urov-10q_20190630.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 June 30, 2019

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

98-1463899

(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 (0)207 400-3347

 

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

(Title of each class)

(Trading Symbol)

(Name of each exchange on which registered)

Common Shares, $0.000037453 par value

UROV

Nasdaq Global Select Market

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 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 August 12, 2019, the registrant had 30,340,432 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 June 30, 2019 and March 31, 2019

2

 

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2019 and 2018

3

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended June 30, 2019 and 2018

4

 

Condensed Consolidated Statements of Shareholders’ Equity (Deficit) for the Three Months Ended June 30, 2019 and 2018

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2019 and 2018

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

27

Item 4.

Controls and Procedures

27

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

29

Item 1A.

Risk Factors

29

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

69

Item 3.

Defaults Upon Senior Securities

69

Item 4.

Mine Safety Disclosures

69

Item 5.

Other Information

69

Item 6.

Exhibits

70

Signatures

71

 

 

 

i


PART I—FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)

UROVANT SCIENCES LTD.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

 

 

 

June 30, 2019

 

 

March 31, 2019

 

Assets

 

 

 

 

 

(Note 2)

 

Current assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

62,360

 

 

$

85,353

 

Restricted cash

 

 

243

 

 

 

243

 

Prepaid expenses and other current assets

 

 

8,416

 

 

 

12,914

 

Total current assets

 

 

71,019

 

 

 

98,510

 

Furniture and equipment, net

 

 

1,203

 

 

 

923

 

Operating lease right-of-use assets

 

 

3,386

 

 

 

 

Restricted cash, net of current portion

 

 

623

 

 

 

600

 

Other assets

 

 

21

 

 

 

88

 

Total assets

 

$

76,252

 

 

$

100,121

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

2,971

 

 

$

1,925

 

Accrued expenses

 

 

8,287

 

 

 

9,877

 

Due to Roivant Sciences Ltd.

 

 

97

 

 

 

15

 

Current portion of operating lease liabilities

 

 

92

 

 

 

 

Total current liabilities

 

 

11,447

 

 

 

11,817

 

Long-term debt

 

 

13,728

 

 

 

13,534

 

Operating lease liabilities, net of current portion

 

 

3,357

 

 

 

 

Total liabilities

 

 

28,532

 

 

 

25,351

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 9)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' equity

 

 

 

 

 

 

 

 

Common shares, par value $0.000037453 per share, 267,001,308 shares

   authorized, 30,340,432 and 30,322,911 issued and outstanding at

   June 30, 2019 and March 31, 2019, respectively

 

 

1

 

 

 

1

 

Common shares subscribed

 

 

(1

)

 

 

(1

)

Accumulated other comprehensive income

 

 

457

 

 

 

269

 

Additional paid-in capital

 

 

251,279

 

 

 

250,032

 

Accumulated deficit

 

 

(204,016

)

 

 

(175,531

)

Total shareholders' equity

 

 

47,720

 

 

 

74,770

 

Total liabilities and shareholders' equity

 

$

76,252

 

 

$

100,121

 

 

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

2


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development(1)

 

$

22,014

 

 

$

27,965

 

General and administrative(2)

 

 

5,465

 

 

 

3,504

 

Total operating expenses

 

 

27,479

 

 

 

31,469

 

Other income (expense):

 

 

 

 

 

 

 

 

Interest expense, net

 

 

(513

)

 

 

 

Loss on disposal of furniture and equipment

 

 

(236

)

 

 

 

Other income (expense)

 

 

(190

)

 

 

229

 

Loss before provision for income taxes

 

 

(28,418

)

 

 

(31,240

)

Provision for income taxes

 

 

67

 

 

 

55

 

Net loss

 

$

(28,485

)

 

$

(31,295

)

Net loss per common share—basic and diluted

 

$

(0.94

)

 

$

(1.56

)

Weighted average common shares outstanding—basic and diluted

 

 

30,325,169

 

 

 

20,025,098

 

 

(1)

Includes $0 and $2,431 of costs allocated from Roivant Sciences Ltd. during the three months ended June 30, 2019 and 2018, respectively. Also includes share-based compensation expense (see Note 8).

(2)

Includes $60 and $893 of costs allocated from Roivant Sciences Ltd. during the three months ended June 30, 2019 and 2018, respectively. Also includes share-based compensation expense (see Note 8).

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

3


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Net loss

 

$

(28,485

)

 

$

(31,295

)

Other comprehensive income (loss):

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

188

 

 

 

(220

)

Total other comprehensive income (loss)

 

 

188

 

 

 

(220

)

Comprehensive loss

 

$

(28,297

)

 

$

(31,515

)

 

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

4


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Shareholders’ Equity (Deficit)

(in thousands, except share data)

 

 

 

Common Shares

 

 

Common

Shares

 

 

Shareholder

 

 

Additional

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Subscribed

 

 

Receivable

 

 

Paid-in Capital

 

 

Deficit

 

 

Income

 

 

Equity

 

Balance at March 31, 2019

 

 

30,322,911

 

 

$

1

 

 

$

(1

)

 

$

 

 

$

250,032

 

 

$

(175,531

)

 

$

269

 

 

$

74,770

 

Capital contributions from RSI and RSG

 

 

 

 

 

 

 

 

 

 

 

 

 

 

130

 

 

 

 

 

 

 

 

 

130

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

1,047

 

 

 

 

 

 

 

 

 

1,047

 

Exercise of stock options

 

 

17,521

 

 

 

 

 

 

 

 

 

 

 

 

70

 

 

 

 

 

 

 

 

 

70

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

188

 

 

 

188

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(28,485

)

 

 

 

 

 

(28,485

)

Balance at June 30, 2019

 

 

30,340,432

 

 

$

1

 

 

$

(1

)

 

$

 

 

$

251,279

 

 

$

(204,016

)

 

$

457

 

 

$

47,720

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

 

Common

Shares

 

 

Shareholder

 

 

Additional

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Subscribed

 

 

Receivable

 

 

Paid-in Capital

 

 

Deficit

 

 

Income (Loss)

 

 

Equity (Deficit)

 

Balance at March 31, 2018

 

 

20,025,098

 

 

$

1

 

 

$

(1

)

 

$

(1,310

)

 

$

72,562

 

 

$

(64,185

)

 

$

7

 

 

$

7,074

 

Capital contributions

 

 

 

 

 

 

 

 

 

 

 

 

 

 

18,500

 

 

 

 

 

 

 

 

 

18,500

 

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

320

 

 

 

 

 

 

 

 

 

320

 

Capital contribution – share-based

   compensation expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

486

 

 

 

 

 

 

 

 

 

486

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(220

)

 

 

(220

)

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,295

)

 

 

 

 

 

(31,295

)

Balance at June 30, 2018

 

 

20,025,098

 

 

$

1

 

 

$

(1

)

 

$

(1,310

)

 

$

91,868

 

 

$

(95,480

)

 

$

(213

)

 

$

(5,135

)

 

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

 

5


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Cash Flows

(in thousands)

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(28,485

)

 

$

(31,295

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

54

 

 

 

40

 

Share-based compensation expense

 

 

1,047

 

 

 

806

 

Amortization of debt discount and issuance costs

 

 

194

 

 

 

 

Amortization of operating lease right-of-use assets

 

 

63

 

 

 

 

Loss on disposal of furniture and equipment

 

 

236

 

 

 

 

Unrealized foreign currency translation adjustment

 

 

188

 

 

 

(220

)

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

4,498

 

 

 

(692

)

Other assets

 

 

67

 

 

 

 

Due to Roivant Sciences Ltd.

 

 

19

 

 

 

1,194

 

Accounts payable

 

 

834

 

 

 

4,209

 

Accrued expenses

 

 

(1,220

)

 

 

5,197

 

Net cash used in operating activities

 

 

(22,505

)

 

 

(20,761

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of furniture and equipment

 

 

(278

)

 

 

(115

)

Net cash used in investing activities

 

 

(278

)

 

 

(115

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from capital contributions from Roivant Sciences Ltd.

 

 

130

 

 

 

18,500

 

Proceeds from exercise of stock options

 

 

70

 

 

 

 

Debt financing costs paid

 

 

(387

)

 

 

 

Initial public offering costs paid

 

 

 

 

 

(565

)

Net cash (used in) provided by financing activities

 

 

(187

)

 

 

17,935

 

Net change in cash, cash equivalents and restricted cash

 

 

(22,970

)

 

 

(2,941

)

Cash, cash equivalents and restricted cash—beginning of period

 

 

86,196

 

 

 

7,194

 

Cash, cash equivalents and restricted cash—end of period

 

$

63,226

 

 

$

4,253

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Furniture and equipment included in accounts payable and accrued expenses

 

$

229

 

 

$

 

Furniture and equipment included in due to Roivant Sciences Ltd.

 

$

63

 

 

$

 

Unpaid initial public offering costs included in accounts payable

 

$

 

 

$

288

 

Supplemental disclosure of cash paid:

 

 

 

 

 

 

 

 

Income taxes

 

$

 

 

$

 

Interest

 

$

385

 

 

$

 

 

The accompanying notes are an integral part of these unaudited 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 abdominal pain due to irritable bowel syndrome. The Company’s second product candidate, URO-902, is a 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, (3) Urovant Sciences, Inc. (“USI”), a Delaware corporation based in the United States of America, and in March 2019 incorporated as its wholly owned subsidiaries (4) Urovant Treasury Holdings, Inc. (“UTH”), a Delaware corporation based in the United States of America, and (5) Urovant Sciences Treasury, Inc. (“UST”), 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 URO-902, 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. URO-902 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 prior to the Company’s initial public offering, which was completed in October 2018, were paid by Roivant Sciences Ltd., inclusive of its wholly owned subsidiaries (“RSL”), and were reimbursed by the Company including amounts pursuant to services agreements with Roivant Sciences, Inc. (“RSI”) and Roivant Sciences GmbH (“RSG”).

The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty. 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 and cash equivalents, together with the financing commitment currently available to be drawn down by the Company, assuming no events of default, of $30 million from Hercules Capital, Inc. (see Note 4), will be sufficient to fund its committed operating expenses and capital expenditure requirements for at least the next 12 months from the date of issuance of these condensed consolidated financial statements. This estimate is based on the Company’s current assumptions, including assumptions relating to its ability to manage its’ spend, its ability to draw down the $30 million from Hercules Capital, Inc., and that 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 URO-902. 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. The Company’s agreement with Hercules Capital, Inc. involves, and any agreements for future debt or preferred equity financings, if available, may involve, covenants limiting or restricting the Company’s ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. If the Company is unable to obtain such additional financing, operations would need to be scaled back or discontinued and substantial uncertainty would exist with respect to the Company’s ability to continue as a going concern.

The Company’s future operations are highly dependent on a combination of factors, including (1) the success of its research and development programs; (2) the timely and successful completion of any additional financing; (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, URO-902 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 June 30, 2019, the condensed consolidated statements of operations, comprehensive loss and cash flows for the three months ended June 30, 2019 and 2018 and the condensed consolidated statements of shareholders’ equity (deficit) for the three months ended June 30, 2019 and 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, 2019 included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the Securities and Exchange Commission (“SEC”) on June 14, 2019.

The condensed consolidated balance sheet at March 31, 2019 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 months ended June 30, 2019 are not necessarily indicative of the results to be expected for the year ending March 31, 2020 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, USI, UTH and UST, USL’s wholly owned subsidiaries. USL has no unconsolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

There have been no significant changes in the Company's accounting policies from those disclosed in its Annual Report on Form 10-K for the fiscal year ended March 31, 2019 filed with the SEC on June 14, 2019 other than the adoption of ASU No. 2016-02, Leases (Topic 842) (“ASU No. 2016-02”).      

[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 materially 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.

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, cash equivalents consisting of money market accounts, restricted cash, accounts payable, accrued expenses, amounts due to and from RSL and long-term debt. The carrying value of the Company’s long-term debt approximates fair value based on current interest rates for similar types of borrowings and is included in Level 2 of the fair value hierarchy. The remaining financial instruments are stated at their respective historical carrying amounts, which approximates fair value due to their short-term nature.

8


 

[D] Cash, cash equivalents, and restricted cash:

Cash and cash equivalents include cash deposits in banks and all highly liquid investments that are readily convertible to cash without penalty. The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. The Company maintains cash deposits and cash equivalents in highly-rated, federally-insured financial institutions in excess of federally insured limits. The Company has established guidelines relative to diversification and maturities to maintain liquidity and preservation of capital. The Company has not experienced any credit losses related to these financial instruments and does not believe that it is exposed to any significant credit risk related to these instruments.

Restricted cash consists of legally restricted non-interest-bearing deposit accounts held as compensating balances against the Company’s corporate credit card program and irrevocable standby letters of credit connected to its office leases (see Note 10)Restricted cash classified as a current asset consists of the restricted deposit account relating to the Company’s corporate credit card agreement. Restricted cash classified as a long-term asset consists of the restricted deposit account related to the irrevocable standby letters of credit.

Cash as reported in the condensed consolidated statements of cash flows includes the aggregate amounts of cash, cash equivalents, and restricted cash as presented on the condensed consolidated balance sheets. Cash as reported in the condensed consolidated statements of cash flows consists of (in thousands):

 

 

 

June 30, 2019

 

 

June 30, 2018

 

Cash and cash equivalents

 

$

62,360

 

 

$

4,253

 

Restricted cash

 

 

866

 

 

 

 

Cash, cash equivalents and restricted cash

 

$

63,226

 

 

$

4,253

 

 

[E] Leases:

In accordance with ASU No. 2016-02, as adopted on April 1, 2019, the Company determines if an arrangement is a lease at inception. Operating lease right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset during the lease term, and operating lease liabilities represent the Company’s obligation to make lease payments arising from the lease. Operating leases are included in ROU assets, current operating lease liabilities, and long-term operating lease liabilities on our condensed consolidated balance sheets.

Operating lease ROU assets and lease liabilities are initially recognized based on the present value of the future minimum lease payments over the lease term at commencement date calculated using the Company’s incremental borrowing rate applicable to the lease asset, unless the implicit rate is readily determinable. Operating lease ROU assets also include any lease payments made at or before lease commencement and exclude any lease incentives received. The Company determines the lease term as the noncancellable period of the lease, and may include options to extend or terminate the lease when it is reasonably certain that the Company will exercise that option. Leases with a term of 12 months or less are not recognized on the condensed consolidated balance sheet. The Company’s leases do not contain any residual value guarantees. Lease expense for minimum lease payments is recognized on a straight-line basis over the lease term.

The Company accounts for lease and non-lease components as a single lease component for all its leases.

Prior to April 1, 2019, at the inception of a lease, the Company evaluated the lease agreement to determine whether the lease was an operating or capital lease. For operating leases, the Company recognized rent expense on a straight-line basis over the lease term and recorded the difference between cash rent payments and the recognition of rent expense as a deferred liability. Where lease agreements contained rent escalation clauses, rent abatements and/or concessions, such as rent holidays and tenant improvement allowances, the Company applied them in the determination of straight-line rent expense over the lease term.

[F] 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 shareholders by the diluted weighted-average number of common shares outstanding during the period calculated in accordance with the treasury stock method. In periods in which the Company reports a net loss, all common share equivalents are deemed anti-dilutive such that basic net loss per common share and diluted net loss per common share are equivalent. Potentially dilutive common shares have been excluded from the diluted net loss per common share computations in all periods presented because such securities have an anti-dilutive effect on net loss per common share due to the Company’s net loss. There are no reconciling items used to calculate the weighted-average number of total common shares outstanding for basic and diluted net loss per common share data.

9


 

At June 30, 2019 and 2018, potentially dilutive securities were as follows:

 

 

 

June 30,

 

 

 

2019

 

 

2018

 

Options

 

 

4,031,231

 

 

 

2,422,158

 

Restricted stock units (unvested)

 

 

5,000

 

 

 

 

Warrants

 

 

33,259

 

 

 

 

Total

 

 

4,069,490

 

 

 

2,422,158

 

 

[G] Recently adopted accounting pronouncements:

In February 2016, the FASB issued 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 requires 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. The Company adopted this standard on April 1, 2019 using the optional modified retrospective transition method and applied the transition package of practical expedients allowed by the standard. Comparative periods were not restated. Upon adoption, on April 1, 2019, the Company recorded a $0.2 million increase in operating lease right-of-use assets and a $0.2 million increase in operating lease liabilities. The adoption of the new standard did not materially impact the Company’s consolidated results of operations and cash flows and did not have an impact on the Company’s beginning accumulated deficit balance.

ASU No. 2016-02 provides a number of optional practical expedients in transition. For leases that commenced prior to April 1, 2019, the Company elected the following package of practical expedients when assessing the transition impact: (1) not to reassess whether any expired or existing contracts are or contain leases; (2) not to reassess the lease classification for any expired or existing leases; and (3) not to reassess initial direct costs for any existing leases. The Company also elected to: (1) use the total lease term in its initial incremental borrowing rate calculation; (2) combine its lease and non-lease components and account for them as a single lease component; and (3) not apply the use of hindsight in determining the lease term when considering lessee options to extend or terminate the lease and to purchase the underlying asset. For additional information regarding the Company’s leases, see Note 10.

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 adoption of ASU No. 2018-07 on April 1, 2019 did not have a material 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. 2018-09”), 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 adoption of ASU No. 2018-19 on April 1, 2019 did not have a material impact on the Company's consolidated financial position, results of operations and related disclosures.

Other recent accounting pronouncements issued by the FASB (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by management to, have a material impact on the Company’s present or future consolidated financial position, results of operations or cash flows.

[H] Recently issued accounting pronouncements:

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820) Disclosure Framework Changes to the Disclosure Requirements for Fair Value Measurement, (“ASU No. 2018-13”) which provides guidance that remove, modify and add to the disclosure requirements related to fair value measurements. The guidance removes the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 assets, the policy for timing and transfers between levels and the valuation process for Level 3 fair value measurements. The guidance modifies disclosure requirements for investments in certain entities that calculate net asset value and clarifies the purpose of the measurement uncertainty disclosure. The guidance adds requirements to disclose changes in unrealized gains or losses included in other comprehensive income for recurring Level 3 fair value measurements and to disclose the range and weighted average used to develop significant unobservable inputs for Level 3 fair value measurements. The guidance is effective for fiscal years beginning after December 15, 2019 and interim periods within those fiscal years. The Company is currently evaluating the new standard and its impact on the Company’s consolidated financial position, results of operations and related disclosures.

10


 

Note 3—Accrued expenses

Accrued expenses at June 30, 2019 and March 31, 2019 consist of the following (in thousands):

 

 

 

June 30, 2019

 

 

March 31, 2019

 

Research and development expenses

 

$

6,921

 

 

$

4,993

 

General and administrative expenses

 

 

331

 

 

 

615

 

Compensation-related expenses

 

 

729

 

 

 

3,398

 

Professional services expenses

 

 

282

 

 

 

821

 

Other expenses

 

 

24

 

 

 

50

 

Total accrued expenses

 

$

8,287

 

 

$

9,877

 

 

 

 

Note 4—Long-term debt

In February 2019, the Company and its subsidiaries, UHL, USG (collectively with the Company and UHL, the “Borrowers”) and USI (collectively with the Borrowers, the “Loan Parties”) entered into a secured debt financing agreement (the “Hercules Loan Agreement”) with Hercules Capital, Inc., as agent and lender (the “Administrative Agent”) in the amount of $100 million (the “Term Loans”). A first tranche of $15 million, or net cash proceeds of $14.1 million, was funded upon execution of the Hercules Loan Agreement, and the remaining $85 million is available in three additional optional tranches through June 30, 2021, subject to certain terms and conditions, including the achievement of certain milestones.

The Term Loans bear a variable interest rate equal to the greater of (i) 10.15% or (ii) the lesser of (x) the prime rate as reported in The Wall Street Journal plus 4.65% and (y) 12.15%. The interest rate on the Term Loans was 10.15% at June 30, 2019. The Company is obligated to make monthly payments of accrued interest for the first 12 months from closing (the “Interest-only Period”), followed by monthly installments of principal and interest through the maturity date. Pursuant to the terms of the Hercules Loan Agreement, the end of the Interest-only Period has been extended from April 1, 2020 to October 1, 2020 as a result of the achievement of a clinical milestone. The Interest-only Period may be extended an additional six months to April 1, 2021 if certain milestones are met.

The Term Loans mature 36 months from closing and include an option for the Loan Parties to extend the maturity date up to 18 months if certain defined milestones are met. Pursuant to the terms of the Hercules Loan Agreement, the Term Loan Maturity Date (as defined in the Hercules Loan Agreement) has been extended from March 1, 2022 to March 1, 2023 as a result of the achievement of a clinical milestone. The Loan Parties have the option to prepay the Terms Loans and the prepayment of the Term Loans will be subject to, in some circumstances, a prepayment charge equal to 2% in the first 12 months from closing, 1% in the second 12 months, and 0% thereafter. Upon repayment of the Term Loans, the Company will be obligated to pay an end of term charge in an amount equal to 4.25% of the amount of the Term Loans actually advanced.

The Company’s obligations under the Hercules Loan Agreement are fully and unconditionally guaranteed by the subsidiaries of the Borrowers, including USI. The Loan Parties’ obligations under the Hercules Loan Agreement are secured by a first priority security interest on substantially all of their personal property, other than intellectual property, and subject to certain other exceptions. The Hercules Loan Agreement contains certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings. The agreement also contains a minimum cash covenant that requires the Loan Parties to hold certain minimum cash balances in the event that either certain milestones are not achieved or the market capitalization of the Company is below a certain threshold for certain periods of time. Such minimum cash covenant ceases to apply if the Company achieves certain clinical development and financial milestones as set forth in the Hercules Loan Agreement. The Hercules Loan Agreement also contains customary events of default (subject, in certain instances, to specified grace periods). If any event of default occurs, the principal, premium, if any, interest and any other monetary obligations on all the then outstanding amounts under the Term Loans may become due and payable immediately. Upon the occurrence of an event of default, a default interest rate of an additional 5% may be applied to the outstanding principal balance, and the Administrative Agent may declare all outstanding obligations immediately due and payable (subject, in certain instances, to specified grace periods) and take such other actions as set forth in the Hercules Loan Agreement. Upon the occurrence of certain bankruptcy and insolvency events, the obligations under the Hercules Loan Agreement would automatically become due and payable. The Company is in compliance with the covenants under the Hercules Loan Agreement as of June 30, 2019.

In connection with each funding of the Term Loans, the Company is required to issue to the Administrative Agent a warrant (the “Warrants”) to purchase a number of the Company’s common shares equal to 2% of the principal amount of the relevant Term Loan funded divided by the exercise price, which will be based on the closing price of the Company’s common shares on the business day immediately prior to the relevant Term Loan funding (or for the first and second tranches only at the lower of (i) $9.02 per share or (ii) the closing price of the Company’s common shares on the business day immediately prior to the relevant Term Loan funding). The Warrants may be exercised on a cashless basis, and are immediately exercisable through the seventh anniversary of the applicable funding date. The number of common shares for which each Warrant is exercisable and the associated exercise price are subject to certain proportional adjustments as set forth in such Warrant.

11


 

In connection with the first tranche of the Term Loans, the Company issued a Warrant to the Administrative Agent, exercisable for an aggregate of 33,259 of the Company’s common shares at an exercise price of $9.02 per share. The Company accounted for the Warrant as an equity instrument since it was indexed to the Company’s common shares and met the criteria for classification in shareholders’ equity. The relative fair value of the Warrant related to the first tranche funding was approximately $0.2 million and was treated as a discount to the Term Loan. This amount is being amortized to interest expense using the effective interest method over the life of the Term Loan. The Company estimated the fair value of the Warrant using the Black-Scholes option-pricing model based on the following key assumptions:

 

 

 

Tranche 1

 

Exercise price

 

$9.02

 

Common share price on date of issuance

 

$10.50

 

Expected volatility

 

69.6%

 

Contractual term, in years

 

7.00

 

Risk-free interest rate

 

2.55%

 

Expected dividend yield

 

—%

 

 

The Company recorded the first tranche of the Term Loan at a discount of $1.8 million, including the proceeds allocated to the related Warrant, and incurred financing costs of $0.4 million relating to the Hercules Loan Agreement which are recorded as an offset to long-term debt on the Company’s consolidated balance sheet. The debt discount and deferred financing costs are being amortized over the term of the debt using the effective interest method, and are included in interest expense in the Company’s condensed consolidated statement of operations. During the three months ended June 30, 2019, interest expense included $0.2 million of amortized debt discount and issuance costs related to the Term Loan.

Outstanding debt obligations to Hercules Capital, Inc. are as follows (in thousands):

 

 

 

June 30, 2019

 

Principal amount

 

$

15,000

 

End of term charge

 

 

638

 

Less: unamortized debt discount and issuance costs

 

 

(1,910

)

Loan payable less unamortized debt discount and issuance costs

 

 

13,728

 

Less: current maturities

 

 

 

Long-term debt, net of unamortized debt discount and issuance costs

 

$

13,728

 

 

Note 5—Related party transactions

[A] Services agreements:

In May 2017, the Company entered into a 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.

In addition, 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 provisioning of services by RSG to USG related to clinical development, administrative and finance and accounting activities. The Company refers to the amended and restated services agreements with RSI and RSG, collectively, as the Services Agreements.

Under the Services Agreements, for the three months ended June 30, 2019 and 2018, the Company incurred expenses of $0.06 million and $2.8 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 and $2.0 million, and amounts included in general and administrative expenses totaled $0.06 million and $0.8 million during the three months ended June 30, 2019 and 2018, respectively.  

[B] 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

12


 

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.

[C] 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.

[D] Operating lease:

In June 2019, the Company entered into a sublease agreement with our affiliate, RSI, for 2,784 square feet of office space located in Durham, North Carolina that expires in July 2025. The lease has scheduled rent increases each year and the total lease payment obligations under the agreement is $0.6 million.  See Note 10 for more details on the lease.

Note 6—Income taxes

The Company is not subject to taxation under the laws of Bermuda since it was organized as a Bermuda Exempted Limited Company, for which there is no current tax regime. The Company’s provision for income taxes is primarily based on income taxes in the U.S. for federal and state taxes.

The Company’s effective tax rate for the three months ended June 30, 2019 and 2018 was (0.24)% and (0.18)%, respectively. The effective tax rate is driven by the Company’s jurisdictional earnings by location and a valuation allowance that eliminates the Company’s global net deferred tax assets.

The Company assesses the realizability of its deferred tax assets at each balance sheet date based on available positive and negative evidence in order to determine the amount which is more likely than not to be realized and records a valuation allowance as necessary.

Note 7—Shareholders’ equity

Capital contributions:

For the three months ended June 30, 2019 and 2018, RSL made cash capital contributions of $0.1 million and $18.5 million, respectively.

Note 8—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 the Company’s 2017 Plan will be deemed to refer to the 2017 Plan, as amended and restated, unless context otherwise requires.    

Pursuant to the “evergreen” provision contained in the 2017 Plan, the number of common shares reserved for issuance under the 2017 Plan automatically increases on November 1 of each year, commencing on November 1, 2018 and ending on November 1, 2028, in an amount equal to 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 June 30, 2019, a total of 229,679 common shares were available for future issuance under the 2017 Plan.

13


 

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

June 30, 2019

 

 

Three Months

Ended

June 30, 2018

Risk-free interest rate

 

1.95% - 2.30%

 

 

2.73% - 2.96%

Expected term, in years

 

 

6.11

 

 

6.00 - 6.25

Expected volatility

 

64.4% - 65.1%

 

 

67.9% - 68.4%

Expected dividend yield

 

—%

 

 

—%

 

The following table presents a summary of stock option activity and data under the Company’s 2017 Plan through June 30, 2019 (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, 2019

 

 

4,058,866

 

 

$

6.10

 

 

$

3.90

 

 

 

9.13

 

 

 

 

 

Granted

 

 

85,800

 

 

$

8.07

 

 

$

4.86

 

 

 

 

 

 

 

 

 

Exercised

 

 

(17,521

)

 

$

4.01

 

 

$

2.57

 

 

 

 

 

 

 

 

 

Forfeited

 

 

(95,914

)

 

$

6.16

 

 

$

4.18

 

 

 

 

 

 

 

 

 

Options outstanding at June 30, 2019

 

 

4,031,231

 

 

$

6.15

 

 

$

3.92

 

 

 

8.90

 

 

$

8,734

 

Options exercisable at June 30, 2019

 

 

894,638

 

 

$

4.45

 

 

$

2.84

 

 

 

8.42

 

 

$

3,133

 

 

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 June 30, 2019. At June 30, 2019, there were 894,638 vested or exercisable options outstanding. During the three months ended June 30, 2019, the Company granted options to purchase 85,800 common shares to certain employees of the Company with a weighted-average exercise price of $8.07 under the 2017 Plan.  The aggregate intrinsic value of options exercised to purchase 17,521 common shares during the three months ended June 30, 2019 was $0.07 million.

Restricted stock unit (“RSUs”):

A summary of restricted stock unit activity under the Company’s 2017 Plan through June 30, 2019 is as follows:

 

 

 

Number of Shares

 

Unvested balance at March 31, 2019

 

 

5,000

 

Granted

 

 

 

Unvested balance at June 30, 2019

 

 

5,000

 

 

[A] Share-based compensation expense:

 

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

 

 

Three Months

Ended

June 30, 2019

 

 

Three Months

Ended

June 30, 2018

 

Share-based compensation recognized as:

 

 

 

 

 

 

 

 

Research and development

 

$

265

 

 

$

452

 

General and administrative

 

 

782

 

 

 

354

 

Total

 

$

1,047

 

 

$

806

 

 

Share-based compensation expense is included in research and development and general and administrative expenses in the accompanying 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 8[B].

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

For the three months ended June 30, 2019 and 2018, the Company recorded share-based compensation expense related to stock options and restricted stock units issued to employees, directors and consultants of $1.0 million and $0.3 million, 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.

14


 

Total unrecognized share-based compensation expense was approximately $12.1 million at June 30, 2019 and is expected to be recognized over a weighted-average period of 3.00 years.

[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 and $0.5 million for the three months ended June 30, 2019 and 2018, 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 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 market condition, if both are achieved within the requisite service period. As of June 30, 2019, the performance condition had not been met and was deemed not probable of being met.

For the three months ended June 30, 2019 and 2018, the Company recorded no share-based compensation expense related to the RSUs that were issued. At June 30, 2019, 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.

Note 9—Commitments and contingencies

The Company entered into certain commitments under the Merck license agreement, the ICI license agreement, 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. 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.

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 months ended June 30, 2019, there were no 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, 2019 included in the Company’s Annual Report on Form 10-K filed with the SEC on June 14, 2019 other than the lease agreement entered into in June 2019 with RSI (see Note 10).

Note 10—Leases

In December 2017, the Company entered into an operating lease agreement for office space which consisted of approximately 8,038 square feet located in Irvine, California. The lease term was 26 months beginning January 2018 through February 2020, with no option to extend the term. In connection with this lease, the Company recognized an operating lease right-of-use asset of $0.2 million and an aggregate operating lease liability of $0.2 million in the accompanying condensed consolidated balance sheet on April 1, 2019. The estimated incremental borrowing rate was 13.4%. This lease and all future obligations under this lease were terminated in June 2019 upon the commencement of the Company’s new office lease agreement and, as result, the remaining operating lease liability and right-of-use asset on the lease termination date were written off. The net impact to the condensed consolidated statement of operations was not material.

15


 

In November 2018, the Company entered into an operating lease for office space in Irvine, California for approximately 21,489 square feet. The lease term for the operating lease is seven years with options to terminate after five years and to extend the lease term for an additional five years which are both not reasonably certain of exercise. Subject to rent abatement for the first through five months of the lease, the Company will be required to pay $54,367 per month for rent for the first twelve months of the lease term which will increase at a fixed rate of approximately 3% per year. The lease further provides that we are obligated to pay certain variable costs, including common area maintenance expenses. The lease commenced in June 2019. The Company recognized an operating lease right-of-use asset of $3.0 million and an operating lease liability of $3.1 million as of June 30, 2019. In connection with the lease, the Company maintains a standby letter of credit for the benefit of the landlord in the amount of $0.6 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash as of June 30, 2019 and March 31, 2019. The remaining lease term is 6.9 years at June 30, 2019 and the estimated incremental borrowing rate applied is 12.4%.

In June 2019, the Company entered into a sublease agreement with our affiliate, RSI, for office space in Durham, North Carolina for approximately 2,784 square feet. The lease term for the operating lease is six years and two months with no option to extend the lease term. The Company will be required to pay $7,192 per month through July 2020 which will increase at a fixed rate of 3% per year. The lease commenced in June 2019. The Company recognized an operating lease right-of-use asset of $0.4 million and an operating lease liability of $0.4 million as of June 30, 2019. In connection with the lease, the Company maintains a standby letter of credit for the benefit of RSI in the amount of $0.02 million. The Company secured the letter of credit for the full amount of the letter with cash on deposit, which is reported as restricted cash as of June 30, 2019. The remaining lease term is 6.1 years at June 30, 2019 and the estimated incremental borrowing rate applied is 12.4%.

Supplemental balance sheet information related to operating leases was as follows (in thousands, except lease term and discount rate):

 

 

 

June 30, 2019

 

Operating lease right-of-use assets

 

$

3,386

 

 

 

 

 

 

Operating lease liabilities, current portion

 

$

92

 

Operating lease liabilities, long-term portion

 

 

3,357

 

Total lease liabilities

 

$

3,449

 

 

 

 

 

 

Weighted average remaining lease term (years)

 

6.8 years

 

Weighted average discount rate

 

12.4%

 

 

Supplemental cash flow information for the three months ended June 30, 2019 related to operating leases as follows (in thousands):

 

 

 

June 30, 2019

 

Cash paid within cash flows used in operations

 

$

42

 

Amortization of operating lease right-of-use assets

 

$

63

 

 

The undiscounted future lease payments under the lease liabilities as of June 30, 2019 were as follows:

 

Years Ending March 31,

 

Lease Payments

 

Remainder of 2020

 

$

337

 

2021

 

 

758

 

2022

 

 

781

 

2023

 

 

804

 

2024

 

 

828

 

Thereafter

 

 

1,794

 

Total lease payments

 

 

5,302

 

Less: imputed interest

 

 

(1,853

)

Total lease liabilities

 

$

3,449

 

 

16


 

Operating lease costs for the three months ended June 30, 2019 were $0.1 million. Short-term and variable lease costs were not material for the three months ended June 30, 2019.

Disclosures related to periods prior to adopting the new lease guidance

Rent expense for the three months ended June 30, 2018 was $0.06 million.

Approximate future operating lease obligations (excluding the optional lease renewal term) as of March 31, 2019 were as follows (in thousands):

 

Years Ending March 31,

 

Operating Leases

 

2020

 

$

455

 

2021

 

 

675

 

2022

 

 

692

 

2023

 

 

711

 

2024

 

 

731

 

Thereafter

 

 

1,662

 

Total minimum operating lease payments

 

$

4,926

 

 

 

17


 

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, 2019 included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the United States Securities and Exchange Commission, or the SEC, on June 14, 2019. 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.

Business Overview

We are a clinical-stage biopharmaceutical company focused on developing and commercializing innovative therapies for urologic conditions. Our goal is to be a leading urology company by developing, commercializing and acquiring innovative therapies. 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. Vibegron is currently being developed for three potential indications: overactive bladder, or OAB, the treatment of OAB in men with benign prostatic hyperplasia, or BPH, and the treatment of abdominal pain due to irritable bowel syndrome, or IBS.  Our second product candidate, URO-902, is a novel gene therapy that we are developing for patients with OAB who have failed oral pharmacological therapy.  Vibegron was licensed to us in February 2017 by Merck Sharp & Dohme Corp., or Merck, and URO-902 was licensed to us in August 2018 by Ion Channel Innovations, LLC, or ICI.

We were incorporated in January 2016, and our operations to date have been limited to organizing and staffing our company, identifying and in-licensing our product candidates, including acquiring worldwide rights (excluding Japan and certain other Asian countries) to vibegron and worldwide rights to URO-902, preparing for and advancing the clinical development of our product candidates, and preparing for the potential commercialization of vibegron.

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

18


 

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

Our Product Candidates

VIBEGRON

We are currently developing vibegron in three target indications: OAB; OAB in men with BPH; and abdominal pain due to IBS. 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 believe vibegron, if approved by the U.S. Food and Drug Administration, or 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.

Urovant Sciences GmbH, or USG, our wholly owned subsidiary, holds global commercial rights to vibegron, excluding Japan and certain other Asian countries. In September 2017, Kyorin Pharmaceutical Co., Ltd., or Kyorin, submitted a marketing application for vibegron to the Japan Pharmaceuticals and Medical Devices Agency, and received marketing approval from Japan’s Ministry of Health, Labour and Welfare for vibegron for the treatment of adults with OAB in September 2018.

Our Phase 3 Program for the Treatment of OAB

In March 2018, we enrolled the first patients in our international pivotal Phase 3 EMPOWUR trial of vibegron in adults with OAB. The EMPOWUR trial was a randomized, double-blind, placebo- and active comparator-controlled clinical trial in men and women with OAB wet or dry. The trial had a design in line with the Phase 2b clinical trial conducted by Merck and the Japanese Phase 3 clinical trial conducted by Kyorin. Enrollment of more than 1,500 patients into the EMPOWUR trial was completed in October 2018.

To have been eligible for the EMPOWUR trial, patients had to be at least 18 years old with a history of OAB (as diagnosed by a physician) for at least three months. During the screening period, patients were required to experience on average at least eight micturitions per day; either an average of at least three urgency episodes per day or at least one urge urinary incontinence, or UUI, episode per day; and total UUI episodes exceeding stress urinary incontinence episodes.

Enrolled patients were randomized across more than 200 sites into one of three groups for a 12-week treatment period: vibegron 75 mg administered orally once daily, placebo administered orally once daily, or extended release tolterodine, or tolterodine ER (a commonly prescribed anticholinergic for OAB), 4 mg administered orally once daily. Additionally, more than 500 patients completing the initial 12-week blinded assessment have been enrolled in a 40-week double-blind extension study to evaluate the safety and efficacy of longer-term treatment.

In March 2019, we reported positive top-line results from our international pivotal Phase 3 EMPOWUR trial of vibegron in adults with OAB. In this pivotal Phase 3 clinical trial with over 1,500 patients, vibegron 75 mg met both co-primary efficacy endpoints demonstrating a highly significant reduction in daily UUI episodes and micturitions. In the primary efficacy analysis, once-daily vibegron met the co-primary endpoints at week 12, achieving statistical significance over placebo on both reduction in daily UUI episodes (p<0.0001) and reduction in daily micturitions (p<0.001). The difference from placebo was statistically significant as early as week 2, which was the first timepoint measured, for both UUI episodes and micturitions (p<0.0001 and p<0.001, respectively), and statistically significant efficacy was maintained at all timepoints measured through the end of the study for both endpoints. Additionally, at all measured timepoints, vibegron achieved numerically better efficacy than tolterodine, the active control in this study, which is a currently available OAB treatment.

Vibegron met all seven pre-specified key secondary endpoints, including a statistically significant reduction in daily urgency episodes compared to placebo (p=0.002). Secondary endpoints included, among others, changes in the frequency of urgency episodes and total incontinence episodes (which includes all incontinence episodes, whether UUI or stress-related), as well as self-reported quality of life scores.

19


 

P-value is a conventional statistical method for measuring the statistical significance of clinical results. A p-value of 0.05 or less represents statistical significance, meaning there is a less than 1-in-20 likelihood that the observed results occurred by chance. The FDA utilizes statistical significance, as measured by p-value, as an evidentiary standard of efficacy and typically requires a p-value of 0.05 or less to demonstrate statistical significance. The results of the co-primary and key secondary endpoints used in our Phase 3 EMPOWUR trial at the end of the study are depicted below.

The EMPOWUR Phase 3 clinical trial data showing reductions in daily UUI episodes over time are shown in the graphs below.

The EMPOWUR Phase 3 clinical trial data showing reductions in daily UUI episodes at the end of the study for patients in the vibegron treatment group, compared to the tolterodine treatment group and placebo treatment group, are shown in the graphs below.

20


 

Vibegron was well tolerated and the most common adverse events reported versus placebo (>2% in vibegron and greater than placebo) were headache (4.0% vs 2.4%), nasopharyngitis (2.8% vs 1.7%), diarrhea (2.2% vs 1.1%), and nausea (2.2% vs 1.1%). The frequency of serious adverse events was similar across treatment arms (1.1% in placebo, 1.5% in vibegron, and 2.3% in tolterodine). The incidence of the reported adverse event of hypertension was equal to placebo (1.7% in vibegron, 1.7% in placebo, and 2.6% in tolterodine).

In the Phase 3 EMPOWUR trial there were two serious adverse events, or SAEs, reported in two patients in the vibegron treatment group considered to be treatment related by the investigator: (1) non-cardiac chest pain in one patient (with no evidence of an acute cardiac event) and (2) pneumonia in one patient. Our independent assessment did not consider these SAEs to be treatment related.

In August 2019, we completed the ambulatory blood pressure study for vibegron. The purpose of the study was to rule out an effect of vibegron relative to placebo on daytime systolic blood pressure. The primary endpoint variable was the change from baseline to day 28 in mean daytime ambulatory systolic blood pressure. Secondary endpoints included: 1) change from baseline in mean daytime diastolic blood pressure and heart rate, 2) full 24 hour mean change in systolic and diastolic blood pressure and heart rates as well as 3) maximum changes 30 minutes to 6.5 hours post dosing.

Vibegron achieved its primary endpoint demonstrating that vibegron does not have an effect on daytime systolic ambulatory blood pressure compared to placebo (where no effect was defined as a change from baseline of less than 3.5mm Hg compared to placebo within a 90% confidence interval). For the full 24h ambulatory systolic blood pressure, there was no statistically significant difference for vibegron compared to placebo. The treatment differences from baseline to day 28 for vibegron over placebo were +0.57 mm Hg, for diastolic blood pressure -0.19 mm Hg and for heart rate +0.96 beats/minute.  Regarding the categorical changes from baseline in systolic blood pressure for the in clinic visit vital signs, there were small, not clinically relevant increases in the percentage of patients having a 10 mm Hg or 15mmg Hg increase in systolic blood pressure compared to placebo. The adverse event profile was consistent with the EMPOWUR phase 3 study with the most common adverse events being headache, diarrhea, upper respiratory tract infection and urinary tract infection at rates below 5%.

We plan to submit a new drug application, or NDA, to the FDA by the first quarter of 2020.

Our Phase 3 Program for the Treatment of OAB in Men with BPH

In March 2019, we initiated the Phase 3 COURAGE randomized, double blind, placebo-controlled trial for OAB in men with BPH who are also taking BPH medications but continue experiencing OAB symptoms in approximately 1,000 patients. The study is being conducted in two phases.  In part one, we are assessing initial safety in 80 patients via an independent Data Safety Monitoring Board. We expect part one of the study to be completed in the second half of 2019. Part two will assess safety and efficacy in all patients, and test 75 mg of vibegron versus placebo, the same dose studied in our Phase 3 EMPOWUR trial. The primary efficacy analysis for the co-primary efficacy endpoints will be measured at 12 weeks and include change from baseline in the average number of micturitions per 24 hours and change from baseline in the average number of urgency episodes per 24 hours. Secondary endpoints include change from baseline in the average number of nocturia episodes per night, which is awakening at night to use the bathroom to urinate. The duration for the double-blind study is 24 weeks. In addition, a 28-week open-label extension study will evaluate the long-term safety and efficacy of vibegron in men with OAB symptoms and on another therapy for BPH.

Our Phase 2a Program for the Treatment of Abdominal Pain Due to IBS

In December 2018, we enrolled our first patient in this trial. The Phase 2a trial is a double-blind, placebo-controlled study in women with abdominal pain due to IBS with predominant diarrhea, or IBS-D, or mixed episodes of diarrhea and constipation, or IBS-M. The trial is expected to enroll approximately 200 patients in the United States, randomized to receive either 75 mg of vibegron or placebo, administered orally once daily for a 12-week period. The primary endpoint will be a 30% reduction in abdominal pain intensity, while secondary endpoints will include Global Improvement Scale ratings, stool symptoms and safety. We expect to receive top-line data from the Phase 2a clinical trial in 2020.

URO-902

Our second product candidate, URO-902, 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 intend to initiate a placebo-controlled, randomized, multicenter proof-of-concept Phase 2a clinical trial in the fourth quarter of 2019 to evaluate the safety and efficacy of URO-902 for the treatment of OAB in approximately 50 to 80 patients who have not responded to oral pharmacological therapies. The proposed key efficacy endpoints for this Phase 2a clinical trial include reductions per day in micturitions, urgency episodes and UUI episodes. In addition, our design of the Phase 2a clinical trial will consider the safety data and preliminary efficacy data available from the two Phase 1b clinical trials in OAB conducted by ICI. The Biologics License Application for URO-902 will rely primarily on data from our planned Phase 2 and 3 clinical trials of URO-902.

Financial History

We have incurred, and expect to continue to incur, significant operating losses and negative cash flows for at least the next several years as we continue to develop our product candidates and prepare for the potential future regulatory approvals and commercialization of vibegron. Our ability to generate product revenue sufficient to achieve profitability will depend heavily on the successful development and eventual commercialization of vibegron, URO-902 and any future product candidates. To date, we have not generated any revenue, and we do not

21


 

expect to generate revenue unless and until we successfully complete development and obtain regulatory approval for one of our product candidates.

Prior to the completion of our initial public offering, or IPO, our operations were primarily funded through capital contributions or short-term advances from Roivant Sciences Ltd. or its affiliates. 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 $132.9 million, after deducting $10.1 million in underwriting discounts and commissions and $1.2 million in offering expenses.

In February 2019, we and our subsidiaries, Urovant Holdings Limited, or UHL, USG and Urovant Sciences, Inc., or USI, entered into a secured debt financing agreement with Hercules Capital, Inc., or Hercules, as agent and lender, or the Hercules Loan Agreement, in the amount of $100.0 million. A first tranche of $15.0 million was funded upon execution of the Hercules Loan Agreement, and the remaining $85.0 million is available in three additional optional tranches through June 30, 2021, subject to certain terms and conditions, including the achievement of certain milestones.

As of June 30, 2019 and March 31, 2019, we had an accumulated deficit of $204.0 million and $175.5 million, respectively. For the three months ended June 30, 2019 and 2018, we recorded net losses of $28.5 million and $31.3 million, respectively. As of June 30, 2019, we had $62.4 million of cash and cash equivalents.

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, 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 Roivant Sciences GmbH, or RSG, a wholly owned subsidiary of our parent company, Roivant Sciences Limited, or 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 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 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 URO-902 worldwide, pursuant to our license agreement with ICI, which we entered into in August 2018. Pursuant to this agreement, we made an upfront payment of $0.25 million to ICI during the year ended March 31, 2019. 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 were previously supported by our affiliates, Roivant Sciences, Inc., or RSI, and RSG, each a wholly owned subsidiary of our parent company, RSL. RSI provided us with certain administrative, financial and research and development services, and RSG provided 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 services agreements with RSI and RSG, 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. Our reliance on RSI and RSG has decreased significantly as we have completed the hiring of personnel to manage our operations and the development and potential commercialization of vibegron and any future product candidates. We do not expect our reliance on RSI and RSG to be significant in the future.

22


 

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, URO-902 or any future product candidate alone or in collaboration with third parties, we may generate revenue from vibegron, URO-902 or any such future product candidate.

Research and Development Expenses

Our research and development expenses to date have been primarily attributed to the license of the rights to vibegron 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 complete the open-label extension study of our ongoing Phase 3 EMPOWUR trial for the treatment of OAB, advance our Phase 3 COURAGE trial for the treatment of OAB in men with BPH, advance our Phase 2a clinical trial of vibegron for the treatment of abdominal pain due to IBS, and initiate and advance our planned Phase 2a clinical trial for URO-902 for the treatment of OAB in patients who have not responded to oral pharmacological therapies. Research and development expenses will include program-specific costs, as well as unallocated costs.

Program-specific costs include:

 

direct third-party costs 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.

Unallocated costs primarily include:

 

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

 

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

 

costs allocated to us for activities performed by RSI and RSG under the Services Agreements and share-based compensation expense allocated to us from RSL.

Research and development expenses also include in-process research and development expense related to our acquisition of the rights to our product candidates from Merck and ICI.

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 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.

In addition, the probability of success for vibegron, URO-902 and any other product candidates will depend on numerous factors, including competition, manufacturing capability and commercial viability. As a result, we are unable to determine the duration and completion costs of our programs or when and to what extent we will generate revenue from commercialization and sale of any of our product candidates. Our research and development activities may be subject to change from time to time as we evaluate our priorities and available resources.

General and Administrative Expense

General and administrative expenses consist primarily of employee-related expenses, such as salaries, share-based compensation, benefits and travel expenses for general and administrative personnel, professional fees for legal, consulting, accounting, auditing and tax services, commercial readiness costs, rent and facilities expense, information technology costs, general overhead and services received under the Services Agreements with RSI and RSG.

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 continuing to operate as a public company. These increases will likely include increased costs related to the hiring of additional personnel, professional fees and additional rent and other facilities related costs,

23


 

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. We expect to incur increased costs associated with establishing sales, marketing, and commercialization functions in advance of potential future regulatory approvals and commercialization of our product candidates. 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 and funding commercial activities.

Results of Operations

Comparison of the Three Months Ended June 30, 2019 and 2018

The following table sets forth our results of operations for the three months ended June 30, 2019 and 2018 (in thousands):

 

 

 

Three Months Ended June 30,

 

 

 

2019

 

 

2018

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

22,014

 

 

$

27,965

 

General and administrative

 

 

5,465

 

 

 

3,504

 

Total operating expenses

 

 

27,479

 

 

 

31,469