product candidates, our revenue will be dependent upon, in part and among other things, the size of the markets in the territories for which we gain regulatory approval, the number of competitors in such markets, the accepted price for our product candidates and whether we own the commercial rights for those territories. If the indication approved by regulatory authorities is narrower than we expect, or the treatment population is narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from sales of our product candidates, even if approved. Even if we do achieve profitability, we may not be able to sustain or increase profitability on a quarterly or annual basis. Failure to become and remain profitable may adversely affect the market price of our common shares and our ability to raise capital and continue operations.

We expect our research and development expenses in connection with our development programs for our product candidates to continue to be significant. In addition, as we prepare for and if we obtain regulatory approval for our product candidates, we expect to incur increased sales, marketing and manufacturing expenses. As a result, we expect to continue to incur significant and increasing operating losses and negative cash flows for the foreseeable future. These losses had and will continue to have an adverse effect on our results of operations, financial position and working capital.

We are heavily dependent on the success of our lead product candidate, vibegron, and if vibegron does not successfully complete clinical development or receive regulatory approval, or is not successfully commercialized, our business may be harmed.

We currently have no products that are approved for commercial sale and may never be able to develop marketable products. We expect that a substantial portion of our efforts and expenditures over the next few years will be devoted to the advancement of vibegron, through clinical trials and the regulatory approval process, as well as the commercialization of vibegron following regulatory approval, if received. Accordingly, our business currently depends heavily on the successful completion of our Phase 3 EMPOWUR trial and subsequent regulatory approval and commercialization of vibegron.

We cannot be certain that vibegron will receive regulatory approval, or be successfully commercialized even if we receive regulatory approval. The research, testing, manufacturing, labeling, approval, sale, marketing and distribution of products are, and will remain, subject to extensive regulation by the FDA and other regulatory authorities in the United States and other countries that each have differing regulations. We are not permitted to market vibegron in the United States until we receive approval of an NDA, or in any foreign country until we receive the requisite approvals from the appropriate authorities in such countries for marketing authorization.

We have not yet demonstrated our ability to complete later-stage or pivotal clinical trials, and there can be no assurance that our Phase 3 EMPOWUR trial of vibegron for OAB will produce results sufficient for us to submit an NDA or differentiate our product from currently available OAB therapies. Our ongoing Phase 3 EMPOWUR trial may not demonstrate a statistically significant difference for the active 75 mg vibegron dose compared to placebo for the co-primary endpoints, which are reductions in frequency of micturitions and UUI episodes. Any failure to demonstrate a statistically significant change from baseline would adversely impact the potential for regulatory approval, if any, of vibegron in the United States. Furthermore, even if the statistical difference compared to placebo is achieved for these co-primary endpoints, we may not be able to demonstrate such differences for our secondary endpoints, such as changes in the frequency of urinary urgency episodes and total incontinence episodes and self-reported quality of life scores. As such, even if we were able to obtain approval for vibegron, these key secondary endpoints would not be mentioned in the U.S. label, which could potentially adversely affect product differentiation.

We have not submitted an NDA for vibegron, a Biologics License Application, or BLA, for hMaxi-K, or any other marketing authorizing application for any other product candidates to the FDA or any comparable application to any other regulatory authority. Obtaining approval of an NDA, BLA or similar regulatory approval is an extensive, lengthy, expensive and inherently uncertain process, and the FDA or other foreign regulatory authorities may delay, limit or deny approval of any of our current or future product candidates for many reasons, including:

 

we may not be able to demonstrate that our product candidates are effective as treatments for any of our targeted indications to the satisfaction of the FDA or other relevant regulatory authorities;

 

the relevant regulatory authorities may require additional pre-approval studies or clinical trials, which would increase our costs and prolong our development timelines;

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the results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or other relevant regulatory authorities for marketing approval;

 

the FDA or other relevant regulatory authorities may disagree with the number, design, size, conduct or implementation of our clinical trials;

 

the contract research organizations, or CROs, that we retain to conduct clinical trials may take actions outside of our control, or otherwise commit errors or breaches of protocols, that materially adversely impact our clinical trials and ability to obtain market approvals;

 

the FDA or other relevant regulatory authorities may not find the data from nonclinical studies or clinical trials sufficient to demonstrate that the clinical and other benefits of these products outweigh their safety risks;

 

the FDA or other relevant regulatory authorities may disagree with our interpretation of data or significance of results from the nonclinical studies and clinical trials of our product candidates, or may require that we conduct additional studies;

 

the FDA or other relevant regulatory authorities may not accept data generated from our clinical trial sites;

 

if our NDA or other foreign application is reviewed by an advisory committee, the FDA or other relevant regulatory authority, as the case may be, may have difficulties scheduling an advisory committee meeting in a timely manner or the advisory committee may recommend against approval of our application or may recommend that the FDA or other relevant regulatory authority, as the case may be, require, as a condition of approval, additional nonclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;

 

the FDA or other relevant regulatory authorities may require development of a risk evaluation and mitigation strategy, or REMS, or its equivalent, as a condition of approval;

 

the FDA or other relevant regulatory authorities may require additional post-marketing studies, which would
be costly;

 

the FDA or other relevant regulatory authorities may find the chemistry, manufacturing and controls data insufficient to support the quality of our product candidates;

 

the FDA or other relevant regulatory authorities may identify deficiencies in the manufacturing processes or facilities of our third-party manufacturers; or

 

the FDA or other relevant regulatory authorities may change their approval policies or adopt new regulations.

We will require additional capital to fund our operations, and if we fail to obtain necessary financing, we may not be able to complete the development and commercialization of vibegron.

We expect to spend substantial capital to complete the development of, seek regulatory approvals for and commercialize our product candidates. These expenditures will include costs associated with our license agreements with Merck and ICI pursuant to which we are obligated to cover the development and commercialization costs of vibegron and hMaxi-K, respectively, make payments in connection with the achievement of certain regulatory milestones prior to generating any product sales, make further payments upon the achievement of certain sales milestones and make tiered royalty payments in connection with the sale of approved products, if any.

We will require additional capital to complete the development and potential commercialization of our product candidates. Because the length of time and activities associated with successful development of our product candidates are highly uncertain, we are unable to estimate with certainty the actual funds we will require for development and any approved marketing and commercialization activities. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:

 

the timing, costs and results of our Phase 3 EMPOWUR trial of vibegron for the treatment of OAB;

 

the initiation, timing, costs and results of our proposed Phase 3 clinical trial of vibegron for the treatment of OAB in men with BPH and our proposed Phase 2a clinical trial of vibegron for the treatment of IBS-associated pain;

 

the timing, costs and results of our proposed Phase 2a clinical trial for hMaxi-K for the treatment of OAB in patients who have not responded to oral pharmacological therapies;

 

the outcome, timing and cost of meeting regulatory requirements established by the FDA and other comparable foreign regulatory authorities;

 

the cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;

 

the cost of defending potential intellectual property disputes, including patent infringement actions brought by third parties against us or any of our current or future product candidates;

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the effect of competing technological and market developments;

 

the cost and timing of completion of commercial-scale manufacturing activities;

 

the cost of establishing sales, marketing and distribution capabilities for our products in regions where we choose to commercialize our products on our own; and

 

the initiation, progress, timing and results of our commercialization of our product candidates, if approved for commercial sale.

We currently believe that our existing cash, including the net proceeds from our recently completed initial public offering, will be sufficient to fund our operating expenses and capital expenditure requirements for at least the next 12 months. This estimate is based on assumptions that may prove to be wrong, and we could use our available capital resources sooner than we currently expect. We do not have any committed external source of funds. We cannot be certain that additional capital will be available on acceptable terms, or at all. If we are unable to raise additional capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the development or commercialization of our current and any future product candidates, or potentially discontinue operations altogether. In addition, attempting to secure additional capital may divert the time and attention of our management from day-to-day activities and harm our product candidate development efforts. Because of the numerous risks and uncertainties associated with the development and potential commercialization of our product candidates, we are unable to estimate the amounts of increased capital outlays, operating expenditures and capital requirements associated with our current product development programs.

Raising additional funds by issuing securities may cause dilution to existing shareholders, raising additional funds through debt financings may involve restrictive covenants, and raising funds through lending and licensing arrangements may restrict our operations or require us to relinquish proprietary rights.

We expect that significant additional capital will be needed in the future to continue our planned operations. Until such time, if ever, that we can generate substantial product revenue, we expect to finance our cash needs through a combination of equity offerings, debt financings, strategic alliances and license and development agreements or other collaborations. To the extent that we raise additional capital by issuing equity securities, our existing shareholders’ ownership may experience substantial dilution, and the terms of these securities may include liquidation or other preferences that could adversely affect the rights of a common shareholder. Additionally, any agreements for future debt or preferred equity financings, if available, may involve covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise additional funds through collaborations, strategic alliances or marketing, distribution or licensing arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise develop and market ourselves.

We rely on our license agreements with Merck and ICI to provide rights to the core intellectual property relating to vibegron and hMaxi-K, respectively. Any termination or loss of significant rights under either agreement, would adversely affect our development or commercialization of these product candidates.

We have licensed our core intellectual property relating to vibegron and hMaxi-K from Merck and ICI, respectively. If, for any reason, our license agreement with Merck or ICI is terminated or we otherwise lose those rights, it would adversely affect our business. Our license agreements impose on us obligations relating to exclusivity, territorial rights, development, commercialization, funding, payment, diligence, sublicensing, insurance, intellectual property protection and other matters. If we breach any material obligations, or use the intellectual property licensed to us in an unauthorized manner, we may be required to pay damages to Merck or ICI, and Merck or ICI may have the right to terminate our license, which would result in us being unable to develop, manufacture and sell our product candidates.

Pursuant to our license agreement with Merck, Merck agreed to provide a supply of the vibegron compound to support the development of vibegron. Under this agreement, we may only use such material in preclinical and clinical work. The agreement also provides for Merck to reasonably assist us during a specified period of time with a technical transfer of the manufacturing process from Merck to us or our designee for production of vibegron. Although Merck has already transferred the manufacturing process for vibegron to us, we may still need additional assistance during scale-up of vibegron if we experience any setbacks with the manufacturing at a larger scale. If Merck fails to fulfill its continuing obligations under this agreement, if needed, or if we require additional assistance after their obligation to assist us expires, our development of vibegron could be significantly delayed or otherwise adversely affected.

Under our license agreement with ICI, ICI agreed to reasonably assist us during a specified period of time with a technical transfer of the manufacturing process from ICI to us or our designee for production of hMaxi-K. If ICI fails to fulfill its obligations under this agreement, or if we require additional assistance after their obligation to assist us expires, our manufacture and development of hMaxi-K could be significantly delayed or otherwise adversely affected.

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We may be required to make significant payments to third parties under our licensing and collaboration agreements for our current product candidates.

Under our agreements with Merck, Kyorin and ICI, we are subject to significant obligations, including payment obligations upon the achievement of specified milestones and payments based on product sales, as well as other material obligations. Certain of the milestone payments payable by us under these agreements are due upon events that will occur prior to our planned commercialization of our product candidates. Accordingly, we will be required to make such payments prior to the time at which we are able to generate any revenue, if any, from sales of our product candidates. There can be no assurance that we will have the funds necessary to make such payments, or be able to raise such funds when needed, on terms acceptable to us, or at all. Furthermore, if we are forced to raise additional funds, we may be required to delay, limit, reduce or terminate our product development or future commercialization efforts, or grant rights to develop and market product candidates that we would otherwise develop and market ourselves.

We currently have a limited number of employees who are employed by our wholly owned subsidiaries and we rely on RSI and RSG to provide various services for us.

As of September 30, 2018, we had no employees, and our wholly owned subsidiary, USI, had 40 employees. We currently rely in part on services provided by RSI and RSG, wholly owned subsidiaries of RSL, which provide services to us pursuant to the Services Agreements with RSI and RSG. Personnel and support staff who provide services to us under these Services Agreements are not required to treat management and administration of our business as their primary responsibility, or act exclusively for us and we do not expect them to do so. Under the Services Agreements, RSI and RSG have the discretion to determine who, among their employees, will perform services for us. RSI and RSG have limited resources. If either RSI or RSG fails to perform its obligations in accordance with the terms of the Services Agreements or to effectively manage services provided to us, the operations of our business may be adversely affected.

We may not be able to manage our business effectively if we are unable to attract and retain key personnel.

We may not be able to attract or retain qualified management and commercial, scientific and clinical personnel due to the intense competition for qualified personnel among biotechnology, pharmaceutical and other businesses. If we are not able to attract and retain necessary personnel to accomplish our business objectives, we may experience constraints that will significantly impede the achievement of our development objectives, our ability to raise additional capital and our ability to implement our business strategies.

We are highly dependent on the skills and leadership of our senior management team and key employees. Our senior management and key employees may terminate their positions with us at any time. If we lose one or more members of our senior management team or key employees, our ability to successfully implement our business strategies could be adversely affected. Replacing these individuals may be difficult, cause disruption and may take an extended period of time due to the limited number of individuals in our industry with the breadth of skills and experience required to develop, gain regulatory approval of and commercialize products successfully. Competition to hire from this limited pool is intense, and we may be unable to hire, train, retain or motivate additional key personnel. We do not maintain “key person” insurance for any members of our senior management team or other employees.

We will need to expand our organization, and we may experience difficulties in managing this growth, which could disrupt our operations.

We expect to hire, either directly, or through any current or future subsidiaries of ours, additional employees for our managerial, finance and accounting, clinical, scientific and engineering, regulatory, operational, manufacturing, medical affairs and sales and marketing teams. We may have difficulties identifying, hiring and integrating new personnel. Future growth would impose significant additional responsibilities on our management, including the need to identify, recruit, maintain, motivate and integrate additional employees, consultants and contractors. Also, our management may need to divert a disproportionate amount of its attention away from our day-to-day activities and devote a substantial amount of time to managing these growth activities. We may not be able to effectively manage the expansion of our operations across our entities, which may result in weaknesses in our infrastructure, give rise to operational mistakes, loss of business opportunities, loss of employees and reduced productivity among remaining employees. Our expected growth could require significant capital expenditures and may divert financial resources from other projects, such as the development of vibegron, hMaxi-K and any future product candidates. If our management is unable to effectively manage our growth, our expenses may increase more than expected, our ability to generate or grow revenue could be reduced, and we may not be able to implement our business strategy. Our future financial performance and our ability to commercialize our current or future product candidates and compete effectively will partly depend on our ability to effectively manage any future growth.

Many of the other pharmaceutical companies we compete against for qualified personnel and consultants have greater financial and other resources, different risk profiles and a longer operating history in the industry than we do. They also may provide more diverse opportunities and better chances for career advancement. Some of these opportunities may be more appealing to high-quality candidates and consultants than what we have to offer. If we are unable to continue to attract and retain high-quality personnel and consultants, the rate and success at which we can develop product candidates and our business will be harmed.

Our or our affiliates’ employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers and other vendors may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements, which could have an adverse effect on our results of operations.

We are exposed to the risk that our or our affiliates’ employees and contractors, including principal investigators, CROs, consultants, commercial collaborators, service providers and other vendors may engage in misconduct or other illegal activity. Misconduct by these parties

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could include intentional, reckless or negligent conduct or other unauthorized activities that violate the laws and regulations of the FDA or other similar regulatory bodies, including those laws that require the reporting of true, complete and accurate information to such regulatory bodies; manufacturing and the FDA’s Good Clinical Practice, or GCP, or current Good Manufacturing Practice, or cGMP, standards; federal, state and foreign healthcare fraud and abuse laws and data privacy; or laws that require the true, complete and accurate reporting of financial information or data. In particular, sales, marketing and other business arrangements in the healthcare industry are subject to extensive laws intended to prevent fraud, kickbacks, self-dealing, bribery, corruption, antitrust violations and other abusive practices. These laws may restrict or prohibit a wide range of business activities, including research, manufacturing, distribution, pricing, discounting, marketing and promotion, sales commission, customer incentive programs and other business arrangements. Activities subject to these laws also involve the improper use or misrepresentation of information obtained in the course of clinical trials, creating fraudulent data in our nonclinical studies or clinical trials or illegal misappropriation of drug product, which could result in regulatory sanctions and serious harm to our reputation. It is not always possible to identify and deter employee or third-party misconduct, and the precautions we take to detect and prevent this activity may not be effective in controlling unknown or unmanaged risks or losses or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to comply with such laws or regulations. Additionally, we are subject to the risk that a person, including any person who may have engaged in any fraud or misconduct, or government agency could allege such fraud or other misconduct, even if none occurred. Furthermore, we rely on our CROs and clinical trial sites to adequately report data from our ongoing clinical trials. For example, any failure by such parties to adequately report safety signals to us in a timely manner from any such trials may also affect the approvability of our product candidates or cause delays and disruptions for the approval of our product candidates, if any. If our or our affiliates’ employees, independent contractors, principal investigators, consultants, commercial collaborators, service providers or other vendors are alleged or found to be in violation of any such regulatory standards or requirements, or become subject to a corporate integrity agreement or similar agreement to resolve allegations of non-compliance with these laws and curtailment of our operations, it could have a significant impact on our business and financial results, including the imposition of significant civil, criminal and administrative penalties, damages, monetary fines, suspension or delay in our clinical trials, possible exclusion from participation in Medicare, Medicaid and other federal healthcare programs, FDA debarment, contractual damages, reputational harm, diminished profits and future earnings, and additional reporting requirements and oversight, any of which could adversely affect our ability to operate our business and our results of operations.

We may not be successful in our efforts to identify and acquire or in-license additional product candidates, or to enter into collaborations or strategic alliances for the development and commercialization of any such future product candidates.

Part of our strategy involves identifying and acquiring or in-licensing novel product candidates. The process by which we identify product candidates may fail to yield product candidates for clinical development for a number of reasons, including those discussed in these risk factors and also:

 

the process by which identify and decide to acquire product candidates may not be successful, including through the business development support we receive from RSL and its subsidiaries pursuant to the
Services Agreements;

 

potential product candidates may, upon further study, be shown to have harmful side effects or other characteristics that indicate that they are unlikely to be products that will receive marketing approval and achieve market acceptance;

 

potential product candidates may not be effective in treating their targeted diseases; or

 

the acquisition or in-licensing transactions can entail numerous operational and functional risks, including exposure to unknown liabilities, disruption of our business, or incurrence of substantial debt or dilutive issuances of equity securities to pay transaction consideration or costs, higher than expected acquisition or integration costs.

We may choose to focus our efforts and resources on a potential product candidate that ultimately proves to be unsuccessful. We also cannot be certain that, following an acquisition or in-licensing transaction, we will achieve the revenue or specific net income that justifies such transaction. Further, time and resources spent identifying, acquiring and developing potential product candidates may distract management’s attention from our primary business or other development programs. If we are unable to identify and acquire suitable product candidates for clinical development, this would adversely impact our business strategy, our financial position and share price.

In the future, we may also decide to collaborate with other pharmaceutical companies for the development and potential commercialization of our product candidates in the United States or other countries or territories of the world. We will face significant competition in seeking appropriate collaborators. We may not be successful in our efforts to establish a strategic partnership or other alternative arrangements for our product candidates because they may be deemed to be at too early of a stage of development for collaborative effort and third parties may not view our product candidates as having the requisite potential to demonstrate safety and efficacy. If and when we collaborate with a third party for development and commercialization of a product candidate, we can expect to relinquish some or all of the control over the future success of that product candidate to the third party. Our ability to reach a definitive agreement for a collaboration will depend, among other things, upon our assessment of the collaborator’s resources and expertise, the terms and conditions of the proposed collaboration and the proposed collaborator’s evaluation of a number of factors.

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International expansion of our business exposes us to business, legal, regulatory, political, operational, financial and economic risks associated with conducting business outside of the United States.

Part of our business strategy involves international expansion, including establishing and maintaining operations outside of the United States and establishing and maintaining relationships with health care providers, payors, government officials, distributors and manufacturers globally. Conducting business internationally involves a number of risks, including:

 

multiple conflicting and changing laws and regulations such as tax laws, export and import restrictions, employment laws, anti-bribery and anti-corruption laws, regulatory requirements and other governmental approvals, permits and licenses;

 

failure by us or our distributors to obtain appropriate licenses or regulatory approvals for the sale or use of our product candidates, if approved, in various countries;

 

difficulties in managing foreign operations;

 

complexities associated with managing multiple payor-reimbursement regimes or self-pay systems;

 

financial risks, such as longer payment cycles, difficulty enforcing contracts and collecting accounts receivable and exposure to foreign currency exchange rate fluctuations;

 

reduced protection for intellectual property rights;

 

natural disasters, political and economic instability, including wars, terrorism and political unrest, outbreak of disease, boycotts, curtailment of trade and other business restrictions; and

 

failure to comply with the United States Foreign Corrupt Practices Act, or FCPA, including its books and records provisions and its anti-bribery provisions, the United Kingdom Bribery Act 2010, or UK Bribery Act, and similar antibribery and anticorruption laws in other jurisdictions, for example by failing to maintain accurate information and control over sales or distributors’ activities.

Any of these risks, if encountered, could significantly harm our future international expansion and operations and, consequently, negatively impact our financial condition, results of operations and cash flows.

Our business and operations would suffer in the event of system failures, cyber-attack