urov-10q_20200630.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, 2020

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, 2020, the registrant had 31,181,794 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, 2020 and March 31, 2020

2

 

Condensed Consolidated Statements of Operations for the Three Months Ended June 30, 2020 and 2019

3

 

Condensed Consolidated Statements of Comprehensive Loss for the Three Months Ended June 30, 2020 and 2019

4

 

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity for the Three Months Ended June 30, 2020 and 2019

5

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended June 30, 2020 and 2019

6

 

Notes to Condensed Consolidated Financial Statements

7

Item 2.

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

20

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

32

Item 4.

Controls and Procedures

32

PART II.

OTHER INFORMATION

 

Item 1.

Legal Proceedings

33

Item 1A.

Risk Factors

33

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

80

Item 3.

Defaults Upon Senior Securities

80

Item 4.

Mine Safety Disclosures

80

Item 5.

Other Information

80

Item 6.

Exhibits

81

Signatures

82

 

 

 

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, 2020

 

 

March 31, 2020

 

Assets

 

 

 

 

 

(Note 2)

 

Current assets:

 

 

 

 

 

 

 

 

Cash

 

$

63,039

 

 

$

51,414

 

Restricted cash

 

 

250

 

 

 

243

 

Prepaid expenses and other current assets

 

 

8,980

 

 

 

6,489

 

Due from Sumitovant Biopharma Ltd.

 

 

 

 

 

172

 

Total current assets

 

 

72,269

 

 

 

58,318

 

Property and equipment, net

 

 

1,237

 

 

 

1,210

 

Operating lease right-of-use assets

 

 

3,939

 

 

 

3,135

 

Restricted cash, net of current portion

 

 

623

 

 

 

623

 

Other assets

 

 

69

 

 

 

9

 

Total assets

 

$

78,137

 

 

$

63,295

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders' Deficit

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$

130

 

 

$

1,589

 

Accrued expenses

 

 

23,098

 

 

 

21,756

 

Due to Roivant Sciences Ltd.

 

 

2

 

 

 

31

 

Current portion of share-based compensation liabilities

 

 

6,919

 

 

 

7,204

 

Current portion of operating lease liabilities

 

 

422

 

 

 

351

 

Total current liabilities

 

 

30,571

 

 

 

30,931

 

Share-based compensation liabilities, net of current portion

 

 

370

 

 

 

32

 

Related-party long-term debt

 

 

128,270

 

 

 

87,252

 

Operating lease liabilities, net of current portion

 

 

3,862

 

 

 

3,086

 

Total liabilities

 

 

163,073

 

 

 

121,301

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 10)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Shareholders' deficit

 

 

 

 

 

 

 

 

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

   authorized, 30,906,598 and 30,635,258 issued and outstanding at

   June 30, 2020 and March 31, 2020, respectively

 

 

1

 

 

 

1

 

Common shares subscribed

 

 

(1

)

 

 

(1

)

Accumulated other comprehensive income

 

 

495

 

 

 

452

 

Additional paid-in capital

 

 

267,339

 

 

 

263,818

 

Accumulated deficit

 

 

(352,770

)

 

 

(322,276

)

Total shareholders' deficit

 

 

(84,936

)

 

 

(58,006

)

Total liabilities and shareholders' deficit

 

$

78,137

 

 

$

63,295

 

 

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,

 

 

 

2020

 

 

2019

 

Operating expenses:

 

 

 

 

 

 

 

 

Research and development

 

$

16,354

 

 

$

22,014

 

General and administrative(1)

 

 

12,489

 

 

 

5,465

 

Total operating expenses

 

 

28,843

 

 

 

27,479

 

Other expense:

 

 

 

 

 

 

 

 

Interest expense, net(2)

 

 

(1,443

)

 

 

(513

)

Loss on disposal of property and equipment

 

 

 

 

 

(236

)

Other expense, net

 

 

(118

)

 

 

(190

)

Loss before provision for income taxes

 

 

(30,404

)

 

 

(28,418

)

Provision for income taxes

 

 

90

 

 

 

67

 

Net loss

 

$

(30,494

)

 

$

(28,485

)

Net loss per common share—basic and diluted

 

$

(0.99

)

 

$

(0.94

)

Weighted average common shares outstanding—basic and diluted

 

 

30,705,334

 

 

 

30,325,169

 

(1)

Includes $0 and $60 of costs allocated from Roivant Sciences Ltd. during the three months ended June 30, 2020 and 2019, respectively.

(2)

Includes $1,456 of interest expense from related-party long-term debt with Sumitomo Dainippon Pharma Co., Ltd. during the three months ended June 30, 2020 (see Note 4).

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,

 

 

 

2020

 

 

2019

 

Net loss

 

$

(30,494

)

 

$

(28,485

)

Other comprehensive income:

 

 

 

 

 

 

 

 

Foreign currency translation adjustment

 

 

43

 

 

 

188

 

Total other comprehensive income

 

 

43

 

 

 

188

 

Comprehensive loss

 

$

(30,451

)

 

$

(28,297

)

 

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

4


UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity

(in thousands, except share data)

 

 

 

Common Shares

 

 

Common

Shares

 

 

Additional

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Subscribed

 

 

Paid-in Capital

 

 

Deficit

 

 

Income

 

 

Deficit

 

Balance at March 31, 2020

 

 

30,635,258

 

 

$

1

 

 

$

(1

)

 

$

263,818

 

 

$

(322,276

)

 

$

452

 

 

$

(58,006

)

Share-based compensation expense

 

 

 

 

 

 

 

 

 

 

 

1,032

 

 

 

 

 

 

 

 

 

1,032

 

Exercise of stock options

 

 

231,799

 

 

 

 

 

 

 

 

 

1,205

 

 

 

 

 

 

 

 

 

1,205

 

Share-based compensation liabilities

   reclassified to equity upon exercise

   of stock options

 

 

 

 

 

 

 

 

 

 

 

988

 

 

 

 

 

 

 

 

 

988

 

Share-based compensation expense

   reclassified to liabilities

 

 

 

 

 

 

 

 

 

 

 

(35

)

 

 

 

 

 

 

 

 

(35

)

Issuance of common shares pursuant

   to 2019 ESPP

 

 

39,541

 

 

 

 

 

 

 

 

 

331

 

 

 

 

 

 

 

 

 

331

 

Foreign currency translation adjustment

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

43

 

 

 

43

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(30,494

)

 

 

 

 

 

(30,494

)

Balance at June 30, 2020

 

 

30,906,598

 

 

$

1

 

 

$

(1

)

 

$

267,339

 

 

$

(352,770

)

 

$

495

 

 

$

(84,936

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Shares

 

 

Common

Shares

 

 

Additional

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

Total

Shareholders'

 

 

 

Shares

 

 

Amount

 

 

Subscribed

 

 

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

 

 

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,

 

 

 

2020

 

 

2019

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Net loss

 

$

(30,494

)

 

$

(28,485

)

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

77

 

 

 

54

 

Share-based compensation expense

 

 

2,038

 

 

 

1,047

 

Amortization of debt discount and issuance costs

 

 

18

 

 

 

194

 

Non-cash operating lease cost

 

 

229

 

 

 

63

 

Loss on disposal of property and equipment

 

 

 

 

 

236

 

Unrealized foreign currency translation adjustment

 

 

43

 

 

 

188

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses and other current assets

 

 

(2,491

)

 

 

4,498

 

Other assets

 

 

(60

)

 

 

67

 

Due from Sumitovant Biopharma Ltd.

 

 

172

 

 

 

 

Due to Roivant Sciences Ltd.

 

 

(29

)

 

 

19

 

Accounts payable

 

 

(1,459

)

 

 

834

 

Accrued expenses

 

 

1,342

 

 

 

(1,220

)

Operating lease liabilities

 

 

(186

)

 

 

 

Net cash used in operating activities

 

 

(30,800

)

 

 

(22,505

)

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(104

)

 

 

(278

)

Net cash used in investing activities

 

 

(104

)

 

 

(278

)

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from capital contributions from Roivant Sciences Ltd.

 

 

 

 

 

130

 

Proceeds from exercise of stock options

 

 

1,205

 

 

 

70

 

Debt financing costs paid

 

 

 

 

 

(387

)

Cash proceeds from related-party debt financing

 

 

41,000

 

 

 

 

Proceeds from issuance of common shares pursuant to 2019 ESPP

 

 

331

 

 

 

 

Net cash provided by (used in) financing activities

 

 

42,536

 

 

 

(187

)

Net change in cash and restricted cash

 

 

11,632

 

 

 

(22,970

)

Cash and restricted cash—beginning of period

 

 

52,280

 

 

 

86,196

 

Cash and restricted cash—end of period

 

$

63,912

 

 

$

63,226

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Property and equipment included in accounts payable and accrued expenses

 

$

 

 

$

229

 

Property and equipment included in due to Roivant Sciences Ltd.

 

$

 

 

$

63

 

Reclassification of share-based compensation liabilities to additional

   paid-in capital upon exercise of stock options

 

$

988

 

 

$

 

Reclassification of share-based compensation expense from additional

   paid-in capital to liabilities

 

$

35

 

 

$

 

Supplemental disclosure of cash paid:

 

 

 

 

 

 

 

 

Income taxes

 

$

 

 

$

 

Interest

 

$

1,438

 

 

$

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” and, on an unconsolidated basis and excluding its subsidiaries, “USL”) 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 (“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 U.S. Food and Drug Administration (“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. (“RSL”). As of June 30, 2020, the Company has the following 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, (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.

On December 27, 2019, Sumitomo Dainippon Pharma Co., Ltd. (“Sumitomo Dainippon Pharma”) and RSL announced the closing of the transactions between Sumitomo Dainippon Pharma and RSL and certain of its affiliates contemplated by the definitive transaction agreement entered into on October 31, 2019 (the “Sumitomo Transaction”), pursuant to which all of the Company’s common shares held by RSL were contributed to Sumitovant Biopharma Ltd., a wholly-owned subsidiary of RSL at the time of such contribution (“Sumitovant”), and subsequent to such contribution, Sumitomo Dainippon Pharma acquired all issued and outstanding equity securities of Sumitovant.

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 historically been capitalized with funding from its initial public offering, which was completed in October 2018, and debt financings.

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. Since inception, 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 of, obtains regulatory approval for, and commercializes one of its product candidates. At June 30, 2020, the Company reported cash of $63.0 million and a shareholders’ deficit of $84.9 million. The Company currently believes its existing cash, together with the draw down under the Sumitomo Loan Agreement (as defined below) of $43.0 million in July 2020 and the remaining financing commitment from Sumitomo Dainippon Pharma of $128.5 million, which is available to the Company based on funding requests made in accordance with the operating budget approved by the Company’s Board of Directors (the “Board”) (see Notes 4 and 12), 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 the timing of regulatory approval and subsequent launch of vibegron for OAB and its ability to manage the amount and timing of its spend. The Company’s available capital may also be consumed faster than anticipated due to other events, including the length and severity of the global novel coronavirus (“COVID-19”) pandemic and measures taken to control the spread of COVID-19, as well as changes in and progress of our development activities and the impact of commercialization efforts due to the COVID-19 pandemic. The Company will seek to obtain additional capital as needed through equity financings, debt or other financing arrangements, but given the impact of COVID-19 on the U.S. and global financial markets and any limitations on future financing arrangements pursuant to the terms of the Sumitomo Loan Agreement, as well as Sumitomo Dainippon Pharma’s ability to exert substantial influence and control over the Company due to Sumitomo Dainippon Pharma’s majority ownership of the Company’s outstanding common shares, the Company may be unable to access further equity or debt financing when needed. As such, 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 Sumitomo Dainippon Pharma involves, and any agreements for future debt or preferred equity financings, if available, may involve, covenants limiting or

7


 

restricting the Company’s ability to take specific actions, such as incurring additional debt, incurring capital expenditures or declaring dividends. If the Company is unable to obtain such additional financing, as needed, in sufficient amounts or on terms acceptable to the Company, or if the remaining financing commitment of $128.5 million available to the Company under the Sumitomo Loan Agreement is no longer available to the Company despite future funding requests made in accordance with its Board approved operating budget, the Company may have to significantly delay or scale back its operations to reduce working capital requirements beginning in the first calendar quarter of 2021 and substantial uncertainty would exist with respect to the Company’s ability to continue as a going concern. The Company will prioritize necessary and appropriate steps to enable the continued operations of the business and preservation of the value of its assets beyond the next twelve months, including but not limited to actions such as reduced personnel-related costs, curtailment of the Company’s pre-commercial launch efforts, development activities and other discretionary expenditures that are within the Company’s control.  These reductions in expenditures, if required, may have an adverse impact on the Company’s ability to achieve certain of the Company’s planned objectives in fiscal years 2020 and 2021.

The Company’s future operations are highly dependent on a combination of factors, including (1) the success of its research and development programs; (2) regulatory approval and market acceptance of vibegron, URO-902 or any future product candidate; (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) the timely and successful completion of any additional financing.

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, 2020, the condensed consolidated statements of operations, comprehensive loss and cash flows for the three months ended June 30, 2020 and 2019 and the condensed consolidated statements of shareholders’ (deficit) equity for the three months ended June 30, 2020 and 2019 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 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, 2020 included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2020, filed with the Securities and Exchange Commission (“SEC”) on June 19, 2020.

The condensed consolidated balance sheet as of March 31, 2020 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, 2020 are not necessarily indicative of the results to be expected for the year ending March 31, 2021 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, 2020 filed with the SEC on June 19, 2020.      

[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, and expenses including the evaluation of the Company’s ability to continue as a going concern, as well as share-based compensation expenses, research and development expenses and accruals, 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 may differ from these estimates under different assumptions or conditions and such differences may be material.

[C] Risks and uncertainties:

The Company is subject to risks common to early stage companies in the biopharmaceutical industry including, but not limited to, uncertainties related to commercialization of products, including the need to successfully commercialize and gain market acceptance of its product candidates, the need to obtain marketing approval for its product candidates, risks of failure or unsatisfactory results of nonclinical studies and clinical trials, the need to obtain additional financing to fund the future development and commercialization of its product candidates,

8


 

dependence on key products, third-party service providers such as contract research organizations and contract manufacturing organizations, protection of intellectual property rights, compliance with government regulations, and the ability to make milestone, royalty or other payments due under any license, collaboration or supply agreements.

In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. Due to the COVID-19 pandemic, there has been uncertainty and disruption in the global economy and financial markets. Through August 13, 2020, the date of issuance of this Quarterly Report on Form 10-Q, the Company’s results of operations and cash flows have not been significantly impacted by the COVID-19 outbreak. The Company is not aware of any specific event or circumstance that would require an update to its estimates, judgments and assumptions or a revision of the carrying value of the Company’s assets or liabilities as of August 13, 2020.

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

Cash includes cash deposits in banks. 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 in 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 11)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 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, 2020

 

 

March 31, 2020

 

Cash

 

$

63,039

 

 

$

51,414

 

Restricted cash

 

 

873

 

 

 

866

 

Cash and restricted cash

 

$

63,912

 

 

$

52,280

 

[E] 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 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, restricted cash, accounts payable, accrued expenses, amounts due to and from RSL and Sumitovant, share-based compensation liabilities, and debt obligations. The carrying value of the Company’s debt obligations 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 share-based compensation liabilities are remeasured at fair value on a recurring basis and are included in Level 3 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.

9


 

The Company measured the share-based compensation liabilities at fair value based on significant inputs not observable in the market, which caused them to be classified as a Level 3 measurement within the fair value hierarchy (see Note 9). The valuation of the share-based compensation liabilities used assumptions and estimates the Company believed would be made by a market participant in making the same valuation.

The stock options liability is marked-to-market each reporting period with the change in fair value recorded as share-based compensation expense on the Company’s condensed consolidated statements of operations until the stock options are exercised and are sold to Sumitovant or to the market or the former Principal Executive Officer has held the exercised and unsold shares for a period of at least six months. The fair value of the stock options liability is determined at each reporting period by utilizing the Black-Scholes option-pricing model.

The stock appreciation rights (“SARs”) liability is marked-to-market each reporting period with the change in fair value recorded as share-based compensation expense on the Company’s condensed consolidated statements of operations over the vesting term and until the SARs are exercised. The fair value of the SARs liability is determined at each reporting period by utilizing a binominal lattice model.  

[F] Net loss per common share:

Basic net loss per common share is computed by dividing net loss applicable to common shareholders 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.

At June 30, 2020 and 2019, potentially dilutive securities were as follows:

 

 

 

June 30,

 

 

 

2020

 

 

2019

 

Options

 

 

4,268,295

 

 

 

4,031,231

 

Restricted stock units (unvested)

 

 

1,510,162

 

 

 

5,000

 

Stock appreciation rights

 

 

845,732

 

 

 

 

Warrants

 

 

99,777

 

 

 

33,259

 

Total

 

 

6,723,966

 

 

 

4,069,490

 

 

[G] Recently adopted 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 removes, modifies and adds 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 adoption of ASU No. 2018-13 on April 1, 2020 did not have a material impact on the Company's consolidated financial position, results of operations and related disclosures.

[H] Recently issued accounting pronouncements:

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, (“ASU No. 2016-13”), which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU No. 2016-13 replaces the existing incurred loss impairment model with an expected loss model that requires the use of forward-looking information to calculate credit loss estimates. It also eliminates the concept of other-than-temporary impairment and requires credit losses on available-for-sale debt securities to be recorded through an allowance for credit losses instead of as a reduction in the amortized cost basis of the securities. ASU No. 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. In November 2019, the FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) Effective Dates, which deferred the effective date of ASU No. 2016-13 for public business entities that meet the definition of a smaller reporting company, as defined by the SEC, as of November 15, 2019.  As the Company met the definition of a smaller reporting company as of November 15, 2019, ASU No. 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2022. Early adoption is permitted, including adoption in any interim period. The Company does not expect the adoption to have a material impact on the Company’s condensed consolidated financial position, results of operations, and related disclosures.

10


 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments of this update simplify the accounting for income taxes by removing certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. The new standard also simplifies aspects of the accounting for franchise taxes and enacted changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. The guidance is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. Early adoption is permitted. The Company is currently assessing the impact the adoption of this standard will have on its consolidated financial position, results of operations, and related disclosures.

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, that provides temporary optional guidance to ease the potential burden in accounting for or recognizing the effects of reference rate reform on financial reporting. The new guidance provides expedients and exceptions for applying U.S. GAAP to contract modifications and hedging relationships affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London Inter-bank Offered Rate (“LIBOR”) or another reference rate that is expected to be discontinued due to reference rate reform. This new guidance is effective prospectively beginning on March 12, 2020 through December 31, 2022. As of June 30, 2020, the Company has not modified its contract that will be impacted by reference rate reform. The Company will continue to assess the impact the adoption of this standard will have on its consolidated financial position, results of operations, and related disclosures when its contract impacted by reference rate reform is modified.

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.

Note 3—Accrued expenses

Accrued expenses at June 30, 2020 and March 31, 2020 consist of the following (in thousands):

 

 

 

June 30, 2020

 

 

March 31, 2020

 

Research and development expenses

 

$

18,373

 

 

$

13,728

 

Compensation-related expenses

 

 

2,973

 

 

 

6,296

 

Professional services expenses

 

 

273

 

 

 

433

 

Other general and administrative expenses

 

 

1,479

 

 

 

1,299

 

Total accrued expenses

 

$

23,098

 

 

$

21,756

 

 

Note 4—Related-party long-term debt

On December 27, 2019, the Company entered into a $300 million unsecured revolving debt facility with Sumitomo Dainippon Pharma (the “Sumitomo Loan Agreement”). Sumitomo Dainippon Pharma funded an initial amount of $87.5 million on December 30, 2019 under the terms of the Sumitomo Loan Agreement. In April and July 2020, Sumitomo Dainippon Pharma funded an additional amount of $41.0 million and $43.0 million, respectively (see Note 12). Additional funds may be drawn down by the Company, upon request, no more than once in any calendar quarter, subject to funding requests by the Company that are made are in accordance with the Company’s Board approved operating budget.

Loans under the Sumitomo Loan Agreement (“Loans”) bear a variable interest rate per annum equal to LIBOR plus a margin of 3% payable on the last day of each calendar quarter. LIBOR is currently expected to be phased out by the end of 2021, and if it becomes unavailable, the Company and Sumitomo Dainippon Pharma will negotiate in good faith to select an alternative interest rate and, if applicable as a result of such alternative interest rate, margin adjustment that is consistent with industry accepted successor rates for determining a LIBOR replacement. The interest rate on the Loans was 3.31% at June 30, 2020. The Loans mature and are payable in full on the five-year anniversary of the closing date of the Sumitomo Loan Agreement or December 27, 2024.

The Company’s obligations under the Sumitomo Loan Agreement are fully and unconditionally guaranteed by each of the Company’s direct and indirect subsidiaries. The Sumitomo Loan Agreement contains certain representations and warranties, affirmative covenants, negative covenants and conditions that are customarily required for similar financings.

The Sumitomo 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 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 Sumitomo Dainippon Pharma 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 Sumitomo Loan Agreement. Upon the occurrence of certain bankruptcy and insolvency events, the obligations under the Sumitomo Loan Agreement would automatically become due and payable. The Company is in compliance with the covenants pursuant to the Sumitomo Loan Agreement as of June 30, 2020.

11


 

The Company incurred financing costs of $0.3 million relating to the Sumitomo Loan Agreement which are recorded as an offset to related-party long-term debt on the Company’s condensed consolidated balance sheet. The 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.

Outstanding debt obligations to Sumitomo Dainippon Pharma are as follows (in thousands):

 

 

 

June 30, 2020

 

 

March 31, 2020

 

Principal amount

 

$

128,500

 

 

$

87,500

 

Less: unamortized debt issuance costs

 

 

(230

)

 

 

(248

)

Loan payable less unamortized debt issuance costs

 

 

128,270

 

 

 

87,252

 

Less: current maturities

 

 

 

 

 

 

Long-term debt, net of unamortized debt issuance costs

 

$

128,270

 

 

$

87,252

 

 

Note 5—Related party transactions

[A] Sumitomo loan agreement:

See Note 4 for information regarding the Sumitomo Loan Agreement.

[B] Investor rights agreement – Sumitomo Dainippon Pharma and Sumitovant:

On December 27, 2019, the Company entered into an investor rights agreement with Sumitomo Dainippon Pharma and Sumitovant (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, among other things, the Company agreed to comply with any demands by Sumitovant to register for sale, under the Securities Act of 1933, as amended, any common shares of the Company beneficially owned by Sumitovant that have an anticipated aggregate net offering price of at least $5 million, subject to certain customary exceptions and the right of the Company to refuse any demand for registration if the Company already effected two registrations for Sumitovant in the year preceding such demand. In addition, the Company agreed to periodically provide Sumitovant with (i) certain financial statements, projections, capitalization summaries and other information customarily provided to significant investors in publicly-traded companies and (ii) access to the Company’s books, records, facilities and employees during the Company’s normal business hours as Sumitovant may reasonably request.

Moreover, the Investor Rights Agreement also contains certain protections for the Company’s minority shareholders for so long as Sumitomo Dainippon Pharma or certain of its affiliates beneficially own between 50% and 90% of the total number of votes entitled to be cast at elections of the Company’s directors (the “Total Voting Power”). These protections include, among other things: (i) a requirement for a minimum of three independent directors on the Company’s Board (each of whom cannot be removed by Sumitomo Dainippon Pharma or certain of its affiliates without the approval of a majority of the minority shareholders); (ii) a requirement that the audit committee of the Board (the “Audit Committee”) be comprised solely of independent directors; (iii) the appointment of Mr. Pierre Legault as the Company’s lead independent director; (iv) a requirement that any transaction proposed by Sumitomo Dainippon Pharma or certain of its affiliates that would increase Sumitomo Dainippon Pharma’s beneficial ownership to over 76% of the Total Voting Power be approved by the Audit Committee (if occurring prior to December 27, 2021) and, if such transaction would increase Sumitomo Dainippon Pharma’s beneficial ownership to over 80% of the Total Voting Power, a majority of the Company’s minority shareholders must vote on such matter; and (v) a requirement that any related person transactions between Sumitomo Dainippon Pharma or certain of its affiliates and the Company be approved by the Audit Committee, consistent with the Company’s existing Related Person Transactions Policy.

Pursuant to the Investor Rights Agreement, the Company also agreed that so long as Sumitomo Dainippon Pharma or certain of its affiliates beneficially own between 50% and 90% of the Total Voting Power, the Company will inform Sumitovant before issuing any new common shares and allow Sumitovant to (i) participate in such issuance up to its pro rata share (unless such issuance is in connection with the acquisition of a business or its assets) or (ii) make sufficient open market purchases of the Company’s securities to ensure that Sumitomo Dainippon Pharma’s beneficial ownership percentage does not decline as a result of such issuance. No amounts have been paid or received under this agreement; however, the Company believes this agreement is material to its business and operations.

[C] Information sharing agreement – Sumitovant:

On May 21, 2020, the Company entered into an information sharing and cooperation agreement (the “Sumitovant Information Sharing Agreement”) with Sumitovant. The Sumitovant Information Sharing Agreement, among other things, obligates the Company to deliver to Sumitovant drafts of (i) the Company’s quarterly and annual financial statements and (ii) the discussion and analysis by the Company’s management of its financial condition and the results of its operations for such fiscal periods, prior to the applicable deadlines for filing such information with the SEC.  The Company also agreed to coordinate with Sumitovant before releasing earnings results or any interim financial guidance and to notify Sumitovant before issuing any other material press releases.

In addition, the Sumitovant Information Sharing Agreement requires the Company to give Sumitovant’s auditors access to its auditors and its books and records to facilitate the completion of Sumitovant’s own internal audit and their review of the Company’s financial statements and internal accounting controls and operations.  The Company also agreed to provide Sumitovant any documents or materials relating to its business and access to its senior management to discuss any matters, in each case as Sumitovant may reasonably request.  To the extent the

12


 

Company provides Sumitovant any information in response to such a request, Sumitovant may not (i) disclose such information to certain of its affiliates or (ii) use such information in a manner it deems, in good faith, to be detrimental to the Company or its shareholders.  In addition, both parties agreed to hold any information they receive from the other party in the strictest confidence, subject to customary exceptions for information that becomes public, that has been independently developed, or that is otherwise received on a non-confidential basis from a third party.

Moreover, the Sumitovant Information Sharing Agreement provides that the Company must adopt and maintain policies to address its obligations with respect to financial reporting, audits, internal controls, record keeping, taxes, and other applicable laws.  In addition, the Board must have a compliance oversight committee (the “Compliance Committee”) that oversees a compliance program designed to ensure the Company complies with its obligations under applicable laws (the “Compliance Program”).  The Compliance Committee, in turn, is required to (i) appoint a member of the Company’s senior management to administer the Compliance Program and (ii) cause the implementation of internal reporting procedures and training to support the Compliance Program.  The Sumitovant Information Sharing Agreement also requires the Company to comply in all material respects with applicable laws.

No amounts have been paid or received under this agreement; however, the Company believes this agreement is material to its business and operations.

[D] Market access services agreement – Sunovion:

On June 17, 2020, USG entered into a market access services agreement (the “Market Access Services Agreement”) with Sunovion Pharmaceuticals, Inc. (“Sunovion”), a wholly-owned subsidiary of Sumitomo Dainippon Pharma. Pursuant to the Market Access Services Agreement, among other things, USG appointed Sunovion as the exclusive distributor of vibegron in the United States, including all of its territories and possessions.  

Sunovion, in turn, has agreed to provide certain market access services with respect to the distribution and sale of vibegron, including, among other things:  (i) adding vibegron to Sunovion’s agreements with its third party logistics providers; (ii) adding vibegron to certain of Sunovion’s contracts with wholesalers, group purchasing organizations and integrated delivery networks; (iii) facilitating USG’s entry into new contracts with certain health organizations regarding vibegron; (iv) managing the validation, processing and payment of rebates, chargebacks, and certain administrative, distribution and service fees related to vibegron; (v) providing USG with price reporting metrics and other information required for it to comply with applicable government price reporting requirements; (vi) coordinating with USG and any applicable wholesalers to address any recalls, investigations, or product holds; and (vii) providing certain other ancillary support services to facilitate the foregoing.

In order to facilitate Sunovion’s provision of these services, USG agreed, among other things, to: (i) grant Sunovion a non-exclusive license under all intellectual property owned or controlled by USG, solely to enable Sunovion to perform the contemplated services; (ii) provide Sunovion periodic reports of sales projections and volume requirements, as well as such other information as Sunovion reasonably requests or may need to perform the services; (iii) comply with the provisions of any agreements between Sunovion and third parties pursuant to which vibegron will be distributed or sold; (iv) cooperate with certain investigations related to orders and audits of USG’s quality systems; and (v) promptly notify Sunovion in the event vibegron is recalled.

As consideration for the services, USG will pay Sunovion an agreed-upon monthly service charge for each of the first two years of the agreement term.  After the second year of the agreement term, the monthly service charges will be subject to good faith negotiations between the parties.  In addition, USG also agreed to (x) reimburse Sunovion for any pass-through expenses it incurs while providing the services and (y) establish an escrow fund for use by Sunovion when managing any rebates, chargebacks and similar fees.

The Market Access Services Agreement also contains customary representations and warranties by the parties and customary provisions related to confidentiality, indemnification and insurance.  The initial term of the Market Access Services Agreement is three years.  Thereafter, the term will be automatically extended for one-year periods, unless either party provides notice of its intent to terminate the agreement at least nine (9) months prior to the expiration of the applicable term.  Either party may also terminate the agreement prior to the end of its term in the event of an uncured material breach by the other party or if such other party becomes insolvent or undergoes a change of control.  Finally, USG may also terminate the Market Access Services Agreement if Sunovion fails to satisfy certain market access milestones or upon payment of a break-up fee.

No amounts have been paid or received under this agreement; however, the Company believes this agreement is material to its business and operations.

[E] Operating lease – Roivant:

In June 2019, the Company entered into a sublease agreement with a related party, RSI, for 2,784 square feet of office space located in Durham, North Carolina that expires in July 2025. The sublease has scheduled rent increases each year and the total sublease payment obligations under the agreement are $0.6 million.  See Note 11 for more details on the sublease.

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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, 2020 and 2019 was (0.30)% and (0.24)%, 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’ deficit

At-the-market equity offering program:

In November 2019, the Company entered into a sales agreement with Jefferies LLC (“Jefferies”) to sell its common shares having an aggregate offering price of up to $50 million from time to time through an “at-the-market” equity offering program under which Jefferies acts as the Company’s agent. As of June 30, 2020, the Company has not sold any common shares under its “at-the-market” equity offering program.

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 were initially reserved for grant.  On June 15, 2018, the Board approved an increase in the number of 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.    

In September 2019, the shareholders of the Company approved an amendment to the 2017 Plan to increase the number of common shares reserved for issuance under the 2017 Plan by 3,000,000 common shares.  

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 prior to any such increase date. On November 1, 2019 and 2018, the number of common shares authorized for issuance increased automatically by 1,215,257 shares and 1,212,916 shares, respectively, in accordance with the evergreen provision of the 2017 Plan.

At June 30, 2020, a total of 1,330,353 common shares were available for future issuance under the 2017 Plan.

2019 Employee Stock Purchase Plan:

In July 2019, the Company’s Board adopted the 2019 Employee Stock Purchase Plan (the “2019 ESPP”). In September 2019, the Company’s shareholders approved the 2019 ESPP. A total of 450,000 common shares are authorized for issuance under the 2019 ESPP. Pursuant to the “evergreen” provision contained in the 2019 ESPP, the number of common shares reserved for issuance under the 2019 ESPP automatically increases on November 1 of each year, commencing on November 1, 2020 and ending on November 1, 2028, in an amount equal to the lesser of (i) 1% of the total number of the Company’s common shares outstanding on March 31st of the preceding calendar year, and (ii) 600,000 common shares. The Company’s Board may approve an increase of a lesser number of common shares prior to any such increase date.

The 2019 ESPP permits eligible employees to purchase common shares at a discount through payroll deductions during defined six month consecutive offering periods beginning on January 1st. The price at which the shares are purchased is equal to the lower of (i) 85% of the fair market value of the common shares on the first day of the offering or (ii) 85% of the fair market value of the common shares on the purchase date. A participant may purchase a maximum of 60,000 common shares during each offering period, not to exceed $25,000 worth of common shares on the offering date during each calendar year, and the maximum number of common shares that can be purchased by all participants during each offering period is 150,000 shares. The Company uses the Black-Scholes option-pricing model, in combination with the discounted employee price, in determining the value of the 2019 ESPP share-based compensation expense to be recognized during each offering period. The weighted-average grant date fair value per share for the offering period during the three months ended June 30, 2020 using the Black-Scholes option-pricing model was $5.26.

During the three months ended June 30, 2020, 39,541 common shares were issued pursuant to the 2019 ESPP for total proceeds of $0.3 million and, as of June 30, 2020, 410,459 shares remain available for future issuance under the 2019 ESPP. At June 30, 2020 and March 31, 2020, the Company had an outstanding liability of $0.05 million and $0.2 million, respectively, which is included in accrued expenses in the condensed consolidated balance sheets.

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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,

 

 

 

2020

 

2019

 

Risk-free interest rate

 

0.41% - 0.56%

 

1.95% - 2.30%

 

Expected term, in years

 

6.00 - 6.11

 

 

6.11

 

Expected volatility

 

77.6% - 78.4%

 

64.4% - 65.1%

 

Expected dividend yield

 

—%

 

—%

 

The following table presents a summary of stock option activity and data under the Company’s 2017 Plan through June 30, 2020 (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, 2020

 

 

4,134,100

 

 

$

6.85

 

 

$

4.24

 

 

 

8.38

 

 

 

 

 

Granted

 

 

365,994

 

 

$

10.05

 

 

$

6.72

 

 

 

 

 

 

 

 

 

Exercised

 

 

(231,799

)

 

$

5.20

 

 

$

3.23

 

 

 

 

 

 

 

 

 

Options outstanding at June 30, 2020

 

 

4,268,295

 

 

$

7.21

 

 

$

4.59

 

 

 

8.30

 

 

$

12,590

 

Options exercisable at June 30, 2020

 

 

3,643,501

 

 

$

6.67

 

 

$

4.22

 

 

 

8.06

 

 

$

12,442

 

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, 2020. At June 30, 2020, there were 3,643,501 vested or exercisable options outstanding. During the three months ended June 30, 2020, the Company granted options to purchase 365,994 common shares to certain employees and directors of the Company with a weighted-average exercise price and grant date fair value per share of $10.05 and $6.72, respectively, under the 2017 Plan.  The aggregate intrinsic value of options exercised to purchase 231,799 common shares during the three months ended June 30, 2020 was $1.2 million.

During the year ended March 31, 2020, in connection with the resignation of the Company’s former Principal Executive Officer, fully-vested stock options to purchase 1,416,166 common shares with a weighted-average exercise price of $5.59 per share held by the former Principal Executive Officer were reclassified from equity to liabilities following the modification of the stock options to include a share repurchase feature (see Note 9). The share repurchase feature is in the form of a right of first refusal for Sumitovant to purchase up to 1,416,666 shares underlying the stock options upon exercise by the former Principal Executive Officer. The stock options remain exercisable through October 1, 2021. No shares issued upon exercise of stock options by the former Principal Executive Officer during the three months ended June 30, 2020 were purchased by Sumitovant.  

Stock appreciation rights (“SARs”):

SARs entitle the holder to receive, upon exercise, an amount of the Company’s common shares or cash (or a combination thereof) determined by reference to appreciation, from and after the date of grant, in the fair market value of the Company’s common shares over the strike price on the exercise date.  The SARs are subject to vesting terms similar to the Company’s stock options and restricted stock units.

In March 2020, a total of 845,732 SARs were granted under the 2017 Plan to the Company’s new Principal Executive Officer pursuant to his employment agreement. The SARs vest as to 25% on the one-year anniversary of the grant date with the remaining SARs vesting in 12 equal quarterly installments thereafter, subject to the Principal Executive Officer providing continuous service to the Company through each such vesting date. The SARs can be settled in shares or cash upon exercise, at the sole discretion of the Company’s Board. Due to the current presumption that the SARs will be settled in cash upon exercise, the SARs have been classified as a liability instrument requiring the Company to remeasure the SARs at each reporting period until exercise (see Note 9). The estimated fair value of the SARs granted was $5.4 million and $5.2 million, respectively, at June 30, 2020 and March 31, 2020.

15


 

Restricted stock unit (“RSUs”):

A summary of restricted stock unit activity under the Company’s 2017 Plan through June 30, 2020 is as follows:

 

 

 

Number of Shares

 

 

Weighted

Average

Grant Date

Fair Value

 

Unvested balance at March 31, 2020

 

 

751,927

 

 

$

13.84

 

Granted

 

 

957,915

 

 

$

9.12

 

Forfeited

 

 

(199,680

)

 

$

14.39

 

Unvested balance at June 30, 2020

 

 

1,510,162

 

 

$

10.77

 

The fair value of the RSUs is estimated at the grant date using the Company’s common share price. The weighted average grant-date fair value of RSUs granted during the three months ended June 30, 2020 was $9.12 per unit.

Share-based compensation expense:

 

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

 

 

 

Three Months Ended June 30,

 

 

 

2020

 

 

2019

 

Share-based compensation recognized as:

 

 

 

 

 

 

 

 

Research and development

 

$

369

 

 

$

265

 

General and administrative

 

 

1,669

 

 

 

782

 

 

 

$

2,038

 

 

$

1,047

 

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 from those share-based awards classified as liability instruments mentioned above.

Total unrecognized share-based compensation expense was approximately $23.7 million at June 30, 2020 and is expected to be recognized over a weighted-average period of 3.63 years.

Note 9—Fair value measurements

As of June 30, 2020 and March 31, 2020, the liabilities measured at fair value on a recurring basis consisted of certain liability classified stock options and SARs (see Note 8), which are included in share-based compensation liabilities in the accompanying condensed consolidated balance sheets. There were no assets measured at fair value on a recurring basis as of June 30, 2020 and March 31, 2020. The following represents the fair value using the hierarchy described in Note 2[E] for the Company’s financial liabilities that are required to be measured at fair value on a recurring basis as of June 30, 2020 and March 31, 2020 (in thousands):

 

 

 

As of June 30, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total Fair Value

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation liability - stock options

 

$

 

 

$

 

 

$

6,919

 

 

$

6,919

 

Share-based compensation liability - SARs

 

 

 

 

 

 

 

 

370

 

 

 

370

 

   Total liabilities

 

$

 

 

$

 

 

$

7,289

 

 

$

7,289

 

 

 

 

As of March 31, 2020

 

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

Total Fair Value

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Share-based compensation liability - stock options

 

$

 

 

$

 

 

$

7,204

 

 

$

7,204

 

Share-based compensation liability - SARs

 

 

 

 

 

 

 

 

32

 

 

 

32

 

   Total liabilities

 

$

 

 

$

 

 

$

7,236

 

 

$

7,236

 

 

 

16


 

The fair value of the stock options liability as of June 30, 2020 was calculated using the following significant unobservable inputs:

 

Input

 

June 30, 2020

 

Risk-free interest rate

 

0.16%

 

Expected dividend yield

 

—%

 

Expected term, in years

 

1.25

 

Expected volatility

 

79.6%

 

Exercise price (per share)

 

$3.86 - $14.00

 

Share price (per share)

 

$9.84

 

Number of stock options valued

 

1,272,914

 

 

The fair value of the SARs liability as of June 30, 2020 was calculated using the following significant unobservable inputs:

 

Input

 

June 30, 2020

Risk-free interest rate

 

0.64%

Expected dividend yield

 

—%

Expected term, in years

 

9.73

Expected volatility

 

77.1%

Post-vesting cancellation rate

 

5.0%

Exercise ratio

 

2.8

Exercise price (per share)

 

$9.16

Share price (per share)

 

$9.84

Number of SARs granted

 

845,732

 

The table presented below is a summary of changes in the fair value of the Company’s Level 3 valuation for the share-based compensation liabilities for the three months ended June 30, 2020 (in thousands):

 

 

 

Stock Options

 

 

SARs

 

Balance at March 31, 2020

 

$

7,204

 

 

$

32

 

Additions

 

 

 

 

 

 

Change in fair value

 

 

703

 

 

 

338

 

Settlements

 

 

(988