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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 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, 2019

☐ 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 001-37929

Myovant Sciences Ltd.

(Exact name of registrant as specified in its charter)



Bermuda		98-1343578
(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: +44 207 400 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, $0.000017727 par value per share	MYOV	New York Stock Exchange

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 ý No o

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 ý No o

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



Large accelerated filer	ý	Accelerated filer	☐
Non-accelerated filer	o	Smaller reporting company	☒
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

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

The number of shares outstanding of the Registrant’s common shares, $0.000017727 par value per share, on January 31, 2020, was 89,788,054.

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MYOVANT SCIENCES LTD.

QUARTERLY REPORT ON FORM 10-Q

FOR THE QUARTER ENDED DECEMBER 31, 2019

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	Page
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Condensed Consolidated Balance Sheets as of December 31, 2019 and March 31, 2019 (Unaudited)	3
Condensed Consolidated Statements of Operations for the Three and Nine Months Ended December 31, 2019 and 2018 (Unaudited)	4
Condensed Consolidated Statements of Comprehensive Loss for the Three and Nine Months Ended December 31, 2019 and 2018 (Unaudited)	5
Condensed Consolidated Statements of Shareholders' (Deficit) Equity for the Three and Nine Months Ended December 31, 2019 and 2018 (Unaudited)	6
Condensed Consolidated Statements of Cash Flows for the Nine Months Ended December 31, 2019 and 2018 (Unaudited)	8
Notes to Condensed Consolidated Financial Statements (Unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3. Quantitative and Qualitative Disclosures About Market Risk	42
Item 4. Controls and Procedures	42
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	78
Item 3. Defaults Upon Senior Securities	78
Item 4. Mine Safety Disclosures	78
Item 5. Other Information	78
Item 6. Exhibits	79

Signatures	80

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MYOVANT SCIENCES LTD.

Condensed Consolidated Balance Sheets

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



	December 31, 2019			March 31, 2019
Assets
Current assets:
Cash and cash equivalents	$	83,073		$	156,074
Marketable securities	15,815			—
Prepaid expenses and other current assets	12,086			10,194
Income tax receivable	—			524
Total current assets	110,974			166,792
Property and equipment, net	2,406			2,071
Operating lease right-of-use asset	11,491			—
Other assets	4,636			4,114
Total assets	$	129,507		$	172,977
Liabilities and shareholders’ (deficit) equity
Current liabilities:
Accounts payable	$	6,617		$	11,019
Interest payable	—			1,077
Interest payable (related party)	16			—
Accrued expenses	45,214			53,735
Operating lease liability	1,449			—
Current maturities of long-term debt	—			6,142
Total current liabilities	53,296			71,973
Deferred rent	—			1,157
Deferred interest payable	—			2,273
Long-term operating lease liability	11,399			—
Long-term debt, less current maturities	—			93,240
Long-term debt, less current maturities (related party)	113,700			—
Total liabilities	178,395			168,643
Commitments and contingencies (Note 12)
Shareholders’ (deficit) equity:
Common shares, par value $0.000017727 per share, 564,111,242 shares authorized, 89,787,654 and 72,057,490 issued and outstanding at December 31, 2019 and March 31, 2019, respectively	2			1
Additional paid-in capital	678,034			505,851
Accumulated other comprehensive (loss) income	(823		)	507
Accumulated deficit	(726,101		)	(502,025		)
Total shareholders’ (deficit) equity	(48,888		)	4,334
Total liabilities and shareholders’ (deficit) equity	$	129,507		$	172,977

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

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MYOVANT SCIENCES LTD.

Condensed Consolidated Statements of Operations

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



	Three Months Ended December 31,						Nine Months Ended December 31,
	2019			2018			2019			2018
Operating expenses:
Research and development ⁽¹⁾	$	48,927		$	58,434		$	150,847		$	163,588
General and administrative ⁽²⁾	29,142			10,686			59,897			29,738
Total operating expenses	78,069			69,120			210,744			193,326
Interest expense	3,641			1,634			11,222			4,831
Loss on extinguishment of debt	4,851			—			4,851			—
Interest expense (related party)	16			—			16			—
Interest income	(597		)	—			(2,305		)	—
Other (income) expense, net	(567		)	(121		)	(1,151		)	147
Loss before income taxes	(85,413		)	(70,633		)	(223,377		)	(198,304		)
Income tax expense	191			—			699			233
Net loss	$	(85,604	)	$	(70,633	)	$	(224,076	)	$	(198,537	)
Net loss per common share — basic and diluted	$	(0.96	)	$	(1.04	)	$	(2.64	)	$	(3.01	)
Weighted average common shares outstanding — basic and diluted	88,893,579			67,616,419			84,750,114			65,873,779

⁽¹⁾ Includes $25 and $41 of costs allocated from the Company’s former majority shareholder, during the three months ended December 31, 2019 and 2018, respectively, and $76 and $2,524 of costs allocated from the Company’s former majority shareholder during the nine months ended December 31, 2019 and 2018, respectively. Also includes share-based compensation expense (see Note 10).

⁽²⁾ Includes $195 and $470 of costs allocated from the Company’s former majority shareholder during the three months ended December 31, 2019 and 2018, respectively, and $617 and $2,644 of costs allocated from the Company’s former majority shareholder during the nine months ended December 31, 2019 and 2018, respectively. Also includes share-based compensation expense (see Note 10).

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

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MYOVANT SCIENCES LTD.

Condensed Consolidated Statements of Comprehensive Loss

(unaudited; in thousands)



	Three Months Ended December 31,						Nine Months Ended December 31,
	2019			2018			2019			2018
Net loss	$	(85,604	)	$	(70,633	)	$	(224,076	)	$	(198,537	)
Other comprehensive (loss) income:
Foreign currency translation adjustment	(792		)	(150		)	(1,330		)	203
Total other comprehensive (loss) income	(792		)	(150		)	(1,330		)	203
Comprehensive loss	$	(86,396	)	$	(70,783	)	$	(225,406	)	$	(198,334	)

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

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MYOVANT SCIENCES LTD.

Condensed Consolidated Statements of Shareholders’ (Deficit) Equity

(unaudited; in thousands, except share data)



	Common Shares			Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ (Deficit) Equity
	Shares	Amount		Additional Paid in Capital			Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ (Deficit) Equity
Balance at March 31, 2019	72,057,490	$	1	$	505,851		$	507		$	(502,025	)	$	4,334
Issuance of shares in connection with “at-the-market” equity offering, net of commissions of $79	106,494	—		2,546			—			—			2,546
Issuance of shares in connection with public equity offering, net of commissions and offering costs of $9,212	17,424,243	1		134,537			—			—			134,538
Share-based compensation expense	—	—		6,410			—			—			6,410
Capital contribution from former majority shareholder — share-based compensation	—	—		42			—			—			42
Capital contribution from former majority shareholder	—	—		106			—			—			106
Foreign currency translation adjustment	—	—		—			(819		)	—			(819		)
Issuance of shares upon exercise of stock options and vesting of RSUs	34,399	—		314			—			—			314
Net loss	—	—		—			—			(67,904		)	(67,904		)
Balance at June 30, 2019	89,622,626	2		649,806			(312		)	(569,929		)	79,567
Public equity offering, additional offering costs	—	—		(80		)	—			—			(80		)
Share-based compensation expense	—	—		7,879			—			—			7,879
Capital contribution from former majority shareholder — share-based compensation	—	—		52			—			—			52
Capital contribution from former majority shareholder	—	—		123			—			—			123
Foreign currency translation adjustment	—	—		—			281			—			281
Issuance of shares upon vesting of RSUs	938	—		—			—			—			—
Net loss	—	—		—			—			(70,568		)	(70,568		)
Balance at September 30, 2019	89,623,564	2		657,780			(31		)	(640,497		)	17,254
Share-based compensation expense	—	—		19,740			—			—			19,740
Capital contribution from former majority shareholder — share-based compensation	—	—		55			—			—			55
Capital contribution from former majority shareholder	—	—		105			—			—			105
Foreign currency translation adjustment	—	—		—			(792		)	—			(792		)
Issuance of shares upon exercise of stock options and vesting of PSUs and RSUs	164,090	—		354			—			—			354
Net loss	—	—		—			—			(85,604		)	(85,604		)
Balance at December 31, 2019	89,787,654	$	2	$	678,034		$	(823	)	$	(726,101	)	$	(48,888	)

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	Common Shares			Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ Equity
	Shares	Amount		Additional Paid in Capital		Accumulated Other Comprehensive Income (Loss)			Accumulated Deficit			Total Shareholders’ Equity
Balance at March 31, 2018	60,997,856	$	1	$	266,178	$	24		$	(228,474	)	$	37,729
Issuance of shares in connection with “at-the-market” equity offering, net of commissions and offering costs of $2,110	2,767,129	—		57,315		—			—			57,315
Issuance of shares in connection with Private Placement with former majority shareholder	1,110,015	—		22,500		—			—			22,500
Share-based compensation expense	—	—		4,053		—			—			4,053
Capital contribution from former majority shareholder — share-based compensation	—	—		191		—			—			191
Foreign currency translation adjustment	—	—		—		425			—			425
Issuance of shares upon exercise of stock options	16,218	—		76		—			—			76
Net loss	—	—		—		—			(62,134		)	(62,134		)
Balance at June 30, 2018	64,891,218	1		350,313		449			(290,608		)	60,155
Share-based compensation expense	—	—		4,529		—			—			4,529
Capital contribution from former majority shareholder — share-based compensation	—	—		196		—			—			196
Capital contribution from former majority shareholder	—	—		212		—			—			212
Foreign currency translation adjustment	—	—		—		(72		)	—			(72		)
Issuance of shares in connection with public equity offering, net of commissions and offering costs of $5,110	3,533,399	—		74,391		—			—			74,391
Issuance of shares upon exercise of stock options and vesting of RSUs	60,271	—		460		—			—			460
Net loss	—	—		—		—			(65,770		)	(65,770		)
Balance at September 30, 2018	68,484,888	1		430,101		377			(356,378		)	74,101
Share-based compensation expense	—	—		4,669		—			—			4,669
Capital contribution from former majority shareholder — share-based compensation	—	—		125		—			—			125
Capital contribution from former majority shareholder	—	—		384		—			—			384
Foreign currency translation adjustment	—	—		—		(150		)	—			(150		)
Shares issued to NovaQuest, net of issuance costs	2,286,284	—		37,982		—			—			37,982
Issuance of shares upon exercise of stock options and vesting of RSUs	30,349	—		257		—			—			257
Net loss	—	—		—		—			(70,633		)	(70,633		)
Balance at December 31, 2018	70,801,521	$	1	$	473,518	$	227		$	(427,011	)	$	46,735

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

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MYOVANT SCIENCES LTD.

Condensed Consolidated Statements of Cash Flows

(unaudited; in thousands)



	Nine Months Ended December 31,
	2019			2018
Cash flows from operating activities:
Net loss	$	(224,076	)	$	(198,537	)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation	34,178			13,763
Depreciation and amortization ⁽¹⁾	1,236			298
Amortization of debt discount and issuance costs	1,486			1,378
Loss on extinguishment of debt	4,851			—
Other items	(1,174		)	799
Changes in operating assets and liabilities:
Prepaid expenses and other current assets	(1,892		)	(7,235		)
Income tax receivable	524			233
Other assets	(272		)	(146		)
Accounts payable	(4,402		)	893
Interest payable	(1,077		)	147
Interest payable (related party)	16			—
Accrued expenses	(8,400		)	18,079
Operating lease liabilities	(547		)	—
Due to former majority shareholder	(121		)	(1,894		)
Deferred rent	—			724
Deferred interest payable	(2,273		)	518
Net cash used in operating activities	(201,943		)	(170,980		)
Cash flows from investing activities:
Purchases of marketable securities	(32,076		)	—
Maturities of marketable securities	16,440			—
Purchases of property and equipment	(824		)	(718		)
Net cash used in investing activities	(16,460		)	(718		)
Cash flows from financing activities:
Proceeds from issuance of common shares in “at-the-market” equity offering, net of issuance costs paid	2,546			57,315
Proceeds from issuance of common shares in public equity offering, net of issuance costs paid	134,458			74,391
Proceeds from issuance of common shares in private placement with former majority shareholder	—			22,500
Proceeds from third party debt financings, net of financing costs paid	—			54,000
Proceeds from related party debt financings	113,700			—
Proceeds from issuance of common shares to NovaQuest, net of issuance costs paid	—			38,000
Proceeds from stock option exercises	667			771
Payments on third party debt financings and redemption fees	(105,420		)	—
Payment of annual debt administration fee to NovaQuest	(300		)	(300		)
Net cash provided by financing activities	145,651			246,677
Net change in cash, cash equivalents and restricted cash	(72,752		)	74,979
Cash, cash equivalents and restricted cash, beginning of period	157,199			108,624
Cash, cash equivalents and restricted cash, end of period	$	84,447		$	183,603
Non-cash financing activities:
Offering costs included in accounts payable and accrued expenses	$	—		$	18
Deferred financing costs included in accrued expenses	$	—		$	26
Stock options exercised receivables, included in prepaid expenses and other current assets	$	—		$	(22	)

⁽¹⁾ Includes amortization of operating lease right-of-use asset.

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

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MYOVANT SCIENCES LTD.

Notes to Condensed Consolidated Financial Statements (Unaudited)

Note 1—Description of Business

Myovant Sciences Ltd. (or together with its wholly-owned subsidiaries, the “Company”) is a healthcare company focused on developing innovative treatments for women’s health and prostate cancer. The Company is developing a relugolix combination tablet (relugolix 40 mg plus estradiol 1.0 mg and norethindrone acetate 0.5 mg) for women with heavy menstrual bleeding associated with uterine fibroids and for pain associated with endometriosis, a relugolix monotherapy tablet (120 mg) for men with advanced prostate cancer, and an additional product candidate, MVT-602, an oligopeptide kisspeptin-1 receptor agonist, for the treatment of female infertility as part of assisted reproduction. Both relugolix and MVT-602 were licensed to the Company by Takeda Pharmaceuticals International AG, or Takeda, on April 29, 2016.

The Company is an exempted company limited by shares incorporated under the laws of Bermuda in February 2016 under the name Roivant Endocrinology Ltd. The Company changed its name to Myovant Sciences Ltd. in May 2016. Since its inception, the Company has devoted substantially all of its efforts to identifying and in-licensing its product candidates, organizing and staffing the Company, raising capital, preparing for and advancing the clinical development of its product candidates, and preparing for potential future regulatory approvals and commercialization of relugolix combination tablet and relugolix monotherapy tablet.

The Company has incurred, and expects to continue to incur, significant operating losses and negative operating cash flows as it continues to develop its product candidates and prepares for potential future regulatory approvals and commercialization of relugolix combination tablet and relugolix monotherapy tablet. To date, the Company has not generated any revenue, and it does not expect to generate revenue unless and until it successfully completes development and obtains regulatory approval for at least one of its product candidates. The Company has funded its operations primarily from the issuance and sale of its common shares and from debt financing arrangements. See Note 2(C), Summary of Significant Accounting Policies—Going Concern and Management’s Plans.

On December 27, 2019, Sumitovant Biopharma Ltd. (“Sumitovant”), a subsidiary of Sumitomo Dainippon Pharma Co., Ltd. (“DSP”) became the Company’s majority shareholder and a related party after acquiring 45,008,604 of the Company’s outstanding common shares, representing approximately 50.2% of the Company’s common shares outstanding on December 27, 2019. The common shares were acquired from the Company’s former majority shareholder, Roivant Sciences Ltd. (“Roivant,” “RSL,” or “former majority shareholder”) at the closing of a transaction between Roivant and DSP. See Note 7 for additional information.

Note 2—Summary of Significant Accounting Policies

(A) Basis of Presentation

The Company’s fiscal year ends on March 31, and its first three fiscal quarters end on June 30, September 30 and December 31. The Company has determined that it has one operating and reporting segment as it allocates resources and assesses financial performance on a consolidated basis.

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with United States, or U.S., generally accepted accounting principles, or 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. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the U.S. Securities and Exchange Commission, or the SEC, on May 24, 2019. The unaudited consolidated balance sheet at March 31, 2019 has been derived from the audited consolidated financial statements at that date. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary to present fairly the financial position of the Company and its results of operations and cash flows for the interim periods presented have been included. Operating results for the three and nine months ended December 31, 2019 are not necessarily indicative of the results that may be expected for the fiscal year ending March 31, 2020, for any other interim period or for any other future year.

Any reference in these notes to applicable accounting guidance is meant to refer to the authoritative U.S. GAAP included in the Accounting Standards Codification, or ASC, and Accounting Standards Update, or ASU, issued by the Financial Accounting Standards Board, or FASB. The unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries. The Company has no unconsolidated subsidiaries. All intercompany balances and transactions have been eliminated in consolidation.

There have been no significant changes in the Company’s accounting policies from those disclosed in its Annual Report on Form 10-K for the fiscal year ended March 31, 2019, filed with the SEC on May 24, 2019, except for the adoption of ASU 2016-02, Leases (Topic 842), on April 1, 2019. See Note 2(I).

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(B) Use of Estimates

The preparation of unaudited condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions in certain circumstances that affect the amounts reported in the unaudited 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, share-based compensation expenses, research and development, or R&D, expenses and accruals, and income taxes. The Company bases its estimates and assumptions on historical experience and on various other factors that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of expenses incurred during the reporting period, that are not readily apparent from other sources. Estimates and assumptions are periodically reviewed in light of changes in circumstances, facts, or experience. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could differ from those estimates.

The Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the unaudited condensed consolidated financial statements are issued. During the nine months ended December 31, 2019, the Company incurred net losses of $224.1 million and used $201.9 million of cash and cash equivalents in operations. The Company expects to continue to incur significant and increasing operating losses and negative operating cash flows as it continues to develop its product candidates and prepares for potential future regulatory approvals and commercialization of relugolix combination tablet and relugolix monotherapy tablet. In addition, the Company expects that its outstanding debt levels will increase in future periods, which will result in an increase in its quarterly interest payment obligations. The Company has not generated any revenue to date and does not expect to generate revenue unless and until it successfully completes development and obtains regulatory approval for at least one of its product candidates. Based on its current operating plan, the Company expects that its existing cash, cash equivalents, and marketable securities will be sufficient to fund its operating expenses and capital expenditure requirements at least through the end of the Company’s fiscal year ending March 31, 2020. This estimate is based on the Company’s current assumptions, including assumptions relating to its ability to manage its spend, that might prove to be wrong, and it could use its available capital resources sooner than it currently expects. Current cash, cash equivalents and marketable securities will not be sufficient to enable the Company to complete all necessary development and regulatory activities and commercially launch relugolix combination tablet or relugolix monotherapy tablet. The Company anticipates that it will continue to incur net losses and negative operating cash flows for the foreseeable future.

To continue as a going concern, the Company will need, among other things, additional capital resources. The Company continually assesses multiple options to obtain additional funding to support its operations, including through financing activities in public or private capital markets. Management can provide no assurances that any sources of a sufficient amount of financing will be available to the Company on favorable terms, if at all. Although the Company expects to draw under the DSP Loan Agreement (see Note 7) on a quarterly basis, such draws are contingent upon the consent of the Company’s board of directors. If DSP fails to own at least a majority of the Company’s common shares, the Company would not be able to continue to borrow additional amounts under the DSP Loan Agreement. ASC 240-40, Going Concern, does not allow the Company to consider future financing activities that are uncertain in its assessment of the Company’s future cash burn for the purpose of its liquidity assessment. Although the Company believes that it will continue to raise capital to fund its operations as it has in the past, the DSP Loan Agreement involves, and any agreements for future debt or preferred equity financings, if available, may include covenants limiting or restricting the Company’s ability to take specific actions, such as incurring additional debt and raising capital through equity offerings.

Due to these uncertainties, there is substantial doubt about the Company’s ability to continue as a going concern. The unaudited condensed consolidated financial statements and footnotes have been prepared on the basis that the Company will continue as a going concern, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the possible inability of the Company to continue as a going concern.

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(D) 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, reduced, where applicable, for outstanding yet unvested shares of restricted common stock. The computation of diluted net loss per common share is based on the weighted-average number of common shares outstanding during the period plus, when their effect is dilutive, incremental shares consisting of shares subject to stock options, restricted stock units, restricted stock awards, performance stock units, and warrants. 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 equal. 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.

As of December 31, 2019 and 2018, potentially dilutive securities were as follows:



	December 31,
	2019	2018
Stock options	7,744,257	5,351,908
Restricted stock awards (unvested)	705,137	987,193
Restricted stock units (unvested)	683,729	40,325
Performance stock units (unvested)	299,870	—
Warrants	73,710	73,710
Total	9,506,703	6,453,136

(E) Cash, Cash Equivalents, and Restricted Cash

Cash and cash equivalents include cash deposits in banks and all highly liquid investments that are readily convertible to cash. The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. As of December 31, 2019, cash and cash equivalent balances are diversified between three financial institutions. The Company is exposed to credit risk in the event of default by the financial institutions holding its cash and the issuers of its money market funds and commercial paper. The Company maintains its cash deposits and cash equivalents in highly rated, federally insured financial institutions in excess of federally insured limits. The Company has established guidelines relative to diversification and maturities to maintain safety and liquidity. 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. Interest income consists of interest earned on money market funds and the accretion of discounts to maturity for commercial paper and corporate bonds.

Restricted cash consists of non-interest bearing legally restricted deposits held as compensating balances against the Company’s corporate credit card program and an irrevocable standby letter of credit provided as security for the Company’s office lease.

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



	December 31,
	2019		2018
Cash and cash equivalents	$	83,073	$	183,003
Restricted cash ⁽¹⁾	1,374		600
Total cash, cash equivalents and restricted cash	$	84,447	$	183,603

⁽¹⁾ Included in other assets on the unaudited condensed consolidated balance sheets.

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(F) Marketable Securities

Investments in marketable securities are held in a custodial account at a financial institution and managed by the Company’s investment advisor based on the Company’s investment guidelines. The Company considers all highly liquid investments in securities with a maturity of greater than three months at the time of purchase to be marketable securities. As of December 31, 2019, the Company’s marketable securities consisted of commercial paper and highly rated corporate bonds with maturities of greater than three months but less than twelve months at the time of purchase. These short-term commercial paper and corporate debt securities are classified as current assets on the Company’s unaudited condensed consolidated balance sheets under the caption marketable securities.

The Company classifies its marketable securities as available-for-sale at the time of purchase and reevaluates such designation at each balance sheet date. Unrealized gains and losses on available-for-sale commercial paper and short-term corporate debt securities are excluded from earnings and are recorded in accumulated other comprehensive (loss) income until realized. Any unrealized losses are evaluated for other-than-temporary impairment at each balance sheet date. Realized gains and losses are determined based on the specific identification method and are recorded in other (income) expense, net. See Note 3 for additional information.

(G) Fair Value Measurements

The Company utilizes fair value measurement guidance prescribed by accounting standards to value its financial instruments. The guidance establishes a fair value hierarchy for financial instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect the Company’s assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

Fair value is defined as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the reporting date. As a basis for considering market participant assumptions in fair value measurements, the guidance establishes a three-tier fair value hierarchy that distinguishes among the following:


•	Level 1-Valuations are based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.


•	Level 2-Valuations are based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.


•	Level 3-Valuations are based on inputs that are unobservable (supported by little or no market activity) and significant to the overall fair value measurement.

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

The Company’s financial instruments include cash, cash equivalents consisting of commercial paper, corporate bonds, and money market funds, marketable securities consisting of commercial paper and corporate bonds, accounts payable and debt obligations. Cash, cash equivalents, and accounts payable are stated at their respective historical carrying amounts, which approximate fair value due to their short-term nature. Marketable securities are recorded at their estimated fair value and are included in Level 2 of the fair value hierarchy. The carrying value of the Company’s debt approximates fair value and is included in Level 2 of the fair value hierarchy.

(H) Pushdown Accounting

In November 2014, the FASB issued ASU 2014-17, Business Combinations (Topic 805): Pushdown Accounting. The ASU provides an acquired entity with an option to apply pushdown accounting in its separate financial statements upon occurrence of an event in which an acquirer obtains control of the acquired entity. An acquired entity may elect the option to apply pushdown accounting in the reporting period in which the change in control event occurs. If pushdown accounting is applied to an individual change in control event, that election is irrevocable. The Company elected not to apply pushdown accounting in its unaudited condensed consolidated financial statements upon the change in control of the Company on December 27, 2019. See Note 7 for additional information.

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(I) Recently Adopted Accounting Standards

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which is a comprehensive new lease standard that amends various aspects of existing accounting guidance for leases. The core principle of Topic 842 requires lessees to recognize on the consolidated balance sheets a liability to make lease payments and a right-of-use asset representing its right to use the underlying asset for the lease term for both finance and operating leases with lease terms greater than twelve months. The lease liability is measured at the present value of the unpaid lease payments and the right-of-use asset is derived from the calculation of the lease liability. Topic 842 also requires lessees to disclose key information about leasing arrangements. Topic 842 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018, with early adoption permitted.

A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application (“Transition Date”). An entity may choose to use either (i) its effective date or (ii) the beginning of the earliest comparative period presented in the financial statements as its date of initial application. The Company adopted the new standard on April 1, 2019 and used the effective date as its date of initial application.

The new standard provides a number of optional practical expedients in transition. The Company elected the “package of practical expedients,” which permitted it to not reassess under the new standard its prior conclusions about lease identification, lease classification, and initial direct costs. As a result, the Company has continued to account for existing leases - i.e. leases for which the commencement date is before April 1, 2019 - in accordance with Topic 840 throughout the entire lease term, including periods after the effective date, with the exception that the Company applied the new balance sheet recognition guidance for operating leases and applied Topic 842 for remeasurements and modifications after the Transition Date.

The most significant impact of the adoption of Topic 842 on the Company’s unaudited condensed consolidated financial statements was the recognition of a $9.4 million operating lease right-of-use asset, a $0.8 million current operating lease liability, and a $9.8 million long-term operating lease liability on the Company’s unaudited condensed consolidated balance sheet related to its existing facility operating lease. In addition, the Company reclassified the $1.2 million deferred rent liability for its existing facility lease to the related operating lease right-of-use asset. There was no material impact to the Company’s unaudited condensed consolidated statement of operations, and no cumulative-effect adjustment to accumulated deficit. See Note 11 for additional information.

In February 2018, the FASB issued ASU 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income, or ASU 2018-02. ASU 2018-02 allows companies to reclassify stranded tax effects resulting from the newly enacted federal corporate income tax rate under the Tax Cuts and Jobs Act, from accumulated other comprehensive (loss) income to retained earnings. ASU 2018-02 is effective for fiscal years, and interim periods within those years, beginning after December 15, 2018 and early adoption is permitted. The Company adopted the new standard on April 1, 2019. The adoption of ASU 2018-02 did not have an impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, or ASU 2018-07. ASU 2018-07 simplifies the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. ASU 2018-07 is effective for interim and annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company adopted the new standard on April 1, 2019. The adoption of ASU 2018-07 did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.

In July 2018, the FASB issued ASU 2018-09, Codification Improvements, to make changes to a variety of topics to clarify, correct errors in, or make minor improvements to the ASC. Certain items in the amendments in ASU 2018-09 will be effective for the Company in annual periods beginning after December 15, 2018. The adoption of ASU 2018-09 on April 1, 2019 did not have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.

Other recent accounting pronouncements issued by the FASB, (including its Emerging Issues Task Force), the American Institute of Certified Public Accountants, and the SEC did not, or are not believed by the Company to, have a material impact on the Company’s unaudited condensed consolidated financial statements and related disclosures.

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(J) Recently Issued Accounting Standards

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, or ASU 2016-13, which requires the measurement and recognition of expected credit losses for financial assets held at amortized cost. ASU 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 2016-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact the adoption of this new standard will have on its unaudited condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework-Changes to the Disclosure Requirements for Fair Value Measurement, or ASU 2018-13. ASU 2018-13 amends the disclosure requirements in Topic 820 to promote the exercise of discretion by entities when considering fair value measurement disclosures and clarifies that materiality is an appropriate consideration when evaluating fair value measurement disclosure requirements. Certain required disclosures were added, modified, or removed, including removing the required disclosure of the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. ASU 2018-13 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The Company does not currently expect that the adoption of this new standard will have a material impact on its unaudited condensed consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, or ASU 2018-15, which amends ASC 350-40, Internal-Use Software, to include in its scope implementation costs of a cloud computing arrangement that is a service contract. Consequently, the accounting for costs incurred to implement a cloud computing arrangement that is a service arrangement is aligned with the guidance on capitalizing costs associated with developing or obtaining internal-use software. ASU 2018-15 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2019. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact the adoption of this standard will have on its unaudited condensed consolidated financial statements and related disclosures.

In December 2019, the FASB issued ASU No. 2019-12, Simplifying the Accounting for Income Taxes (Topic 740), that eliminates certain exceptions to the general principles in ASC 740 related to intra-period tax allocation, deferred tax liability and general methodology for calculating income taxes. The ASU also simplifies U.S. GAAP by making other changes for matters such as, franchise taxes that are partially based on income, transactions with a government that result in a step up in the tax basis of goodwill, separate financial statements of legal entities that are not subject to tax, and enacted changes in tax laws in interim periods. ASU 2019-12 is effective for annual periods, and interim periods within those annual periods, beginning after December 15, 2020. Early adoption is permitted, including adoption in any interim period. The Company is currently assessing the impact the adoption of this standard will have on its unaudited condensed consolidated financial statements and related disclosures.

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Note 3—Marketable Securities

As of December 31, 2019, the Company’s $15.8 million marketable securities balance consisted of available-for-sale commercial paper and short-term corporate bonds. There were no material unrealized gains or losses on marketable securities as of December 31, 2019. There were no marketable securities as of March 31, 2019.

Note 4—Fair Value Measurements

As of December 31, 2019, and March 31, 2019, assets measured at fair value on a recurring basis consisted of money market funds and commercial paper, which are included in cash and cash equivalents on the unaudited condensed consolidated balance sheets, and short-term corporate bonds and commercial paper, which are included in marketable securities on the unaudited condensed consolidated balance sheets.

The following table summarizes the Company’s assets measured at fair value on a recurring basis and their assigned levels within the fair value hierarchy as of December 31, 2019 (in thousands):



	Level 1		Level 2		Level 3		Total Fair Value
Assets:
Money market funds	$	93	$	—	$	—	$	93
Commercial paper	—		79,026		—		79,026
Corporate bonds	—		5,050		—		5,050
Total assets	$	93	$	84,076	$	—	$	84,169

The following table summarizes the Company’s assets measured at fair value on a recurring basis and their assigned levels within the fair value hierarchy as of March 31, 2019 (in thousands):



	Level 1		Level 2		Level 3		Total Fair Value
Assets:
Money market funds	$	83	$	—	$	—	$	83
Commercial paper	—		126,050		—		126,050
Total assets	$	83	$	126,050	$	—	$	126,133

Money market funds are included in Level 1 of the fair value hierarchy and are valued at the closing price reported by an actively traded exchange. Commercial paper and short-term corporate bonds are included in Level 2 of the fair value hierarchy and are valued using third-party pricing services. The pricing services utilize industry standard valuation models, including both income and market-based approaches, for which all significant inputs are observable, either directly or indirectly.

There were no liabilities measured at fair value on a recurring basis as of December 31, 2019 or March 31, 2019. There were no transfers of assets or liabilities between the fair value hierarchy levels that occurred during the nine months ended December 31, 2019.

Note 5—Accrued Expenses

As of December 31, 2019, and March 31, 2019, accrued expenses consisted of the following (in thousands):



	December 31, 2019		March 31, 2019
Accrued R&D expenses	$	30,941	$	46,947
Accrued compensation-related expenses	8,666		5,024
Accrued professional service fees	1,446		370
Accrued other expenses	4,161		1,394
Total accrued expenses	$	45,214	$	53,735

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Note 6—Financing Arrangements

(A) NovaQuest

In October 2017, the Company, its subsidiaries, as guarantors, and NovaQuest Capital Management, or NovaQuest, entered into (i) a Securities Purchase Agreement, or the NovaQuest Securities Purchase Agreement, and (ii) an Equity Purchase Agreement, or the NovaQuest Equity Purchase Agreement. Pursuant to the NovaQuest Securities Purchase Agreement, the Company issued $60.0 million aggregate principal amount of notes, of which $6.0 million was issued in October 2017 and $54.0 million was issued in December 2018. Concurrent with each purchase of notes, NovaQuest was obligated to purchase up to $20.0 million of the Company’s common shares on a pro rata basis, subject to certain terms and conditions. With the issuance of $6.0 million aggregate principal amount of notes in October 2017, NovaQuest purchased 138,361 common shares for $2.0 million, and with the issuance of $54.0 million aggregate principal amount of notes in December 2018, NovaQuest purchased 1,082,977 common shares for $18.0 million. The equity purchase price for each such purchase was equal to 105% of the average of the volume-weighted average price for the five consecutive trading days immediately prior to the relevant purchase date. Pursuant to the NovaQuest Equity Purchase Agreement, NovaQuest committed to purchase an additional $20.0 million of the Company’s common shares from time to time at the Company’s discretion. In December 2018, the Company exercised this option and issued and sold 1,203,307 common shares for $20.0 million. The purchase price for the common shares issued was equal to 105% of the average of the volume-weighted average price for the five consecutive trading days immediately prior to the relevant purchase date.

The notes bore interest at a rate of 15% per annum, of which 5% was payable quarterly, and 10% was payable on a deferred basis on the earlier of the Amortization Date (as defined below) and the repayment in full of the notes. The scheduled maturity of the notes was October 16, 2023. The Company was required to amortize the principal amount of the notes in equal quarterly installments commencing on November 1, 2021, or the Amortization Date, provided certain terms and conditions were met. Early redemption of the notes was subject to a redemption charge. The Company’s obligations under the NovaQuest Securities Purchase Agreement were secured by a second-lien security interest in substantially all of the Company’s and its subsidiaries’ respective assets (other than intellectual property). The NovaQuest Securities Purchase Agreement included customary affirmative and restrictive covenants and representations and warranties, including a minimum cash covenant that applied commencing on the Amortization Date, and also included customary events of default and a default interest rate of an additional 5% applied to the outstanding note balance.

During each of the three and nine months ended December 31, 2019 and 2018, interest expense included $0.1 million and $0.3 million, respectively, of amortized deferred financing costs related to the NovaQuest notes. During each of the three-month periods ended December 31, 2019 and 2018, the Company paid NovaQuest an annual debt administration fee of $0.3 million.

The Company repaid all of its obligations to NovaQuest on December 31, 2019, including $60.0 million of principal repayment of the notes, accrued and unpaid interest of $7.6 million, and an early redemption fee of $2.4 million.

(B) Hercules

In October 2017, the Company, its subsidiaries, as guarantors, and Hercules Capital, Inc., or Hercules, entered into a Loan Agreement, or the Hercules Loan Agreement, which provided up to $40.0 million principal amount of term loans, or the Term Loans. A first tranche of $25.0 million principal amount was funded upon execution of the Hercules Loan Agreement in October 2017 and the remaining $15.0 million principal amount was funded in March 2018.

The Term Loans bore interest at a variable per annum rate at the greater of (i) the prime rate plus 4.00% and (ii) 8.25%. The interest rate on the Term Loans was 8.75% as of December 31, 2019. The scheduled maturity date of the Term Loans was November 1, 2021. The Company was obligated to make monthly interest payments during the Interest-only Period (through June 1, 2020), subject to certain terms and conditions, followed by monthly installments of principal and interest through the maturity date. Prepayment of the Term Loans was subject to a prepayment charge and the Company was also obligated to pay an end of term charge of 6.55% of the principal amount of the Term Loans funded under the Hercules Loan Agreement. The Company’s obligations under the Hercules Loan Agreement were secured by a first lien security interest in substantially all of the Company’s and its subsidiaries’ respective assets (other than intellectual property). The Hercules Loan Agreement included customary affirmative and restrictive covenants and representations and warranties.

Concurrent with each funding of the Term Loans, the Company was required to issue to Hercules a warrant, or the Warrants, to purchase a number of its common shares equal to 3.00% of the principal amount of the relevant Term Loan funded divided by the exercise price, which was based on the lowest three-day volume-weighted average price for the three consecutive trading days prior to the funding date for such Term Loan. The Warrants may be exercised on a cashless basis and are immediately exercisable through the seventh anniversary of the applicable funding date. In connection with the first tranche funded under the Hercules Loan Agreement, the Company issued a Warrant to Hercules exercisable for an aggregate of 49,800 of its common shares at an exercise price of $15.06 per common share. Concurrent with the funding of the second tranche, the Company issued a Warrant to Hercules exercisable for an aggregate of 23,910 of its common shares at an exercise price of $18.82 per common share.

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During the three and nine months ended December 31, 2019, interest expense included $0.4 million and $1.3 million, respectively, of amortized debt discount and issuance costs related to the Term Loans. During the three and nine months ended December 31, 2018, interest expense included $0.3 million and $1.0 million, respectively, of amortized debt discount and issuance costs related to the Term Loans.

The Company repaid all of its obligations to Hercules on December 31, 2019, including $40.0 million of principal repayment of the Term Loans, accrued and unpaid interest of $0.3 million, a prepayment penalty of $0.4 million, and an end of term charge of $2.6 million.

On December 27, 2019, the Company and its subsidiary, Myovant Sciences GmbH, entered into the DSP Loan Agreement which is further discussed in Note 7. On December 30, 2019, the Company borrowed $113.7 million under the DSP Loan Agreement, the proceeds of which were used to repay all outstanding obligations under the NovaQuest Securities Purchase Agreement and the Hercules Loan Agreement and to satisfy certain other fees and expenses. The repayments resulted in a loss on extinguishment of debt of $4.9 million, which is included under the caption loss on extinguishment of debt in the Company’s unaudited condensed consolidated statements of operations for the three and nine months ended December 31, 2019. The loss on extinguishment of debt was calculated as the difference between the carrying amount of the debt and the amounts paid to retire the debt.

Note 7—Related Party Transactions

(A) Sumitomo Dainippon Pharma Co., Ltd.

On October 31, 2019, the Company’s former majority shareholder, Roivant, and Sumitovant, a subsidiary of DSP, entered into a Transaction Agreement (the “DSP-Roivant Agreement”), which among other things, provided for DSP to acquire all of the Company’s outstanding common shares held by Roivant. In addition, on October 31, 2019, the Company and DSP entered into a letter agreement pursuant to which, among other things, the Company and DSP would enter into an investor rights agreement and loan agreement upon the closing of the transactions contemplated by the DSP-Roivant Agreement (the “Closing”).

On December 27, 2019, the Closing occurred and, as a result, all of the Company’s outstanding common shares held directly or indirectly by Roivant and not already held by Sumitovant were transferred to Sumitovant, and Roivant transferred all of the outstanding equity of Sumitovant to DSP, resulting in Sumitovant directly, and DSP indirectly, owning 45,008,604 of the Company’s outstanding common shares, representing approximately 50.2% of the Company’s common shares outstanding on December 27, 2019. As a result of the transfer of these common shares, Roivant no longer beneficially owns any common shares of the Company.

DSP Loan Agreement

On December 27, 2019, the Company and its subsidiary, Myovant Sciences GmbH (“MSG”), entered into a Loan Agreement with DSP (the “DSP Loan Agreement”). Pursuant to the DSP Loan Agreement, DSP agreed to make revolving loans to the Company in an aggregate principal amount of up to $400.0 million. On December 30, 2019, the Company borrowed $113.7 million under the DSP Loan Agreement, the proceeds of which were used to repay all outstanding obligations of the Company to Hercules and NovaQuest (See Note 6) and to satisfy certain other fees and expenses. Additional funds may be drawn down by the Company no more than once any calendar quarter, subject to certain terms and conditions, including consent of the Company’s board of directors. If DSP fails to own at least a majority of the Company’s common shares, the Company would not be able to continue to borrow additional amounts under the DSP Loan Agreement. Interest is due and payable quarterly, and the outstanding principal amounts are due and payable in full on the five-year anniversary of the closing date of the DSP Loan Agreement. Loans under the DSP Loan Agreement are prepayable at any time without premium or penalty upon 10 business days’ prior written notice.

Loans under the DSP Loan Agreement bear interest at a rate per annum equal to 3-month London Interbank Offered Rate (“LIBOR”) plus a margin of 3% payable on the last day of each calendar quarter. The interest rate under the DSP Loan Agreement was 4.96% as of December 31, 2019. The Company’s obligations under the DSP Loan Agreement are fully and unconditionally guaranteed by the Company and its subsidiaries. The loans and other obligations are senior unsecured obligations of the Company, MSG, and subsidiary guarantees. The DSP Loan Agreement includes customary representations and warranties and affirmative and negative covenants.

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The DSP Loan Agreement also includes customary events of default, including payment defaults, breaches of representations and warranties, breaches of covenants following any applicable cure period, cross acceleration to certain other debt, failure to pay certain final judgments, certain events relating to bankruptcy or insolvency, failure of material provisions of the loan documents to remain in full force and effect or any contest thereto by the Company or any of its subsidiaries and certain breaches by the Company under the Investor Rights Agreement. Upon the occurrence of an event of default, a default interest rate of an additional 5.0% will apply to the outstanding principal amount of the loans, DSP may terminate its obligations to make loans to the Company and declare the principal amount of loans to become immediately due and payable, and DSP may take such other actions as set forth in the DSP Loan Agreement. Upon the occurrence of certain bankruptcy and insolvency events, the obligations of DSP to make loans to the Company would automatically terminate and the principal amount of the loans would automatically become due and payable. In addition, if it becomes unlawful for DSP to maintain the loans under the DSP Loan Agreement or within 30 days of a change of control with respect to the Company, the Company would be required to repay the outstanding principal amount of the Loans.

As of December 31, 2019, the outstanding loan balance of $113.7 million is classified as a long-term liability on the Company’s unaudited condensed consolidated balance sheets under the caption long-term debt, less current maturities (related party). As of December 31, 2019, approximately $286.3 million of borrowing capacity remains available to the Company, subject to the terms of the DSP Loan Agreement. Interest expense under the DSP Loan Agreement was less than $0.1 million for the three and nine months ended December 31, 2019 and is included in interest expense (related party) in the Company’s unaudited condensed consolidated statements of operations.

Investor Rights Agreement

On December 27, 2019, the Company entered into an Investor Rights Agreement with DSP and Sumitovant (the “Investor Rights Agreement”). Pursuant to the Investor Rights Agreement, among other things, the Company agreed, at the request of Sumitovant, to register for sale, under the Securities Act of 1933, common shares beneficially owned by Sumitovant, subject to specified conditions and limitations. In addition, the Company agreed to periodically provide Sumitovant (i) certain financial statements, projections, capitalization summaries and other information and (ii) access to the Company’s books, records, facilities and employees during the Company’s normal business hours as Sumitovant may reasonably request.

The Investor Rights Agreement also contains certain protections for the Company’s minority shareholders for so long as DSP or certain of its affiliates beneficially owns more than 50% of the Company’s common shares. These protections include: (i) a requirement that Sumitovant vote its shares for the election of independent directors in accordance with the recommendation of the Company’s board of directors (the “board”) or in the same proportion as the shareholders not affiliated with Sumitovant vote their shares; (ii) a requirement that the audit committee of the Company’s board be composed solely of three independent directors; (iii) a requirement that any transaction proposed by DSP or certain of its affiliates that would increase DSP’s beneficial ownership to over 60% of the outstanding voting power of the Company must be approved by the Company’s audit committee (if occurring prior to December 27, 2022), and be conditioned on the approval of shareholders not affiliated with Sumitovant approving the transaction by a majority of the common shares held by such shareholders; and a requirement that any related person transactions between DSP or certain of its affiliates and the Company must be approved by the Company’s audit committee.

Pursuant to the Investor Rights Agreement, the Company also agreed that at all times that DSP beneficially owns more than 50% of the Company’s common shares, DSP, by purchasing common shares in the open market or from the Company in certain specified circumstances, will have the right to maintain its percentage ownership in the Company’s common shares in the event of a financing event or acquisition event conducted by the Company, or specified other events, subject to specific conditions.

(B) Roivant Sciences Ltd.

As a result of the closing of the DSP-Roivant Agreement described above, on December 27, 2019 all of the Company’s outstanding common shares held directly or indirectly by Roivant and not already held by Sumitovant were transferred to Sumitovant, and Roivant transferred all of the outstanding equity of Sumitovant to DSP. As a result of the transfer of these common shares, Roivant no longer beneficially owns any common shares of the Company. On December 27, 2019, in connection with the closing of the DSP-Roivant Agreement, the then existing Information Sharing and Cooperation Agreement between the Company and Roivant, the then existing Services Agreements between the Company and certain of its subsidiaries and Roivant and certain of its subsidiaries, and the then existing Option Agreement between the Company and Roivant were terminated.

Under the Services Agreements, for the three months ended December 31, 2019 and 2018, the Company incurred expenses (inclusive of third-party pass-through costs billed to the Company) of $0.2 million and $0.4 million, respectively, inclusive of the mark-up. Under the Services Agreements, for the nine months ended December 31, 2019 and 2018, the Company incurred expenses (inclusive of third-party pass-through costs billed to the Company) of $0.6 million and $4.6 million, respectively, inclusive of the mark-up. In addition, Roivant previously allocated share-based compensation expense to the Company based upon the relative percentage of time spent by Roivant and its subsidiaries’ employees on the Company’s matters. The Company recorded share-based compensation expense allocated from Roivant of $0.1 million for each of the three months ended December 31, 2019 and 2018, respectively, and $0.3 million and $0.5 million for the nine months ended December 31, 2019 and 2018, respectively.

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In April 2018, the Company sold to Roivant 1,110,015 of its common shares at a purchase price of $20.27 per common share, for gross proceeds of $22.5 million, in a private placement. In addition, Roivant purchased 2,424,242 of the Company’s common shares in the Company’s June 4, 2019 underwritten public equity offering at the same price offered to the public of $8.25 per common share, for a total purchase price of $20.0 million. See Note 9 for additional information.

On December 22, 2019, the Company’s board of directors approved, subject to the closing of the DSP-Roivant transaction and shareholder approval and certain other conditions, the adoption of the Company’s Fifth Amended and Restated Bye-Laws (the “New Bye-Laws”), which amended and restated the Company’s bye-laws to, among other things, (i) remove the procedures established in June 2019 providing RSL with the power, under certain circumstances, to appoint a majority of directors on the Company’s board and related powers, (ii) revises certain other aspects of the Company’s corporate governance and (iii) make other minor wording changes and additions, removal and revisions of defined terms. The New Bye-Laws became effective on January 23, 2020.

Note 8—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 income tax expense is primarily based on income taxes in the U.S. for federal, state and local taxes. The Company’s effective tax rate for the three months ended December 31, 2019 and 2018 was (0.22)% and 0.00%, respectively. The Company’s effective tax rate for the nine months ended December 31, 2019 and 2018 was (0.31)% and (0.12)%, respectively. The Company’s 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 the 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.

Section 382 of the U.S. Internal Revenue Code imposes an annual limitation on the amount of existing tax attributes that might be used to offset income tax when a corporation has undergone a significant change in stock ownership. On December 27, 2019, Sumitovant became the Company’s majority shareholder after acquiring approximately 50.2% of the Company’s outstanding common shares which triggered an ownership change under Section 382. The Company is evaluating the impact of the annual limitation. The Company does not believe that annual limitation had a significant impact on the Company’s income tax provision during the three and nine months ended December 31, 2019.

Note 9—Shareholders’ Equity

(A) Underwritten Public Equity Offering of Common Shares

On June 4, 2019, the Company completed an underwritten public equity offering of 17,424,243 of its common shares (including 2,272,727 common shares sold pursuant to the underwriters’ exercise in full of their option to purchase additional common shares) at a public offering price of $8.25 per common share. After deducting the underwriting discounts and commissions and offering costs payable by the Company, the net proceeds to the Company in connection with the underwritten public equity offering, including from the exercise of the underwriters’ option to purchase additional shares, were approximately $134.5 million.

(B) Private Placement with RSL

In April 2018, the Company entered into a share purchase agreement, or the Purchase Agreement, with Roivant, its former majority shareholder, pursuant to which the Company sold to Roivant 1,110,015 of its common shares at a purchase price of $20.27 per common share, for gross proceeds of $22.5 million, in a private placement.

In April 2018, the Company entered into a sales agreement, or the Sales Agreement, with Cowen and Company, LLC, or Cowen, to sell its common shares having an aggregate offering price of up to $100.0 million from time to time through an “at-the-market” equity offering program under which Cowen acts as the Company’s agent. During the nine months ended December 31, 2019 and 2018, the Company issued and sold 106,494 and 2,767,129, respectively, of its common shares under the Sales Agreement. The common shares were sold at a weighted-average price of $24.65 and $21.47 per common share, respectively, for aggregate net proceeds to the Company of approximately $2.5 million and $57.3 million, respectively, after deducting underwriting commissions and offering costs paid by the Company. During the three months ended December 31, 2019 and 2018, no shares were issued and sold under the Sales Agreement. As of December 31, 2019, the Company had approximately $10.4 million of capacity available to it under its “at-the-market” equity offering program.

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Note 10—Share-Based Compensation

(A) Myovant 2016 Equity Incentive Plan

In June 2016, the Company adopted its 2016 Equity Incentive Plan, or as amended, the 2016 Plan, under which 4.5 million common shares were originally reserved for issuance. Pursuant to the “evergreen” provision contained in the 2016 Plan, the number of common shares reserved for issuance under the 2016 Plan automatically increases on April 1 of each year, commencing on (and including) April 1, 2017 and ending on (and including) April 1, 2026, in an amount equal to 4% of the total number of shares of capital stock outstanding on March 31 of the preceding fiscal year, or a lesser number of shares as determined by the Company’s board of directors. On April 1, 2019, the number of common shares authorized for issuance increased automatically by 2.9 million shares in accordance with the evergreen provision of the 2016 Plan. As of December 31, 2019, a total of 1.5 million common shares were available for future issuance under the 2016 Plan.

The Company’s employees, directors, officers and consultants are eligible to receive non-qualified and incentive stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, and other share awards under the 2016 Plan.

(B) Stock Option Repricing

On August 26, 2019 (the “repricing date”), the Company’s Board of Directors approved a stock option repricing program (the “repricing”) whereby certain previously granted and still outstanding vested and unvested stock options held by current employees and certain executives were repriced on a one-for-one basis to $7.78 per share, which represented the closing market price of the Company’s common shares on the repricing date. To be eligible to participate in the stock option repricing program, 735,428 vested stock options to certain executives as of the repricing date are subject to a one-year exercise restriction period beginning from the repricing date. No other terms of the repriced stock options were modified, and the repriced stock options will continue to vest according to their original vesting schedules and will retain their original expiration dates. As a result of the repricing, 5,095,013 vested and unvested stock options outstanding with original exercise prices ranging from $8.82 to $24.44, and a median exercise price of $17.28 per share, were repriced under this program. The repricing resulted in one-time incremental stock-based compensation expense of $9.2 million, which will be recognized over the remaining term of the repriced stock options.

A summary of stock option activity under the Company’s 2016 Plan is as follows:



	Number of Options
Options outstanding at March 31, 2019	5,396,465
Granted	2,768,700
Exercised	(80,548	)
Forfeited	(340,360	)
Options outstanding at December 31, 2019	7,744,257
Options vested and expected to vest at December 31, 2019	7,744,257
Vested options subject to one-year exercise restriction period beginning on August 26, 2019	735,428
Options exercisable at December 31, 2019	2,857,183

As a result of the change in control of the Company described in Note 7, the vesting of 849,212 stock options was accelerated on December 27, 2019, resulting in the recognition of $11.2 million of share-based compensation expense upon the change in control.

(D) Restricted Stock Awards and Restricted Stock Units

A summary of restricted stock award and restricted stock unit activity under the Company’s 2016 Plan is as follows:



	Number of Shares
Unvested balance at March 31, 2019	956,066
Granted	724,554
Vested	(221,781	)
Forfeited	(69,973	)
Unvested balance at December 31, 2019	1,388,866

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(E) Performance Stock Units

On August 26, 2019, the Company’s Board of Directors granted performance stock units covering a total of 408,510 common shares, of which two-thirds of the shares (272,338 shares) subject to each performance stock unit vests based upon the passage of time, and the remaining one-third of the shares (136,172 shares) subject to each performance stock unit vests if the Company achieves certain clinical trial and regulatory milestones. Total share-based compensation expense associated with the performance stock units is based on the fair value of the Company’s common shares on the grant date, which equals the closing market price of the Company’s common shares on the grant date. The Company recognizes the share-based compensation expense related to the performance stock unit awards subject to time-based vesting on a straight-line basis over the requisite service period, which is generally the vesting period of the respective awards. The Company will recognize the share-based compensation expense related to the performance stock unit awards subject to vesting based upon the achievement of certain clinical trial and regulatory milestones only if such milestones are achieved. As of December 31, 2019, the performance conditions had not been met and were deemed not probable of being met. As a result of the change in control of the Company described in Note 7, the vesting of certain performance stock units covering a total of 108,640 common shares was accelerated on December 27, 2019, resulting in the recognition of $0.8 million of share-based compensation expense upon the change in control. As of December 31, 2019, performance stock units covering a total of 299,870 common shares are unvested.

(F) Share-Based Compensation Expense

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



	Three Months Ended December 31,
	2019		2018
Share-based compensation expense recognized as:
R&D expenses	$	5,399	$	1,840
G&A expenses	14,396		2,954
Total	$	19,795	$	4,794



	Nine Months Ended December 31,
	2019		2018
Share-based compensation expense recognized as:
R&D expenses	$	11,565	$	5,247
G&A expenses	22,613		8,516
Total	$	34,178	$	13,763

Share-based compensation expense is included in R&D and G&A expenses in the accompanying unaudited condensed consolidated statements of operations consistent with the grantee’s salary. Total unrecognized share-based compensation expense was approximately $58.8 million as of December 31, 2019 and is expected to be recognized over a weighted-average period of approximately 2.8 years. Share-based compensation expense included in R&D and G&A expenses for the three and nine months ended December 31, 2019 include $1.8 million and $10.2 million, respectively, related to the acceleration of vesting of certain share-based payment awards as a result of the change in control of the Company described previously.

(G) RSL RSUs

The Company’s Principal Executive Officer was granted 66,845 RSL RSUs during the fiscal year ended March 31, 2017. These RSUs will vest to the extent certain RSL performance criteria are achieved and certain RSL liquidity conditions are satisfied within specified years of the grant date, provided that the Company’s Principal Executive Officer has provided continued service to RSL, the Company, or any of their respective subsidiaries through such date. As of December 31, 2019, the performance conditions had not been met and were deemed not probable of being met. For the three and nine months ended December 31, 2019 and 2018, the Company recorded no share-based compensation expense related to these RSL RSUs.

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Note 11—Leases

The Company leases 40,232 square feet of office space located in Brisbane, California pursuant to an operating lease agreement, as amended, that expires in May of 2026. The Company has the option to extend the lease term for an additional seven years but is not reasonably certain that it will exercise the option and has therefore excluded it from the lease term. The lease agreement, as amended, required the Company to deliver an irrevocable standby letter of credit for the duration of the lease in the amount of $0.5 million to the landlord, the amount of which is subject to reduction of approximately $0.2 million if certain conditions are met.

During October 2019, the Company entered into a Sublease Agreement, or sublease, for an additional 20,116 square feet of office space within the same building as its current corporate office space located in Brisbane, California. The sublease term expires in February of 2024, with total expected minimum payments over the sublease term of approximately $3.7 million. The sublease required the Company to deliver an irrevocable standby letter of credit to the sublessor for the duration of the lease in the amount of $0.2 million.

The Company currently has no other significant operating, financing, or short-term leases.

The components of operating lease expense for the Company’s Brisbane, California office space were as follows (in thousands):



	Three Months Ended		Nine Months Ended
	December 31, 2019		December 31, 2019
Operating lease cost	$	729	$	1,767
Variable lease cost ⁽¹⁾	66		121
Total operating lease cost	$	795	$	1,888

⁽¹⁾ Variable lease cost includes common area maintenance and utilities costs which are not included in operating lease liabilities and which are expensed as incurred.

Certain information related to the Company’s operating lease right-of-use assets and operating lease liabilities for its Brisbane, California office space was as follows (in thousands):



	Nine Months Ended
	December 31, 2019
Cash paid for operating lease liabilities	$	1,569
Operating lease right-of-use assets obtained in exchange for new operating lease liabilities	$	12,237

As of December 31, 2019, the Company’s operating leases for its Brisbane, California office space had a weighted average remaining lease term of 5.9 years and a weighted average discount rate of 12.3%.

As of December 31, 2019, maturities of operating lease liabilities for the Company’s Brisbane, California office space were as follows (in thousands):



Years Ended March 31,
2020 (remainder of year)	$	720
2021	2,939
2022	3,028
2023	3,127
2024	3,053
Thereafter	5,307
Total lease payments	18,174
Less imputed interest ⁽¹⁾	(5,326		)
Present value of future minimum lease payments	12,848