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 December 31, 2020

☐	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 whetfher 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.

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 February 11, 2021, the registrant had 32,743,396 common shares, $0.000037453 par value per share, outstanding.

CAUTIONARY STATEMENT

REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (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. Examples of forward-looking statements included in this Quarterly Report on Form 10-Q include statements concerning future matters such as our expected liquidity, the commercialization of our lead product GEMTESA (vibegron), the development of our product candidate, URO-902, our expense levels, expectations regarding the outcome of legal proceedings and other statements regarding matters that are not historical are forward-looking statements. 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 listed below in the section entitled “Summary Risk Factors,” and those discussed in the section titled “Risk Factors” set forth in Part II. Item 1A. of this Quarterly Report on Form 10-Q, elsewhere in this Quarterly Report on Form 10-Q and in our other filings with the U.S. Securities and Exchange Commission (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.

SUMMARY RISK FACTORS

Our business, financial condition and results of operations may be affected by a number of risks and uncertainties. The following is a summary of the principal risks and uncertainties that may impact us, all of which are more fully described in the section entitled “Risk Factors” set forth in Part II, Item 1A of this Quarterly Report on Form 10-Q. The summary below should not be relied upon as an exhaustive summary of the material risks facing our business, and should be read in conjunction with the “Risk Factors” section in Part II, Item 1A of this Quarterly Report on Form 10-Q. In addition, other risks not presently known to us or that we currently deem immaterial may also impact our business.

•

The conditions to the Merger (as such term is defined below) may not be satisfied or waived in a timely manner or at all, and the Merger Agreement (as such term is defined below) may be terminated in accordance with its terms, which could negatively impact our business, financial condition, results of operations, and the price of our common shares.

•

The announcement of the Merger could negatively impact our business, financial condition, or results of operations.

•

Attending to matters related to the Merger could divert our management’s focus from our ongoing business operations.

•

Business interruptions resulting from effects of pandemics or epidemics such as the novel strain of the coronavirus known as COVID-19, may materially and adversely affect our business and financial condition.

•

We believe our current cash and current borrowing capacity under the Sumitomo Loan Agreement (as such term is defined below) will not be sufficient for us to fund our anticipated level of operations until we become cash flow positive. If we fail to obtain additional capital, we will not be able to commercialize GEMTESA or complete the development of, seek regulatory approval for, and commercialize GEMTESA for OAB in men with BPH or our gene therapy product candidate, URO-902.

•

The Sumitomo Loan Agreement (as such term is defined below) contains certain covenants that could adversely affect our operations and, if an event of default were to occur, we could be forced to repay our outstanding indebtedness sooner than planned, including at a time when we do not have sufficient capital to satisfy such obligation. In addition, servicing our existing debt requires a significant amount of cash, and we may not have sufficient cash flow from our business to pay our substantial debt. The occurrence of any of these events could cause a significant adverse impact on our business, prospects and share price.

•

We expect to incur significant operating losses and negative operating cash flows for the foreseeable future, and we may never achieve or maintain profitability.

•

The success of our business depends significantly on the commercial success of GEMTESA., and it may fail to achieve market acceptance by physicians, patients, third-party payors and others in the medical community, which is necessary for GEMTESA’ commercial success. If GEMTESA is not successfully commercialized, our business will be harmed.

•

We do not have our own manufacturing capabilities and rely on third parties to produce clinical and commercial supplies of our lead product and our drug candidate. If these third parties experience economic or production issues, do not maintain their regulatory approvals, or otherwise fail to provide us with the supplies we expect, it may delay our ability to develop and commercialize our lead product, GEMTESA, or our gene therapy product candidate, URO-902.

•

We currently rely on a single supplier for the enzyme used to manufacture GEMTESA, and if such supplier fails to provide us with sufficient supplies of enzyme to manufacture the quantity of GEMTESA we will need for commercialization, it may slow or halt our commercialization efforts for GEMTESA and harm our business.

•

We currently rely on Sunovion Pharmaceuticals, Inc. (“Sunovion”), an affiliate of Sumitovant Biopharma Ltd. (“Sumitovant”), the holder of a majority of our common shares to provide us certain market access and co-promotion services. If we are unable to establish sales, market access, marketing, and distribution capabilities, either on our own or with third-party collaboration partners, we may not be successful in commercializing GEMTESA.

•

If Sunovion does not provide us the services and the commercial and operational support contemplated in the terms of the Market Access Services Agreement and Co-Promotion Agreement (as each item is defined below), our business could be adversely impacted.

•

Coverage and reimbursement may not be available for GEMTESA, which could make it difficult for us to sell it profitably.

•

We face significant competition from other biotechnology and pharmaceutical companies, and our operating results will suffer if we fail to compete effectively.

•

Clinical studies are very expensive, time-consuming, difficult to design and implement, and involve uncertain outcomes. Clinical study failures can occur at any stage of clinical studies, and we could encounter problems that cause us to suspend, abandon or repeat clinical studies. We cannot predict with any certainty the timing for commencement or completion of current or future clinical studies.

•

The results of our clinical studies may not support our proposed claims for our future product candidates. The results of previous clinical studies may not be predictive of future results, and interim or top-line data may be subject to change or qualification based on the complete analysis of data.

•

Our gene therapy product candidate, URO-902, is based on a novel technology, and the regulatory landscape that governs gene therapy products is uncertain and may change, which makes it difficult to predict the amount of time, money and other resources the Company will need to expend to develop URO-902 and obtain regulatory approval.

•

Our product and/or our gene therapy product candidate may cause adverse effects or have other properties that could limit their market acceptance and could delay or prevent the regulatory approval of or limit the scope of any approved label for, our gene therapy product candidate.

•

Regulatory requirements may make it difficult for us to obtain the materials and supplies necessary to conduct clinical studies regarding or to manufacture and sell GEMTESA or our gene therapy product candidate, if approved.

•

We are reliant on third parties to conduct, manage, and monitor our clinical studies, and if those third parties perform in an unsatisfactory manner, it may harm our business.

•

If we are unable to obtain and maintain patent protection for our technology and products, or if the scope of the patent protection obtained is not sufficiently broad, we may not be able to compete effectively in our markets.

•

If we fail to comply with our obligations under any license, collaboration or other agreements, we may be required to pay damages and could lose intellectual property rights that are necessary for developing and protecting our product and/or gene therapy product candidate.

•

We have agreements with Sumitovant, our majority shareholder, and with Sumitomo Dainippon Pharma Co., Ltd., the parent company of Sumitovant (“Sumitomo Dainippon Pharma”), that may be perceived to create conflicts of interest. To the extent other investors perceive that Sumitovant or Sumitomo Dainippon Pharma will not act in the best interests of all of our shareholders, such perception may negatively affect the price of our common shares.

•

We are a “controlled company” within the meaning of the applicable Nasdaq listing rules and, as a result, qualify for exemptions from certain corporate governance requirements. If we rely on these exemptions, our shareholders will not have the same protections afforded to shareholders of companies that are subject to such requirements.

•

We are a Bermuda company, and it may be difficult for shareholders to enforce judgments against us or our directors and executive officers. Bermuda law differs from the laws in effect in the United States and may afford less protection to our shareholders.

•

U.S. holders of our common shares may suffer adverse tax consequences if we are characterized as a passive foreign investment company.

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, and references to “USL” refer to Urovant Sciences Ltd. on an unconsolidated basis and excluding its subsidiaries.

Table of Contents

		Page
PART I.	FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)	4
	Condensed Consolidated Balance Sheets as of December 31, 2020 and March 31, 2020	4
	Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2020 and 2019	5
	Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended December 31, 2020 and 2019	6
	Condensed Consolidated Statements of Shareholders’ (Deficit) Equity for the Three and Nine Months Ended December 31, 2020 and 2019	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2020 and 2019	9
	Notes to Condensed Consolidated Financial Statements	10
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	41
Item 4.	Controls and Procedures	41
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	43
Item 1A.	Risk Factors	43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	90
Item 3.	Defaults Upon Senior Securities	90
Item 4.	Mine Safety Disclosures	90
Item 5.	Other Information	90
Item 6.	Exhibits	91
Signatures		92

iii

PART I—FINANCIAL INFORMATION

Item 1.Financial Statements (Unaudited)

UROVANT SCIENCES LTD.

Condensed Consolidated Balance Sheets

(in thousands, except share and per share data)

	December 31, 2020			March 31, 2020
Assets				(Note 2)
Current assets:
Cash	$	71,295		$	51,414
Restricted cash		250			243
Prepaid expenses and other current assets		14,509			6,489
Due from Sumitovant Biopharma Ltd.		—			172
Total current assets		86,054			58,318
Property and equipment, net		2,020			1,210
Operating lease right-of-use assets		3,705			3,135
Intangible asset, net		14,000			—
Restricted cash, net of current portion		2,198			623
Other assets		910			9
Total assets	$	108,887		$	63,295

Liabilities and Shareholders' Deficit
Current liabilities:
Accounts payable	$	3,509		$	1,589
Accrued expenses		35,113			21,756
Due to Roivant Sciences Ltd.		—			31
Due to Sunovion Pharmaceuticals, Inc.		182			—
Current portion of share-based compensation liabilities		1,112			7,204
Current portion of operating lease liabilities		520			351
Total current liabilities		40,436			30,931
Share-based compensation liabilities, net of current portion		1,195			32
Related-party long-term debt		209,285			87,252
Operating lease liabilities, net of current portion		3,588			3,086
Total liabilities		254,504			121,301

Commitments and contingencies (Note 11)

Shareholders' deficit
Common shares, par value $0.000037453 per share, 267,001,308 shares authorized, 32,533,959 and 30,635,258 issued and outstanding at December 31, 2020 and March 31, 2020, respectively		1			1
Common shares subscribed		(1	)		(1	)
Accumulated other comprehensive (loss) income		(24	)		452
Additional paid-in capital		289,130			263,818
Accumulated deficit		(434,723	)		(322,276	)
Total shareholders' deficit		(145,617	)		(58,006	)
Total liabilities and shareholders' deficit	$	108,887		$	63,295

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

UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Operations

(in thousands, except share and per share data)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2020			2019			2020			2019
Operating expenses:
Research and development	$	15,616		$	23,099		$	46,506		$	62,909
General and administrative⁽¹⁾		29,965			16,687			61,387			29,587
Total operating expenses		45,581			39,786			107,893			92,496
Other (expense) income:
Interest expense, net⁽²⁾		(1,615	)		(1,401	)		(4,522	)		(2,495	)
Loss on disposal of property and equipment		—			—			—			(236	)
Other income (expense), net		271			(34	)		(155	)		(145	)
Loss before (benefit from) provision for income taxes		(46,925	)		(41,221	)		(112,570	)		(95,372	)
(Benefit from) provision for income taxes		(128	)		38			(123	)		113
Net loss	$	(46,797	)	$	(41,259	)	$	(112,447	)	$	(95,485	)
Net loss per common share—basic and diluted	$	(1.46	)	$	(1.36	)	$	(3.59	)	$	(3.14	)
Weighted average common shares outstanding—basic and diluted		32,101,832			30,413,946			31,355,190			30,365,142

⁽¹⁾

Includes $556 and $1,143 of costs from Sunovion Pharmaceuticals, Inc. during the three and nine months ended December 31, 2020, respectively (see Note 6[F]). Also, includes $80 and $213 of costs allocated from Roivant Sciences Ltd. during the three and nine months ended December 31, 2019, respectively.

⁽²⁾	Includes $1,627 and $4,562 of interest expense from related-party long-term debt with Sumitomo Dainippon Pharma Co., Ltd. during the three and nine months ended December 31, 2020, respectively (see Note 5).

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

UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Comprehensive Loss

(in thousands)

	Three Months Ended December 31,						Nine Months Ended December 31,
	2020			2019			2020			2019
Net loss	$	(46,797	)	$	(41,259	)	$	(112,447	)	$	(95,485	)
Other comprehensive (loss) income:
Foreign currency translation adjustment		(577	)		29			(476	)		125
Total other comprehensive (loss) income		(577	)		29			(476	)		125
Comprehensive loss	$	(47,374	)	$	(41,230	)	$	(112,923	)	$	(95,360	)

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

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			(Loss) 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
Change in fair value of share-based compensation liabilities recorded 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	)
Share-based compensation expense		—		—		—			1,824			—			—			1,824
Exercise of stock options		670,318		—		—			2,921			—			—			2,921
Share-based compensation liabilities reclassified to equity upon exercise of stock options		—		—		—			2,045			—			—			2,045
Change in fair value of share-based compensation liabilities recorded to additional paid-in capital		—		—		—			194			—			—			194
Foreign currency translation adjustment		—		—		—			—			—			58			58
Net loss		—		—		—			—			(35,156	)		—			(35,156	)
Balance at September 30, 2020		31,576,916		1		(1	)		274,323			(387,926	)		553			(113,050	)
Share-based compensation expense		—		—		—			1,895			—			—			1,895
Exercise of stock options		908,221		—		—			6,375			—			—			6,375
Share-based compensation liabilities reclassified to equity upon exercise of stock options		—		—		—			6,310			—			—			6,310
Vesting of restricted stock units, net of tax withholding		21,145		—		—			(20	)		—			—			(20	)
Issuance of common shares pursuant to 2019 ESPP		27,677		—		—			247			—			—			247
Foreign currency translation adjustment		—		—		—			—			—			(577	)		(577	)
Net loss		—		—		—			—			(46,797	)		—			(46,797	)
Balance at December 31, 2020		32,533,959	$	1	$	(1	)	$	289,130		$	(434,723	)	$	(24	)	$	(145,617	)

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

UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity — Continued

(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) 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
Capital contributions from RSI and RSG		—		—		—			60			—			—			60
Share-based compensation expense		—		—		—			1,221			—			—			1,221
Exercise of stock options		41,001		—		—			150			—			—			150
Warrants issued with long-term debt		—		—		—			438			—			—			438
Foreign currency translation adjustment		—		—		—			—			—			(92	)		(92	)
Net loss		—		—		—			—			(25,741	)		—			(25,741	)
Balance at September 30, 2019		30,381,433		1		(1	)		253,148			(229,757	)		365			23,756
Capital contributions from RSI and RSG		—		—		—			61			—			—			61
Share-based compensation expense		—		—		—			12,529			—			—			12,529
Exercise of stock options		128,434		—		—			498			—			—			498
Vesting of restricted stock units, net of tax withholding		9,821		—		—			(63	)		—			—			(63	)
Foreign currency translation adjustment		—		—		—			—			—			29			29
Net loss		—		—		—			—			(41,259	)		—			(41,259	)
Balance at December 31, 2019		30,519,688	$	1	$	(1	)	$	266,173		$	(271,016	)	$	394		$	(4,449	)

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

UROVANT SCIENCES LTD.

Condensed Consolidated Statements of Cash Flows

(in thousands)

	Nine Months Ended December 31,
	2020			2019
Cash flows from operating activities:
Net loss	$	(112,447	)	$	(95,485	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		272			178
Share-based compensation expense		9,324			14,797
Amortization of debt discount and issuance costs		33			664
Non-cash operating lease cost		722			448
Loss on disposal of property and equipment		—			236
Unrealized foreign currency translation adjustment		(476	)		125
Changes in operating assets and liabilities:
Prepaid expenses and other current assets		(8,020	)		2,897
Other assets		(576	)		77
Due from Sumitovant Biopharma Ltd.		172			(111	)
Due to Roivant Sciences Ltd.		(31	)		(8	)
Due to Sunovion Pharmaceuticals, Inc.		182			—
Accounts payable		1,920			463
Accrued expenses		(723	)		4,998
Operating lease liabilities		(621	)		(153	)
Interest payable		—			343
Net cash used in operating activities		(110,269	)		(70,531	)
Cash flows from investing activities:
Purchases of property and equipment		(1,082	)		(732	)
Capitalized website development costs		(245	)		—
Cash used in investing activities		(1,327	)		(732	)
Cash flows from financing activities:
Proceeds from capital contributions from Roivant Sciences Ltd.		—			251
Proceeds from exercise of stock options		10,501			718
Debt financing costs paid		—			(387	)
Deferred offering costs paid		—			(165	)
Cash proceeds from debt financing		—			30,000
Cash proceeds from related-party debt financing		122,000			87,500
Payment of restricted stock units tax withholding on net settlement		(20	)		(63	)
Proceeds from issuance of common shares pursuant to 2019 ESPP		578			—
Net cash provided by financing activities		133,059			117,854
Net change in cash and restricted cash		21,463			46,591
Cash and restricted cash—beginning of period		52,280			86,196
Cash and restricted cash—end of period	$	73,743		$	132,787
Non-cash investing and financing activities:
Warrants issued with long-term debt	$	—		$	438
Debt financing costs included in accrued expenses	$	—		$	213
Reclassification of share-based compensation liabilities to additional paid-in capital upon exercise of stock options	$	9,343		$	—
Change in fair value of share-based compensation liabilities recorded to additional paid-in capital	$	159		$	—
Capitalized regulatory milestone payment in accrued expenses	$	14,000		$	—
Capitalized website development costs in accrued expenses	$	80		$	—
Supplemental disclosure of cash paid:
Income taxes	$	110		$	61
Interest	$	4,519		$	1,641

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

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 biopharmaceutical company focused on developing and commercializing innovative therapies for urologic conditions. The Company’s lead product, GEMTESA (vibegron), is an oral, once-daily (75 mg) small molecule beta-3 agonist approved by the U.S. Food and Drug Administration (“FDA”) in December 2020 for the treatment of adult patients with overactive bladder (“OAB”) with symptoms of urge urinary incontinence, urgency and urinary frequency. The Company is also evaluating GEMTESA for the treatment of OAB in men with benign prostatic hyperplasia (“BPH”). The Company’s 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. (“RSL”). As of December 31, 2020, the Company has the following wholly-owned subsidiaries: (i) Urovant Holdings Ltd. (“UHL”), a private limited company incorporated under the laws of England and Wales; (ii) Urovant Sciences GmbH (“USG”), a company with limited liability formed under the laws of Switzerland; (iii) Urovant Sciences, Inc. (“USI”), a Delaware corporation based in the United States of America; (iv) Urovant Treasury Holdings, Inc. (“UTH”), a Delaware corporation based in the United States of America; and (v) 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 the Sumitomo Transaction 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.

On November 12, 2020, Sumitovant, Titan Ltd., a wholly-owned subsidiary of Sumitovant (“Merger Sub”), USL, and Sumitomo Dainippon Pharma, entered into a definitive Agreement and Plan of Merger (the “Merger Agreement”). Pursuant to the Merger Agreement, and subject to the term and conditions set forth therein, Merger Sub will merge with and into USL (the “Merger”), with USL continuing as the surviving company in the Merger and a wholly-owned subsidiary of Sumitovant (the “Surviving Company”). Subject to the terms and conditions set forth in Merger Agreement, in the event the Merger is consummated, holders of the Company’s common shares (other than Excluded Shares, Parent Owned Shares and Dissenting Shares (as each such term is defined below) will be entitled to receive $16.25 per share, without interest and less any applicable withholding taxes (the “Per Share Merger Consideration”). The consummation of the Merger is not subject to any financing condition. See Note 6[A]) for more details on the Merger Agreement.

Since its inception, the Company has devoted substantially all of its efforts to organizing and staffing the Company, acquiring its product, GEMTESA, and its gene therapy product candidate, URO-902, advancing GEMTESA through its clinical development and approval by the FDA for the treatment of OAB, and preparing for the commercialization of GEMTESA. GEMTESA 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, debt financings, and, prior to its initial public offering, capital contributions from its former parent company, RSL.

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. At December 31, 2020, the Company reported cash of $71.3 million and a shareholders’ deficit of $145.6 million. The Company currently believes its existing cash, together with the draw down under the Sumitomo Loan Agreement (as defined below) of $58.0 million in January 2021 and the remaining financing commitment from Sumitomo Dainippon Pharma of $157.5 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 5 and 13), 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 commercial launch of GEMTESA for the treatment of adult patients with OAB, and the Company’s 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 continued length and severity of the global novel coronavirus (“COVID-19”) pandemic, measures taken to control the spread of COVID-19, and changes in the progress of the Company’s development activities and the impact of its commercialization efforts due to the COVID-19 pandemic.

If the Merger is not approved by the Company’s shareholders as required by the Merger Agreement, any of the other conditions to the consummation of the Merger is not satisfied or waived, or the parties to the Merger Agreement fail to consummate the Merger for any other reason (see Note 6[A]), the Company will seek to obtain additional capital as needed through equity financings, debt or other financing arrangements, such as potential collaboration, license or development agreements. However, given the impact of the COVID-19 pandemic on the U.S. and global financial markets, the limitations on future financing arrangements pursuant to the terms of the Sumitomo Loan Agreement, and 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 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 any additional equity or convertible debt securities may dilute existing shareholders, and the terms of these securities may include liquidation or other preferences that adversely affect the rights of the Company’s existing shareholders.

The Sumitomo Loan Agreement 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, 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 $157.5 million 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 second calendar quarter of 2021, and substantial uncertainty would exist with respect to the Company’s ability to continue as a going concern. In addition, the Company would 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 reducing personnel-related costs and delaying or curtailing of the Company’s commercial launch efforts for GEMTESA, 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 year 2021.

The Company’s future operations are highly dependent on a combination of factors, including (i) the successful commercial launch and market acceptance of GEMTESA; (ii) the success of its other research and development programs; (iii) regulatory approval, successful commercial launch and market acceptance of URO-902 or any future product candidate; (iv) the development of competitive therapies by other biotechnology and pharmaceutical companies; (v) the Company’s ability to manage growth of the organization; (vi) the Company’s ability to protect its technology and products; and, ultimately (vii) 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 December 31, 2020, the condensed consolidated statements of operations and comprehensive loss for the three and nine months ended December 31, 2020 and 2019, the condensed consolidated statements of cash flows for the nine months ended December 31, 2020 and 2019, and the condensed consolidated statements of shareholders’ (deficit) equity for the three and nine months ended December 31, 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 and nine months ended December 31, 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, impairment of long-lived assets (including intangible asset), as well as share-based compensation expenses, research and development expenses and accruals, estimated useful lives of depreciable and amortizable assets, 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 lead product, 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 lead product and gene therapy product candidate, 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 February 12, 2021, 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 February 12, 2021.

[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 12) and its fleet rental program. 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):

	December 31, 2020		March 31, 2020
Cash	$	71,295	$	51,414
Restricted cash		2,448		866
Cash and restricted cash	$	73,743	$	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, Sumitovant and Sunovion Pharmaceuticals, Inc., a wholly-owned subsidiary of Sumitomo Dainippon Pharma (“Sunovion”), 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.

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 10). 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 until 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] Intangible assets:

When the Company determines net assets acquired or products in-licensed do not meet the definition of a business combination under the acquisition method of accounting, the transaction is accounted for as an acquisition of assets, and therefore, no goodwill is recorded and contingent consideration such as payments upon achievement of various developmental, regulatory and commercial milestones generally is not recognized at the acquisition date. In an asset acquisition, up-front payments allocated to in-process research and development (“IPR&D”) projects at the acquisition date and subsequent milestone payments are charged to expense in the Company’s condensed consolidated statements of operations unless there is an alternative future use.

Payments for a product license prior to regulatory approval of the product and payments for milestones achieved prior to regulatory approval of the product are expensed in the period incurred as research and development. When development is successfully completed, which generally occurs when regulatory approval is obtained, the milestone payments made in connection with regulatory approvals are capitalized and deemed finite-lived intangible assets which are amortized, primarily on a straight-line basis if the pattern of cash flows cannot be reliably estimated, to cost of product sales over their respective estimated useful lives beginning at that point in time. Any future regulatory or sales-based milestone payments associated with the finite-lived intangible assets are also capitalized.

[G] Impairment of long-lived assets:

Long-lived assets, including property, equipment, and finite-lived intangible assets, are reviewed for impairment whenever facts or circumstances either internally or externally may indicate that the carrying value of an asset may not be recoverable. Should there be an indicator of impairment, the Company tests for recoverability by comparing the estimated undiscounted future cash flows expected to result from the use of the asset to the carrying amount of the asset or asset group. If the asset or asset group is determined to be impaired, any excess of the carrying value of the asset or asset group over its estimated fair value is recognized as an impairment loss.

[H] 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 December 31, 2020 and 2019, potentially dilutive securities were as follows:

	December 31,
	2020		2019
Options		2,906,012		4,358,720
Restricted stock units (unvested)		1,909,930		89,650
Stock appreciation rights		845,732		—
Warrants		99,777		99,777
Total		5,761,451		4,548,147

[I] 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.

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 December 31, 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—Intangible asset

A summary of the Company’s finite-lived intangible asset as of December 31, 2020 is as follows (in thousands, except for years):

	December 31, 2020
	Amortization Period (Years)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Finite-lived asset:
Intangible asset - vibegron	10	$	14,000	$	—	$	14,000

During the three and nine months ended December 31, 2020, there was no amortization expense recognized for our finite-lived intangible asset. The following table summarizes the estimated future amortization expense associated with our finite-lived intangible asset at December 31, 2020 (in thousands):

Years Ending March 31,	Amount
Remainder of 2021	$	353
2022		1,412
2023		1,412
2024		1,412
2025		1,412
Thereafter		7,999
Total	$	14,000

Note 4—Accrued expenses

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

	December 31, 2020		March 31, 2020
Research and development expenses	$	25,651	$	13,728
Compensation-related expenses		5,437		6,296
Professional services expenses		482		433
Other general and administrative expenses		3,543		1,299
Total accrued expenses	$	35,113	$	21,756

Note 5—Related-party long-term debt

On December 27, 2019, the Company entered into a $300.0 million unsecured revolving debt facility with Sumitomo Dainippon Pharma (the “Sumitomo Loan Agreement”), and in February 2021, the Company and Sumitomo Dainippon Pharma amended the Sumitomo Loan Agreement to increase the Company’s borrowing capacity pursuant to the Sumitomo Loan Agreement to $425.0 million (see Note 13[A]).

Sumitomo Dainippon Pharma funded an initial amount of $87.5 million on December 30, 2019 under the terms of the Sumitomo Loan Agreement. During the nine months ended December 31, 2020, Sumitomo Dainippon Pharma funded an amount of $122.0 million. In addition, in January 2021, Sumitomo Dainippon Pharma funded an additional amount of $58.0 million (see Note 13[A]). Additional funds may be drawn down by the Company, upon request, no more than once in any calendar quarter, pursuant 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, a margin adjustment that is consistent with industry accepted successor rates for determining a LIBOR replacement. The interest rate on the Loans was 3.22% at December 31, 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 December 31, 2020.

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 sheets. 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 statements of operations.

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

	December 31, 2020			March 31, 2020
Principal amount	$	209,500		$	87,500
Less: unamortized debt issuance costs		(215	)		(248	)
Loan payable less unamortized debt issuance costs		209,285			87,252
Less: current maturities		—			—
Long-term debt, net of unamortized debt issuance costs	$	209,285		$	87,252

Note 6—Related party transactions

[A] Merger agreement – Sumitomo Dainippon Pharma and Sumitovant

On November 12, 2020, Sumitovant, Merger Sub, USL, and Sumitomo Dainippon Pharma, entered into the Merger Agreement. Pursuant to the Merger Agreement, and subject to the terms and conditions set forth therein, Merger Sub would be merged with and into USL (the “Merger”), with USL continuing as the surviving company in the Merger.

The respective obligations of USL, Sumitovant and Merger Sub to effect the Merger are subject to the satisfaction, or to the extent permitted by applicable law, waiver of certain customary conditions, including requirements that a proposal to approve and adopt the Merger Agreement and certain related agreements and transactions (such proposal, the “Merger Proposal”) is approved at a meeting of the Company’s shareholders by (i) holders of at least 66 2/3% of the issued and outstanding common shares of USL entitled to vote on the Merger Proposal and voting at such meeting (the “General Shareholder Approval”), and (ii) holders of at least a majority of the outstanding common shares of USL held by shareholders of the Company other than Sumitovant and its affiliates (the “Public Shareholder Approval”). However, the consummation of the Merger is not subject to any financing condition.

Subject to the terms and conditions set forth in the Merger Agreement, at the effective time of the Merger (the “Effective Time”), (i) each share of USL’s common stock, par value $0.000037453 per share, issued and outstanding immediately prior to the Effective Time (other than Excluded Shares, Parent Owned Shares and shares for which shareholders have sought appraisal rights under the applicable laws of Bermuda (as each term is defined below)) will automatically cease to exist, and each holder of a common share will cease to have any rights with respect thereto, except for the right to receive the Per Share Merger Consideration; (ii) any common share owned by USL as a treasury share and any common share owned directly by any direct or indirect wholly-owned subsidiary of USL (each, an “Excluded Share”), in each case as of immediately prior to the Effective Time, will be canceled, be no longer outstanding, and will automatically cease to exist, and no consideration will be delivered in exchange therefor; and (iii) each common share that is owned directly by Sumitovant as of immediately prior to the Effective Time (each, a “Parent Owned Share”) will remain outstanding and will constitute a common share of the Surviving Company.

In addition, immediately prior to the Effective Time, (i) each option to purchase common shares that is outstanding and unexercised, whether vested or unvested, that has an exercise price per common share that is less than the Per Share Merger Consideration will be canceled and converted into the right to receive the Per Share Merger Consideration, net of the applicable exercise price, (ii) each option to purchase common shares that is outstanding and unexercised, whether vested or unvested, that has an exercise price per common share that is equal to or greater than the Per Share Merger Consideration will be canceled without payment, (iii) each SAR that is outstanding and unexercised, whether vested or unvested, that has a strike price per common share that is less than the Per Share Merger Consideration will be canceled and converted into the right to receive the Per Share Merger Consideration, net of the applicable strike price, (iv) each SAR that is outstanding and unexercised, whether vested or unvested, that has an exercise price per common share that is equal to or greater than the Per Share Merger Consideration will be canceled without payment, and (v) each then-outstanding time-based restricted share unit of USL and each common share granted by USL that is subject to a restriction on transfer that lapses at the end of a specified period or periods (whether vested or unvested) that has not been settled in common shares of USL prior to the Effective Time will be canceled and the holder thereof will have the right to receive a single lump sum cash payment, without interest, equal to the Per Share Merger Consideration, less any applicable withholding for taxes.

The respective obligations of USL, Sumitovant and Merger Sub to effect the Merger are subject to the satisfaction, or to the extent permitted by applicable law, waiver of several customary conditions, including: (i) the receipt of the General Shareholder Approval and the Public Shareholder Approval, (ii) the absence of any law, injunction, judgment or other legal restraint that prohibits the consummation of the Merger, (iii) the accuracy of each party’s representations and warranties (subject to certain qualifications), (iv) each party’s compliance in all material respects with its obligations contained in the Merger Agreement and (v) the absence of a material adverse effect on USL.

Sumitovant and USL have made customary representations, warranties and covenants in the Merger Agreement, including covenants, in the case of USL, to cause a meeting of its shareholders to be duly called and held as soon as reasonably practicable following the clearance of a proxy statement and the Schedule 13E-3 in connection with the Merger by the SEC for the purpose of voting on the adoption of the Merger Agreement. USL has also agreed to conduct its business in the ordinary course consistent with past practice, including not taking certain specified actions, prior to the consummation of the Merger or the termination of the Merger Agreement pursuant to its terms.

The Merger Agreement also contains certain termination rights for each of Sumitovant and USL and further provides that, upon termination of the Merger Agreement, under specified circumstances, USL may be required to pay Sumitovant a termination fee of $13.62 million. No amounts have been paid to or received from Sumitovant under the Merger Agreement; however, the Company believes the Merger Agreement is material to its business and operations.

[B] Voting agreement – Sumitovant

On November 12, 2020, Sumitovant and USL entered into a Voting and Support Agreement (the “Voting Agreement”) whereby Sumitovant has agreed, among other things, that at any meeting of the shareholders of USL or in connection with any written consent of the shareholders of USL, Sumitovant will appear at such meeting or cause its common shares to be counted as present at such meeting for purposes of establishing a quorum and, so long as Sumitovant is not prohibited from doing so by applicable law or a contractual obligation with USL, vote or consent in favor of the Merger and the adoption of the Merger Agreement.

No amounts have been paid to or received from Sumitovant under the Voting Agreement; however, the Company believes the Voting Agreement is material to its business and operations.

[C] Sumitomo loan agreement – Sumitomo Dainippon Pharma:

See Note 5 for information regarding the Sumitomo Loan Agreement.

[D] 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 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 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 to or received from Sumitomo Dainippon Pharma and Sumitovant under the Investor Rights Agreement; however, the Company believes the Investor Rights Agreement is material to its business and operations.

[E] 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 the Company’s 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 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 to or received from Sumitovant under the Sumitovant Information Sharing Agreement; however, the Company believes the Sumitovant Information Sharing Agreement is material to its business and operations.

[F] Market access services agreement – Sunovion:

On June 17, 2020, USG entered into a market access services agreement (as amended, the “Market Access Services Agreement”) with Sunovion. USG and Sunovion subsequently amended the Market Access Services Agreement on December 21, 2020 and January 8, 2021 to clarify and add certain terms to the Market Access Services Agreement. Pursuant to the Market Access Services Agreement, among other things, USG appointed Sunovion as the exclusive distributor of GEMTESA in the United States, including all of its territories and possessions (the “Territory”).

Sunovion, in turn, has agreed to provide certain market access services with respect to the distribution and sale of GEMTESA, including, among other things: (i) adding GEMTESA to Sunovion’s agreements with its third party logistics providers; (ii) adding GEMTESA 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 GEMTESA; (iv) managing the validation, processing and payment of rebates, chargebacks, and certain administrative, distribution and service fees related to GEMTESA; (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 GEMTESA 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 GEMTESA 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 (i) reimburse Sunovion for any pass-through expenses it incurs while providing the services and (ii) 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.

During the three and nine months ended December 31, 2020, the Company incurred expenses of $0.6 million and $1.1 million, respectively, pursuant to the Market Access Services Agreement, which is included in general and administrative expenses in the accompanying condensed consolidated statements of operations. As of December 31, 2020, the Company’s outstanding obligation pursuant to the Market Access Services Agreement is $0.2 million.

[G] Co-promotion agreement – Sunovion:

On October 6, 2020, USG entered into a Co-Promotion Agreement (the “Co-Promotion Agreement”) with Sunovion. Pursuant to the Co-Promotion Agreement, among other things, USG appointed Sunovion as its co-promoter of GEMTESA to primary care physicians in the Territory, for the period commencing upon the regulatory approval of GEMTESA and ending on March 31, 2026 (the “Co‑Promotion Period”).

Sunovion has agreed, among other things, to use its commercially reasonable efforts to co-promote GEMTESA to primary care physicians in the Territory during the Co-Promotion Period. Sunovion has also agreed that during the term of the Co-Promotion Agreement it will not directly or indirectly promote, co-promote, detail, market or commercialize any other products with an indication for OAB, and will cause its affiliates to refrain from the same.

In addition, the Company has agreed, among other things to: (i) use its commercially reasonable efforts to co-promote, manufacture, and otherwise commercialize GEMTESA in the Territory; (ii) prepare all materials that will be used to promote and market GEMTESA, subject to review and approval of the parties; (iii) develop and provide to Sunovion all materials necessary to train Sunovion’s sales representatives and managers; and (iv) remain responsible for all regulatory obligations related to GEMTESA.

During the Co-Promotion Period, USG and Sunovion will incur expenses related to the co-promotion of GEMTESA to primary care physicians in accordance with a budget that the parties will develop, review and approve annually. Sunovion has agreed that for the period commencing upon the regulatory approval of GEMTESA and ending on March 31, 2023 (the “Initial Co‑Promotion Period”), it will incur at least $60 million of co-promotion expenses specific to the promotion of GEMTESA, which amount may be increased upon agreement of the parties (the “Initial Threshold”). After Sunovion reaches the Initial Threshold in expenses for the Initial Co-Promotion Period, USG shall be responsible for all co-promotion expenses incurred thereafter.

As consideration for the co-promotion activities, starting on April 1, 2023, USG will pay Sunovion certain percentages of the net sales of GEMTESA in the Territory on a quarterly basis until the amounts paid reach a contractually agreed payment threshold that will be calculated based on the amount expended by Sunovion under the Initial Threshold (the “Payout Threshold”). USG will pay Sunovion the percentages of the net sales of GEMTESA until Sunovion has received fees totaling $108 million, plus any expenses that Sunovion incurs in excess of $60 million through the Co-Promotion Period.

In addition to the foregoing, the Co-Promotion Agreement also contains customary representations and warranties by the parties and customary provisions related to dispute resolution, confidentiality, indemnification and insurance. The term of the Co-Promotion Agreement will expire upon the later of (i) the end of the Co-Promotion Period or (ii) when the payments received by Sunovion reach the Payout Threshold. However, 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. USG may also terminate the Co-Promotion Agreement for any reason or no reason at all upon six months prior notice to Sunovion.

No amounts were incurred pursuant to the Co-Promotion Agreement during the three and nine months ended December 31, 2020.

[H] 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 12 for more details on the sublease.

Note 7—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 December 31, 2020 and 2019 was 0.27% and (0.09)%, respectively. The Company’s effective tax rate for the nine months ended December 31, 2020 and 2019 was 0.11% and (0.12)%, 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 8—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 December 31, 2020, the Company has not sold any common shares under its “at-the-market” equity offering program.

Note 9—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 Board prior to any such increase date. On November 1, 2020, the number of common shares authorized for issuance increased automatically by 1,266,394 shares in accordance with the evergreen provision of the 2017 Plan. Previous increases in the number of common shares authorized for issuance in accordance with the evergreen provision of the 2017 Plan totaled 2,428,173 shares.

At December 31, 2020, a total of 2,805,310 common shares were available for future issuance under the 2017 Plan.

Inducement incentive plan:

On October 15, 2020, the compensation committee of the Board adopted the Inducement Incentive Plan (the “Inducement Plan”) pursuant to which the Company may grant nonstatutory options to purchase common shares, restricted share awards, restricted share unit awards, share appreciation rights, performance share awards, cash awards, and other forms of share compensation as an inducement to individuals to join the Company. The Inducement Plan, as adopted, allows the Company to deliver up to 600,000 shares (the “Share Limit”) of its common stock to eligible persons, as defined in the Inducement Plan. As of December 31, 2020, no awards have been granted pursuant to the Inducement Plan.

2019 Employee Stock Purchase Plan:

In July 2019, the 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; provided that the Company’s Board may approve an increase of a lesser number of common shares prior to any such increase date. On November 1, 2020, the number of common shares authorized for issuance increased automatically by 306,352 shares in accordance with the evergreen provision of the 2019 ESPP.

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 and nine months ended December 31, 2020 using the Black-Scholes option-pricing model was $3.91 and $4.53, respectively.

During the three and nine months ended December 31, 2020, 27,677 and 67,218 common shares, respectively, were issued pursuant to the 2019 ESPP for total proceeds of $0.2 million and $0.6 million, respectively, and, as of December 31, 2020, 382,782 shares remain available for future issuance under the 2019 ESPP. At December 31, 2020 and March 31, 2020, the Company had an outstanding liability of $0.04 million and $0.2 million, respectively, which is included in accrued expenses in the condensed consolidated balance sheets.

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 December 31,		Nine Months Ended December 31,
	2020	2019	2020	2019
Risk-free interest rate	0.43%	1.55% - 1.72%	0.28% - 0.56%	1.39% - 2.33%
Expected term, in years	6.11	6.11	5.50 - 6.11	5.50 - 6.11
Expected volatility	76.9%	68.9% - 70.0%	76.5% - 78.4%	62.7% - 70.0%
Expected dividend yield	—%	—%	—%	—%

The following table presents a summary of stock option activity and data under the Company’s 2017 Plan through December 31, 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		621,400		$	9.72	$	6.44
Forfeited		(39,150	)	$	12.31	$	7.95
Exercised		(1,810,338	)	$	5.80	$	3.64
Options outstanding at December 31, 2020		2,906,012		$	8.04	$	5.16		8.20	$	23,506
Options exercisable at December 31, 2020		2,113,487		$	7.33	$	4.66		7.77	$	18,608

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 December 31, 2020. At December 31, 2020, there were 2,113,487 vested or exercisable options outstanding. During the three and nine months ended December 31, 2020, the Company granted options to purchase 6,700 and 621,400 common shares, respectively, to certain employees and directors of the Company with a weighted-average exercise price and grant date fair value per share of $9.54 and $6.32 and $9.72 and $6.44, respectively, under the 2017 Plan. The aggregate intrinsic value of options exercised to purchase 908,221 and 1,810,338 common shares, respectively, during the three and nine months ended December 31, 2020 was $7.3 million and $11.7 million, respectively.

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 10). 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 and nine months ended December 31, 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 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 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 10). The estimated fair value of the SARs granted was $6.2 million and $5.2 million, respectively, at December 31, 2020 and March 31, 2020.

Restricted stock unit (“RSUs”):

A summary of restricted stock unit activity under the Company’s 2017 Plan through December 31, 2020 is as follows:

	Number of Shares			Weighted Average Grant Date Fair Value
Unvested balance at March 31, 2020		751,927		$	13.84
Granted		1,424,361		$	9.23
Forfeited		(243,946	)	$	13.61
Vested		(22,412	)	$	10.06
Unvested balance at December 31, 2020		1,909,930		$	10.48

The fair value of the RSUs is estimated at the grant date using the Company’s common share price. During the three and nine months ended December 31, 2020, the Company granted RSUs totaling 92,300 and 1,424,361, respectively, to certain employees and directors of the Company. The weighted average grant-date fair value of RSUs granted during the three and nine months ended December 31, 2020 was $11.37 and $9.23 per unit, respectively.

Share-based compensation expense:

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

	Three Months Ended December 31,				Nine Months Ended December 31,
	2020		2019		2020		2019
Share-based compensation recognized as:
Research and development	$	404	$	2,844	$	1,192	$	3,366
General and administrative		5,516		9,685		8,132		11,431
	$	5,920	$	12,529	$	9,324	$	14,797

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 $25.4 million at December 31, 2020 and is expected to be recognized over a weighted-average period of 3.22 years.

Note 10—Fair value measurements

As of December 31, 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 9), 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 December 31, 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 December 31, 2020 and March 31, 2020 (in thousands):

	As of December 31, 2020
	Level 1		Level 2		Level 3		Total Fair Value
Liabilities:
Share-based compensation liability - stock options	$	—	$	—	$	1,112	$	1,112
Share-based compensation liability - SARs		—		—		1,195		1,195
Total liabilities	$	—	$	—	$	2,307	$	2,307

	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

The fair value of the stock options liability as of December 31, 2020 was calculated using the following significant unobservable inputs:

Input		December 31, 2020
Risk-free interest rate		0.10%
Expected dividend yield		—%
Expected term, in years		0.75
Expected volatility		97.7%
Exercise price (per share)		$3.86 - $4.01
Share price (per share)		$16.13
Number of stock options valued		90,000

The fair value of the SARs liability as of December 31, 2020 was calculated using the following significant unobservable inputs:

Input		December 31, 2020
Risk-free interest rate		0.86%
Expected dividend yield		—%
Expected term, in years		9.23
Expected volatility		81.3%
Post-vesting cancellation rate		5.6%
Exercise ratio		2.8
Exercise price (per share)		$9.16
Share price (per share)		$16.13
Probability input for completion of Merger		95.0%
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 nine months ended December 31, 2020 (in thousands):

	Stock Options			SARs
Balance at March 31, 2020	$	7,204		$	32
Additions		—			—
Change in fair value		3,251			1,163
Settlements		(9,343	)		—
Balance at December 31, 2020	$	1,112		$	1,195

Note 11—Commitments and contingencies

The Company entered into certain commitments under the Merck license agreement, the ICI license agreement, the enzyme supply agreement with Codexis, Inc., the information sharing collaboration agreement with Kyorin Pharmaceutical Co., Ltd and the Co-Promotion Agreement (see Note 6[G]).

In December 2020, the Company achieved a certain regulatory milestone pursuant to the Merck license agreement and, as a result, recorded a milestone payment of $14.0 million, which is included in intangible asset and accrued expenses as of December 31, 2020 in the accompanying condensed consolidated balance sheet (see Note 3).

The Company also achieved a certain regulatory milestone pursuant to the enzyme supply agreement and, as a result, recorded a milestone payment of $0.5 million, which is included in research and development expenses for the three and nine months ended December 31, 2020 in the accompanying condensed consolidated statement of operations.

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 and its manufacturing of future commercial supply for GEMTESA. 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.

During the three and nine months ended December 31, 2020, 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, 2020 included in the Company’s Annual Report on Form 10-K filed with the SEC on June 19, 2020.

Shareholder Litigation

Since the announcement of the Merger Agreement on November 12, 2020, three single-plaintiff lawsuits have been filed against USL and each of the directors serving on the Board concerning the Merger. The first lawsuit was filed by Claudia Cisneros on January 27, 2021 in the United States District Court for the Southern District of New York, Case No. 1:21-CV-00735. The second lawsuit was filed on January 28, 2021 by Michelle Sovereign in the United States District Court for the District of Delaware, Case No. 1:21-CV-00112. The third lawsuit was filed on February 1, 2021 by Matthew Ho in the United States District Court for the Eastern District of New York, Case No. 1:21-CV-00542. All three lawsuits assert purported violations of Sections 14(a) and 20(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) based on allegations that the Company’s preliminary proxy statement filed on December 29, 2020 with the SEC omits information about the background of the Merger, the Company’s financial projections set forth in the preliminary proxy statement, and the financial analyses of the financial advisor retained by the special committee of the Board to evaluate the fairness of the Merger from a financial standpoint. All three lawsuits seek, among other things, an injunction preventing the consummation of the Merger, or if the Merger is consummated, rescission of the Merger or an award of rescissory damages, a declaration that the Company and its directors violated Sections 14(a) and 20(a) of the Exchange Act, and the award to the plaintiff of the costs of the action, including reasonable allowance for plaintiffs’ attorneys’ and experts’ fees. The Company believes the suits are without merit and intends to defend vigorously against them.

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, unless the Company has determined that any such reasonably possible losses will not have a material impact on the Company’s results of operations, financial condition or cash flows. The Company believes the outcome of currently pending claims or lawsuits will not likely have a material effect on its consolidated operations or financial position.

Note 12—Leases

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 fifth 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 the Company is obligated to pay certain variable costs, including common area maintenance expenses. The lease commenced in June 2019, and the Company recognized an operating lease right-of-use asset of $3.0 million and an operating lease liability of $3.0 million. 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 noncurrent restricted cash as of December 31, 2020 and March 31, 2020. The remaining lease term is 5.4 years at December 31, 2020, and the estimated incremental borrowing rate applied is 12.4%.

In April 2020, the Company entered into an amendment to its Irvine facility operating lease to add approximately 6,865 square feet of office space for a total of approximately 28,354 square feet. The lease term and option to extend the lease term for the additional office space is concurrent with the existing operating lease and expires in May 2026. Subject to rent abatement for the first through fifth months of the additional leased office space, the Company will be required to pay $17,918 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 the Company is obligated to pay certain variable costs, including common area maintenance expenses. In accordance with ASC 842, Leases, the Company determined the operating lease for the additional office space to be a separate lease and not an amendment of the original lease terms of the Irvine facility. The lease commenced in May 2020, and the Company recognized an operating lease right-of-use asset of $0.9 million and an operating lease liability of $0.9 million. The remaining lease term was 5.4 years at December 31, 2020, and the estimated incremental borrowing rate applied was 11.6%.

In June 2019, the Company entered into a sublease agreement with a related party, 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 is 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, and the Company recognized an operating lease right-of-use asset of $0.4 million and an operating lease liability of $0.4 million. 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 noncurrent restricted cash as of December 31, 2020 and March 31, 2020. The remaining lease term is 4.6 years at December 31, 2020, 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):

	December 31, 2020		March 31, 2020
Operating lease right-of-use assets	$	3,705	$	3,135

Operating lease liabilities, current portion	$	520	$	351
Operating lease liabilities, long-term portion		3,588		3,086
Total lease liabilities	$	4,108	$	3,437

Weighted average remaining lease term (years)	5.4 years		6.1 years
Weighted average discount rate	12.2%		12.4%

Supplemental cash flow information for the nine months ended December 31, 2020 and 2019 related to operating leases as follows (in thousands):

		December 31,

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

Emerging growth company

Urovant Sciences Ltd. 10-Q