UroGen Pharma Ltd. - Quarter Report: 2019 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2019

OR

For the transition period from                     to                     

Commission file number: 001-38079

UROGEN PHARMA LTD.

(Exact Name of Registrant as Specified in its Charter)

(646) 768-9780

Registrant’s telephone number, including area code

N/A

(Former name, former address and former fiscal year, if changed since last report)

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  ☒    No  ☐

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

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

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

As of November 4, 2019, the registrant had 20,979,580 shares of ordinary shares, par value NIS 0.01 per share, outstanding.

UROGEN PHARMA, LTD.

INDEX

Trademarks and Trade Names

Unless the context requires otherwise, references in this Quarterly Report to the “Company”, “we,” “us” and “our” refer to UroGen Pharma Ltd. and its subsidiary, Urogen Pharma, Inc. The Company has trademarks for UroGen and RTGel. This Quarterly Report on Form 10-Q, or this Quarterly Report, contains references to our trademarks and to trademarks belonging to other entities. Solely for convenience, trademarks and trade names referred to in this Quarterly Report, including logos, artwork and other visual displays, may appear without the ® or TM symbols, but such references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable law, our rights or the rights of the applicable licensor to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

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PART I—FINANCIAL INFORMATION

Item 1. Financial Statements.

UROGEN PHARMA, LTD.

CONDENSED CONSOLIDATED BALANCE SHEETS

(unaudited; in thousands, except share amounts)

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

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UROGEN PHARMA, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

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

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

2

UROGEN PHARMA, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited; in thousands, except share amounts)

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

3

UROGEN PHARMA, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY

(unaudited; in thousands, except share amounts)

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

4

UROGEN PHARMA, LTD.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited; in thousands)

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

5

UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1-BUSINESS AND NATURE OF OPERATIONS

Nature of Operations

UroGen Pharma Ltd. is an Israeli company incorporated in April 2004 (“UPL”).

UroGen Pharma Inc., a subsidiary of UPL, was incorporated in Delaware in October 2015 and began operating in February 2016 (“UPI”).

UPL and UPI (together the “Company”) is a clinical stage biopharmaceutical company focused on developing novel therapies designed to change the standard of care for urological pathologies. Since commencing operations, the Company has devoted substantially all of its efforts to securing intellectual property rights, performing research and development activities, including conducting clinical trials and manufacturing activities, hiring personnel, preparing for the potential commercial launch of its lead product candidates, UGN-101 and UGN-102 and raising capital to support and expand these activities.

NOTE 2-BASIS OF PRESENTATION

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of the Company’s management, the accompanying condensed consolidated financial statements contain all adjustments (consisting of normal recurring accruals and adjustments) necessary to state fairly the financial position, results of operations and cash flows of the Company at the dates and for the periods indicated. Interim results are not necessarily indicative of results for the full fiscal year. The year-end condensed consolidated balance sheet data was derived from audited financial statements but does not include all disclosures required by accounting principles generally accepted in the United States. The unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.

The consolidated financial statements include the accounts of UPL and its wholly-owned subsidiary UPI. All material intercompany balances and transactions have been eliminated during consolidation.

The Company has not generated any revenue from the sale of products since its inception. The Company has experienced net losses since its inception and has an accumulated deficit of $189.0 million and $122.9 million as of September 30, 2019 and December 31, 2018, respectively. The Company expects to incur losses and have negative net cash flows from operating activities as it expands its portfolio and engages in further research and development activities, particularly conducting nonclinical studies, clinical trials and preparing for the potential commercial launch of its lead product candidates, UGN-101 and UGN-102.

The success of the Company depends on its ability to develop its technologies to the point of U.S. Food and Drug Administration (“FDA”) approval and subsequent revenue generation and, accordingly, to raise enough capital to finance these efforts. Based on management’s cash flow projections, the Company believes that its cash and cash equivalents and marketable securities are sufficient to fund the Company’s planned operations for at least the next 12 months. However, in the future, the Company may need to raise additional capital to finance the continued operating and capital requirements of the Company. There can be no assurances that the Company will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs. If the Company cannot obtain adequate working capital, it may be forced to reevaluate its planned business operations.

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

NOTE 3-SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation

The condensed consolidated financial statements include the accounts of UPL and its subsidiary, UPI. Intercompany balances and transactions have been eliminated during consolidation.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. As applicable to the unaudited condensed consolidated financial statements, the most significant estimates and assumptions relate to the fair value of share-based compensation and timing of revenue recognition.

Functional Currency

The U.S. dollar (“Dollar”) is the currency of the primary economic environment in which the operations of the Company are conducted. Therefore, the functional currency of the Company is the Dollar.

Accordingly, transactions in currencies other than the Dollar are measured and recorded in the functional currency using the exchange rate in effect at the date of the transaction. At the balance sheet date, monetary assets and liabilities that are denominated in currencies other than the Dollar are measured using the official exchange rate at the balance sheet date. The effects of foreign currency re-measurements are recorded in the condensed consolidated statements of operations as “finance (income) expenses.”

Cash and Cash Equivalents

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. Cash and cash equivalents consist primarily of money market funds and bank money market accounts and are stated at cost, which approximates fair value.

Marketable Securities

Cash and cash equivalents and marketable securities totaled $221.7 million as of September 30, 2019.  The Company classifies its marketable securities as available-for-sale in accordance with the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 320, “Investments — Debt and Equity Securities”. Available-for-sale debt securities are carried at fair value with unrealized gains and losses reported in other comprehensive income/loss within shareholders’ equity. Realized gains and losses and declines in fair value judged to be other than temporary, if any, on available-for-sale securities are included in interest and other income (expense), net. The cost of securities sold is based on the specific-identification method.

Short-term investments are valued using models or other valuation methodologies that use Level 2 inputs. These models are primarily industry-standard models that consider various assumptions, including time value, yield curve, volatility factors, default rates, current market and contractual prices for the underlying financial instruments, as well as other relevant economic measures. The majority of these assumptions are observable in the marketplace, can be derived from observable data or are supported by observable levels at which transactions are executed in the marketplace. 

The Company reviews its available-for-sale securities for other-than-temporary declines in fair value below its cost basis each quarter and whenever events or changes in circumstances indicate that the cost basis of an asset may not be recoverable. This evaluation is based on a number of factors that include the length of time and extent to which fair value has been less than the cost basis and adverse conditions related specifically to the security, and the intent to sell, or whether the Company will more likely than not be required to sell, the security before recovery of its amortized cost basis. The Company’s assessment of whether a security is other-than-temporarily impaired could change in the future due to new developments or changes in assumptions related to any particular security. 

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

During the nine months ended September 30, 2018, the Company sold its short-term investments that consisted of mutual and bond funds. The Company recognized a loss on sale of $0.1 million.

Concentration of Credit Risk

Financial instruments, which potentially subject the Company to significant concentrations of credit risk, consist primarily of cash and cash equivalents and marketable securities. The primary objectives for the Company’s investment portfolio are the preservation of capital and the maintenance of liquidity. The Company does not enter into any investment transaction for trading or speculative purposes.

The Company’s investment policy limits investments to certain types of instruments such as certificates of deposit, money market instruments, obligations issued by the U.S. government and U.S. government agencies as well as corporate debt securities, and places restrictions on maturities and concentration by type and issuer. The Company maintains cash balances in excess of amounts insured by the Federal Deposit Insurance Corporation and concentrated within a limited number of financial institutions. The accounts are monitored by management to mitigate the risk.

Income Taxes

The Company provides for income taxes based on pretax income, if any, and applicable tax rates available in the various jurisdictions in which we operate. Deferred taxes are computed using the asset and liability method. Under the asset and liability method, deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. A valuation allowance is recognized to the extent that it is more likely than not that the deferred taxes will not be realized in the foreseeable future.

The Company follows a two-step approach in recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the available evidence indicates that it is more likely than not that the position will be sustained upon examination by the taxing authorities based on the technical merits of the position. If this threshold is met, the second step is to measure the tax benefit as the largest amount that is more likely than not of being realized upon ultimate settlement. As of September 30, 2019, and December 31, 2018, the Company had not accrued a provision for uncertain tax positions. See Note 12 for further discussion related to income taxes.

Property and Equipment

Property and equipment are recorded at historical cost, net of accumulated depreciation, amortization and, if applicable, impairment charges. The Company reviews its property and equipment assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Property and equipment are depreciated over the following useful lives (in years):

Leasehold improvements are amortized on a straight-line basis over the shorter of their estimated useful lives or lease terms. See Note 7 for further discussion regarding property and equipment.

Leases

The Company is a lessee in several noncancelable operating leases, primarily for office space, office equipment and vehicles. The Company currently has no finance leases.

The Company accounts for leases in accordance with ASC Topic 842, “Leases”. The Company determines if an arrangement is a lease at inception. Right-of-use (“ROU”) assets and operating lease liabilities are recognized based on the present value of lease payments over the lease term as of the commencement date. Operating lease ROU assets are presented as operating lease right of use assets on the condensed consolidated balance sheets. The current portion of operating lease liabilities is included in other current liabilities and the long-term portion is presented separately as operating lease liabilities on the condensed consolidated balance sheets.

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Lease expense is recognized on a straight-line basis for operating leases. Variable lease payments associated with the Company’s leases are recognized when the event, activity, or circumstance in the lease agreement on which those payments are assessed occurs. Variable lease payments are presented as operating expense on the condensed consolidated statements of operations in the same line item as expense arising from fixed lease payments.

The Company’s lease terms may include options to extend the lease. The lease extensions are included in the measurement of the right of use asset and lease liability when it is reasonably certain that it will exercise that option.

Because most of the Company’s leases do not provide an implicit rate of return, an incremental borrowing rate is used based on the information available at the commencement date in determining the present value of lease payments on an individual lease basis. The Company’s incremental borrowing rate for a lease is the rate of interest it would have to pay on a collateralized basis to borrow an amount equal to the lease payments under similar terms.

The Company has lease agreements with lease and non-lease components. We applied the modified retrospective transition method and elected the transition option to use the effective date of January 1, 2019 as the date of initial application (“Transition Date”). Consequently, the disclosures required under Topic 842 are not provided for dates and periods before January 1, 2019.

Topic 842 provides for a number of optional practical expedients in transition. The Company elected the ‘package of practical expedients’, which permits not to reassess under Topic 842 its prior conclusions about lease identification, lease classification, and initial direct costs. The Company did not elect the use-of-hindsight or the practical expedient pertaining to land easements; the latter not being applicable to the Company.

Topic 842 had a material impact on our condensed consolidated balance sheets but did not have an impact on our condensed consolidated statements of operations. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases.

ROU assets for operating leases are periodically reviewed for impairment losses under ASC 360-10, “Property, Plant, and Equipment”, to determine whether a ROU asset is impaired, and if so, the amount of the impairment loss to recognize.

Revenues

The Company derives virtually all its revenues from its license and supply agreement (the “Allergan Agreement”) with Allergan Pharmaceuticals International Limited (“Allergan”), a wholly owned subsidiary of Allergan plc. Under the Allergan Agreement, the Company grants Allergan an exclusive license to develop, commercialize, and otherwise exploit products that contain reverse thermal hydrogel (“RTGel”) and agrees to supply Allergan with pre-clinical and clinical quantities of the RTGel product, also referred to as the RTGel vials. The Allergan Agreement contains up-front license fees, future supply fees, development, regulatory, and sales-based milestone payments, and sales-based royalty payments.

The Company determined that Allergan is its customer and the Allergan Agreement is in scope of ASC 606, which was adopted as of January 1, 2018.  The Company adopted ASC 606 under the modified retrospective method, which did not have a material impact on the condensed consolidated statements of operations.

Supply of RTGel to Allergan

The Company recognizes revenue related to supply of RTGel at a point in time, upon delivery to Allergan. During the three and nine months ended September 30, 2019, the Company recognized $0 and $18,000 of revenue related to RTGel supplied to Allergan, respectively; and during the three and nine months ended September 30, 2018, recognized $0.3 million and $1.1 million of revenue related to RTGel supplied to Allergan, respectively.

Shipping and handling costs associated with supply of RTGel are accounted for as a fulfillment cost and are included in cost of revenues.

9

UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

General and Administrative Expenses

General and administrative expenses consist primarily of personnel costs (including share-based compensation related to directors, executives, finance, commercial, medical affairs, business development, investor relations and human resources functions). Other significant costs include commercial, medical affairs, external professional service costs, facility costs, accounting and audit services, legal services, and other consulting fees. General and administrative costs are expensed as incurred, and the Company accrues for services provided by third parties related to the above expenses by monitoring the status of services provided and receiving estimates from its service providers and adjusting its accruals as actual costs become known.

Research and Development Expenses

Research and development costs are expensed as incurred and consist primarily of the cost of salaries, share-based compensation expenses, payroll taxes and other employee benefits, subcontractors and materials used for research and development activities, including nonclinical studies, clinical trials, manufacturing costs and professional services. The costs of services performed by others in connection with the research and development activities of an entity, including research and development conducted by others on behalf of the entity, shall be included in research and development costs and expensed as the contracted work is performed. The Company accrues for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from its external service providers. The Company adjusts its accrual as actual costs become known. Where contingent milestone payments are due to third parties under research and development arrangements or license agreements, the milestone payment obligations are expensed when the milestone results are achieved.

Share-Based Compensation

Share-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the required service period, which is equal to the vesting period. The fair value of options is determined using the Black-Scholes option-pricing model. The fair value of a restricted stock unit (“RSU”) equaled the closing price of our ordinary shares on the grant date.

As of December 31, 2016, the Company early adopted the policy to account for forfeitures as they occur according to the FASB’s Accounting Standards Update (“ASU”) 2016-09, Improvements to Employee Share-Based Payment Accounting.

The Company elected to recognize compensation costs for awards conditioned only on continued service that have a graded vesting schedule using the straight-line method and to value the awards based on the single-option award approach.

As of December 31, 2018, the Company adopted ASU 2018-07, Compensation-Stock Compensation, which establishes that the measurement of equity-classified nonemployee awards will be fixed at the grant date. The adoption of ASU 2018-07 did not have an impact on the condensed consolidated statements of operations.

Net Loss per Ordinary Share

Basic net loss per share is computed by dividing the net loss attributable to ordinary shareholders by the weighted-average number of ordinary shares outstanding. Diluted net loss per share is computed similarly to basic net loss per share except that the denominator is increased to include the number of additional ordinary shares that would have been outstanding if the potential ordinary shares had been issued and if the additional ordinary shares were dilutive.

For all periods presented, potentially dilutive securities are excluded from the computation of fully diluted loss per share as their effect is anti-dilutive.

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Recent Accounting Pronouncements

In June 2018, the FASB issued ASU No. 2018-07, "Compensation-Stock Compensation" (“ASU 2018-07”) to improve the usefulness of information provided to users of financial statements while reducing cost and complexity in financial reporting and provide guidance aligning the measurement and classification for share-based payments to nonemployees with the guidance for share-based payments to employees. Under the guidance, the measurement of equity-classified nonemployee awards will be fixed at the grant date. This standard is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU 2018-07 did not have a material impact on the Company’s Consolidated Statements of Operations.

In February 2016, the FASB issued ASU No. 2016-02, “Leases” (“Topic 842”). Topic 842 supersedes existing guidance in Leases (“Topic 840”). Topic 842 was subsequently amended by ASU No. 2018-01, Land Easement Practical Expedient for Transition to Topic 842; ASU 2018-10, Codification Improvements to Topic 842, Leases; ASU No. 2018-11, Targeted Improvements; ASU 2018-20, Narrow-Scope Improvements for Lessors; and ASU 2019-01 – Leases. Topic 842 requires lessees to recognize ROU assets and lease liabilities on the balance sheet for leases with lease terms greater than twelve months, including those classified as operating leases. The Company adopted Topic 842 and related interpretations effective January 1, 2019 and recognized ROU assets and operating lease liabilities of $3.4 million.

NOTE 4-OTHER FINANCIAL INFORMATION

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following as of September 30, 2019 and December 31, 2018 (in thousands):

Interest and Other (Income) Expenses, Net

Interest and other (income) expenses consisted of the following as of September 30, 2019 and 2018 (in thousands):

NOTE 5-FAIR VALUE MEASUREMENTS

The Company follows authoritative accounting guidance, which among other things, defines fair value, establishes a consistent framework for measuring fair value and expands disclosure for each major asset and liability category measured at fair value on either a recurring or nonrecurring basis. Fair value is an 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. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or liability.

As a basis for considering such assumptions, a three-tier fair value hierarchy has been established, which prioritizes the inputs used in measuring fair value as follows:

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The carrying amounts of the Company’s other current assets, accounts payable and accrued liabilities are generally considered to be representative of their fair value because of the short-term nature of these instruments. No transfers between levels have occurred during the periods presented.

Assets and liabilities measured at fair value on a recurring basis based on Level 1 and Level 2 fair value measurement criteria as of September 30, 2019 are as follows (in thousands):

Assets and liabilities measured at fair value on a recurring basis based on Level 1 and Level 2 fair value measurement criteria as of December 31, 2018 are as follows (in thousands):

The Company’s marketable securities are valued based on publicly available quoted market prices for identical securities as of September 30, 2019 and December 31, 2018.

NOTE 6-MARKETABLE SECURITIES

The following table summarizes the Company’s marketable securities as of September 30, 2019 (in thousands):

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company classifies its marketable securities as available-for-sale and they consist of all debt securities. As of September 30, 2019, they were in a net unrealized gain position of $0.3 million. Unrealized gains and losses on available-for-sale debt securities are included as a component of comprehensive loss.  

At September 30, 2019, the aggregate fair value of marketable securities held by the Company in an unrealized loss position was $20.9 million, which consisted of 14 securities. No securities have been in an unrealized loss position for more than 12 months.

At September 30, 2019, the Company believes the cost basis for its marketable securities were recoverable in all material aspects.

The Company’s marketable securities as of September 30, 2019 mature at various dates through November 2021. The fair values of marketable securities by contractual maturity consist of the following (in thousands):

NOTE 7-PROPERTY AND EQUIPMENT

Property and equipment, consists of the following as of September 30, 2019 and December 31, 2018 (in thousands):

Depreciation and amortization expenses were $0.1 million and $0.2 million and $0.1 million and $0.2 million for the three and nine months ended September 30, 2019 and 2018, respectively.

NOTE 8-LEASES

Operating Leases

The Company has the following office and laboratory facility leases:

In addition, the Company has other operating office equipment and vehicle leases. The Company’s operating leases may require minimum rent payments, contingent rent payments adjusted periodically for inflation, or rent payments equal to the greater of a minimum rent or contingent rent. The Company’s leases do not contain any residual value guarantees or material restrictive covenants. The Company’s leases expire at various dates from 2019 through 2022, with varying renewal and termination options.

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The components of lease cost for the three and nine months ended September 30, 2019 were as follows (in thousands):

The amounts recognized upon adoption and as of September 30, 2019 were as follows (in thousands):

As of September 30, 2019, no impairment losses have been recognized to date.

Supplemental information related to leases for the periods reported is as follows (in thousands):

As of September 30, 2019, maturities of lease liabilities were as follows (in thousands):

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of December 31, 2018, maturities of lease liabilities were as follows (in thousands):

Rent expense charged to operations was $1.2 million for the year ended December 31, 2018.

NOTE 9-LICENSE AND COLLABORATION AGREEMENTS

Allergan Agreement

In October 2016, the Company entered into the Allergan Agreement and granted Allergan an exclusive worldwide license to research, develop, manufacture and commercialize pharmaceutical products that contain RTGel and clostridial toxins (including BOTOX^®), alone or in combination with certain other active ingredients, referred to as the Licensed Products, which are approved for the treatment of adults with overactive bladder who cannot use or do not adequately respond to anticholinergics. Additionally, the Company granted Allergan a non-exclusive, worldwide license to use certain of the Company’s trademarks as required for Allergan to practice its exclusive license with respect to the Licensed Products.

Under the Allergan Agreement, Allergan is solely responsible for costs and development of the Licensed Products and obtaining all regulatory approvals for Licensed Products worldwide, as well as worldwide commercialization of the Licensed Products after receiving the regulatory approval to do so. Allergan is required to use commercially reasonable efforts to develop and commercialize the Licensed Products for overactive bladder in certain major market countries.

The Company has previously supplied Allergan with certain quantities of RTGel for development of Licensed Products through Phase 2 clinical trials using BOTOX together with RTGel in patients with overactive bladder, at Allergan’s request and expense. Prior to completion of the first Phase 2 clinical trial, Allergan has the right to request that the Company transfers to Allergan the Company’s manufacturing process for RTGel and Allergan will assume the responsibility to manufacture RTGel and Licensed Product for its own development and commercialization activities. During the three and nine months ended September 30, 2019, the Company recognized $0 and $18,000 of revenue related to RTGel supplied to Allergan, respectively; and during the three and nine months ended September 30, 2018, recognized $0.3 million and $1.1 million of revenue related to RTGel supplied to Allergan, respectively.

Further, the Company is eligible to receive additional material milestone payments of up to an aggregate of $200.0 million upon the successful completion of certain development, regulatory and commercial milestones. As of September 30, 2019, since inception of the Allergan Agreement the Company has received a total of $25.0 million in milestone payments from Allergan. Allergan will pay the Company a tiered royalty in the low single digits based on worldwide annual net sales of Licensed Products, subject to certain reductions for the market entry of competing products and/or loss of our patent coverage of Licensed Products. The Company is responsible for payments to any third party for certain RTGel-related third-party intellectual properties.

Under the Allergan Agreement, Allergan granted the Company a non-exclusive, sublicensable, fully paid-up, perpetual, worldwide license under any improvements Allergan makes to the composition, formulation, or manufacture of RTGel for the research, development, manufacture and commercialization of any product containing RTGel and any active ingredient (other than a clostridial toxin) for all indications other than indications covered by the agreement and an exclusive, sublicensable, royalty-bearing (in low single digits), perpetual worldwide license under such improvements for use in the prevention or treatment of oncology indications.

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company plans to continue to research, develop and commercialize other products combining RTGel with other active ingredients, except that there are certain restrictions with respect to the overactive bladder and neurogenic detrusor overactivity indications. Subject to provisions called out in the Allergan Agreement, Allergan may unilaterally terminate the Allergan Agreement for any reason upon advance notice. In addition, either party may terminate the Allergan Agreement for various reasons, as previously disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2018 filed with the SEC on February 28, 2019.

Early-Stage Feasibility Evaluation with Janssen Research & Development, LLC (“Janssen”)

On April 22, 2019, the Company entered into an agreement with Janssen to conduct an early-stage feasibility evaluation in a therapeutic area of mutual interest. The Company and Janssen will each conduct certain activities under the terms of the agreement, and the Company will incur the costs of its own efforts related to the feasibility evaluation.

NOTE 10-SHAREHOLDERS’ EQUITY

The Company had 100.0 million ordinary shares authorized for issuance as of September 30, 2019 and December 31, 2018, respectively. The Company had 20.9 million and 16.2 million ordinary shares issued and outstanding as of September 30, 2019 and December 31, 2018, respectively. Each ordinary share is entitled to one vote. The holders of ordinary shares are also entitled to receive dividends whenever funds are legally available, when and if declared by the Board of Directors (the “Board”). Since its inception, the Board has not declared any dividends.

In January 2018, the Company completed an underwritten public offering of 1,682,926 of its ordinary shares, including 219,512 shares sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $41.00 per share. The net proceeds to the Company from the public offering were approximately $64.2 million, after deducting the underwriting discounts and commissions and payment of other offering expenses.

In January 2019, the Company completed an underwritten public offering of 4,207,317 of its ordinary shares, including 548,780 shares sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $41.00 per share. The net proceeds to the Company from the offering were approximately $161.4 million, after deducting the underwriting discounts and commissions and payment of other offering expenses.

NOTE 11-SHARE-BASED COMPENSATION

In October 2010, the Board approved a share option plan (the “Plan”) for grants to Company employees, consultants, directors, and other service providers.

The grant of options to Israeli employees under the Plan is subject to the terms stipulated by Section 102 of the Israeli Income Tax Ordinance (“Section 102”). The option grants are subject to the track chosen by the Company, either the “regular income” track or the “capital gains” track, as set out in Section 102. The Company registered the Plan under the capital gains track, which offers more favorable tax rates to the employees. As a result, and pursuant to the terms of Section 102, the Company is not allowed to claim as an expense for tax purposes the amounts credited to the employees in respect of options granted to them under the Plan, including amounts recorded as salary benefits in the Company’s accounts, with the exception of the work-income benefit component, if any, determined on grant date. For non-employees and for non-Israeli employees, the Plan is subject to Section 3(i) of the Israeli Income Tax Ordinance.

Certain management and professional level employees typically receive options and restricted stock units, or RSU, grants upon commencement of employment. Also, eligible employees may receive an annual grant of options or RSUs. Non-employee members of the Board and any new, future directors may receive a grant of RSUs and/or stock options annually. The term of any option granted under the Plan cannot exceed 10 years. Options shall not have an exercise price less than 100% of the fair market value of the Company’s ordinary shares on the grant date, and generally vest over a period of three years. If the individual possesses more than 10% of the combined voting power of all classes of equity of the Company, the exercise price shall not be less than 110% of the fair market value of an ordinary share on the date of grant.

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The Company’s RSU and option grants provide for accelerated or continued vesting in certain circumstances as defined in the plans and related grant agreements, including a termination in connection with a change in control. RSUs generally vest in a 33% increment upon the first anniversary of grant, and in equal quarterly amounts for the two years following the one-year anniversary of the grant date. Options generally vest in a 33% increment upon the first anniversary of the grant date, and in equal quarterly amounts for the two years following the one-year anniversary of the grant date.

The expected volatility is based on the historical volatility of comparable companies with similar attributes to the Company, including industry, stage of life cycle, size and financial leverage. The risk-free interest rate assumption is based on observed interest rates appropriate for the expected term of the options granted. The expected term is the length of time until the expected dates of exercising the options and is estimated for employees using the simplified method due to insufficient specific historical information of employees’ exercise behavior, and for non-employees, and directors using the contractual term.

In March 2017, the Board adopted the 2017 Equity Incentive Plan (the "2017 Plan"), which was approved by the shareholders in April 2017. The 2017 Plan provides for the grant of incentive stock options to the Company's employees and for the grant of nonstatutory stock options, stock appreciation rights, restricted stock awards, RSU awards, performance share awards, performance cash awards, and other forms of share awards to the Company's employees, directors and consultants.

The maximum number of ordinary shares that may initially be issued under the 2017 Plan is 1,400,000. In addition, the number of ordinary shares reserved for issuance under the 2017 Plan will automatically increase on January 1st of each calendar year, from January 1, 2018 through January 1, 2026, so that the number of such shares reserved for issuance will equal 12% of the total number of ordinary shares outstanding on the last day of the calendar month prior to the date of each automatic increase, or a lesser number of shares determined by the Board. The maximum number of ordinary shares that may be issued upon the exercise of stock options under the 2017 Plan is 5,600,000. On January 1, 2018, the share reserve increased by 250,167 to 1,650,167. On October 12, 2018, the Company increased the amount of registered ordinary shares of the Company’s 2017 Plan by 1,900,000 to 3,550,167.

On January 2, 2019, the Company announced the resignation of its former CEO, and the Board approved a severance package, which included a combination of cash and modifications to grants of his related option awards in the amount of $3.4 million. The cash element followed the termination section in the CEO employment agreement, and the options element included acceleration to certain grants of his related option awards. The fair value of the modifications to these option awards was estimated at $2.8 million. The entire severance package was recorded in general and administrative and research and development expenses, based on salary allocations respectively, in the condensed consolidated statements of operations for the year ended December 31, 2018.

On January 3, 2019, the Company appointed Elizabeth Barrett as its President and Chief Executive Officer.  In connection with Ms. Barrett’s employment, she was granted 277,432 options to purchase the Company’s ordinary shares, at an exercise price of $47.57, as well as 317,065 RSUs, with a combined fair value of $24.1 million.

In May 2019, the Company adopted the UroGen Pharma Ltd. 2019 Inducement Plan (the “Inducement Plan”). Under the Inducement Plan, the Company is authorized to issue up to 900,000 ordinary shares pursuant to awards issued under the Inducement Plan. The only persons eligible to receive grants of Awards (as defined below) under the Inducement Plan are individuals who satisfy the standards for inducement grants under Nasdaq Marketplace Rule 5635(c)(4) or 5635(c)(3) and the related guidance under Nasdaq IM 5635-1, including individuals who were not previously an employee or director of the Company or are following a bona fide period of non-employment, in each case as an inducement material to such individual’s agreement to enter into employment with the Company. Under the Inducement Plan, an “Award” is a nonstatutory stock option, restricted stock unit or other right to receive ordinary shares pursuant to the Inducement Plan.

In June 2019, as part of the Company’s Annual Meeting of Shareholders, the Company’s Board of Directors approved grants of 70,000 options to its non-employee directors. Each then current non-employee director, including the Chairman of the Board, received a grant of 10,000 options. Each option is exercisable into one ordinary share of the Company’s stock at an exercise price of $34.83 per share. The options vest quarterly over one year and expire 10 years from grant date. The grant date fair value of these options was approximately $1.9 million.

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

The following table illustrates the effect of share-based compensation on the condensed consolidated statements of operations (in thousands):

The total unrecognized compensation cost of options and RSUs at September 30, 2019 is $54.6 million with a weighted average recognition period of 2 years.

NOTE 12-INCOME TAXES

The Company is taxed under Israeli tax laws. As of September 30, 2019, the Company continues to maintain a full valuation allowance against deferred tax assets for all jurisdictions. In evaluating the need for a valuation allowance, the Company considers all sources of taxable income available to realize the deferred tax asset, including the future reversal of existing temporary differences, forecasts of future taxable income, and tax planning strategies. The Company has cumulative global pretax accounting losses for the years ended 2018, 2017 and 2016, and for the nine months ended September 30, 2019. The Company will continue to assess the extent to which its deferred tax assets may be realized in the future and will adjust the valuation allowance as needed.

NOTE 13-RELATED PARTIES

UPI entered into a lease agreement, dated as of November 2015 and commencing as of May 2016, for office space at 689 Fifth Avenue in New York (the “Fifth Avenue Office”). UPI shared the Fifth Avenue Office space equitably with Kite Pharma, Inc., a Delaware corporation, which was a cosignatory to such lease agreement. Arie Belldegrun, M.D., UPL’s chairman, served as the Chairman and Chief Executive Officer of Kite Pharma, Inc. until his resignation effective as of October 3, 2017, in connection with the acquisition of Kite Pharma, Inc. by Gilead Sciences, Inc.

In April 2018, UPI terminated its lease for the Fifth Avenue Office, and on December 1, 2018, UPI and Kite Pharma, Inc., completed a full assignment and assumption of the lease to Allogene Therapeutics, Inc. of which Arie Belldegrun, M.D., serves as the Chairman of the Board of Directors.

UPI recorded a loss on disposal of fixed assets of $0.2 million for the year ended December 31, 2018, regarding accelerated depreciation on the leasehold improvements associated with the lease, and there was no further liability as of December 31, 2018.

NOTE 14-COMMITMENTS AND CONTINGENCIES

In the normal course of business, the Company enters into contracts that contain a variety of indemnifications with its employees, licensors, suppliers and service providers. Further, the Company indemnifies its directors and officers who are, or were, serving at the Company’s request in such capacities. The Company’s maximum exposure under these arrangements is unknown as of September 30, 2019 and December 31, 2018. The Company does not anticipate recognizing any significant losses relating to these arrangements.

Grants from the Israeli Innovation Authority in Israel (“IIA”)

The Company has received grants from the IIA for research and development funding. Up until 2007, the IIA participation in the funding of the Company’s operations was as part of the Israeli Ministry of Industry and Commerce Director General Directive 8.2 by grants provided to Granot Ventures, a government supported technology incubator. Since 2008, the funding was provided directly to Company.

The Company is committed to pay royalties to the Government of Israel on proceeds from sales of products in the research and development of which the IIA participates by way of grants. At the time the grants were received, successful development of the related projects was not assured. In the case of failure of a project that was partly financed as above, the Company is not obligated to pay any such royalties. Under the terms of the funding from the IIA, royalties of 3% to 5% are payable on sales of products developed from a project so funded, up to 100% of the amount of the grant received by the Company (dollar linked); with the addition of annual interest at a rate based on 12-month LIBOR. The Company is subject to several conditions, including restrictions on its intellectual property.   

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UROGEN PHARMA, LTD.

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

As of September 30, 2019, the maximum royalty amount payable by the Company under these funding arrangements is $2.1 million (excluding interest, and inclusive of the $0.8 million in royalties that the Company has paid as of September 30, 2019). Under the Encouragement of Industrial Research, Development and Technological Innovation, 5754-1984 (“R&D Law”), a company that received grants from the IIA may not transfer IIA-funded technology or manufacture products developed with IIA-funded technology outside of the State of Israel without first obtaining the approval of the IIA. The Company may be required to pay increased royalties of up to 300% of the amount of the original grant and other amounts; if it does not receive such approvals, it may be required to pay significant penalties. As of September 30, 2019, the Company has paid $0.8 million in royalties due to the IIA, which has been recorded in cost of revenues in the condensed consolidated statements of operations for the year ended December 31, 2018.

Leases

See Note 8 for further discussion regarding lease commitments.

NOTE 15-SUBSEQUENT EVENTS

Lease Agreement

In November 2019, the Company entered into a new lease agreement, dated effective October 31, 2019, for an office in West Windsor, NJ. The lease commencement date is estimated to be in the fourth quarter of 2019 and the lease term is 38 months. The minimum lease obligation is approximately $1.7 million.

Agenus Agreement

In November 2019, the Company entered into a license agreement with Agenus Inc. (“Agenus”). Pursuant to the agreement, Agenus granted the Company an exclusive, worldwide license (not including Argentina, Brazil, Chile, Colombia, Peru, Venezuela and their respective territories and possessions), royalty-bearing, sublicensable license under Agenus’s intellectual property rights to develop, make, use, sell, import, and otherwise commercialize products incorporating a proprietary antibody of Agenus known as AGEN1884 for the treatment of cancers of the urinary tract via intravesical delivery.

Under the terms of the agreement, the Company paid Agenus an upfront fee of $10.0 million and has agreed to pay Agenus up to $115.0 million upon achieving certain clinical development and regulatory milestones, up to $85.0 million upon achieving certain commercial milestones, and royalties on net sales of licensed products in the 14%-20% range. The Company is solely responsible for costs and development, obtaining all regulatory approvals, and commercialization of the licensed products after receiving the regulatory approval to do so. See Note 9 for further information regarding the Company’s license and collaboration agreements.

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

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our unaudited condensed consolidated financial statements and related notes included in this Quarterly Report and the audited financial statements and notes thereto as of and for the year ended December 31, 2018 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, both of which are contained in our Annual Report on Form 10-K for the year ended December 31, 2018 (“Annual Report”), which was filed with the U.S. Securities and Exchange Commission (“SEC”) on February 28, 2019. The information in this discussion contains forward-looking statements and information within the meaning of Section 27A of the Securities Act of 1933, as amended (“Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended, (“Exchange Act”), which are subject to the “safe harbor” created by those sections. These forward-looking statements include, but are not limited to, statements concerning our strategy, future operations, future financial position, future revenues, projected costs, prospects and plans and objectives of management. The words “anticipates,” “believes,” “estimates,” “expects,” “intends,” “may,” “plans,” “projects,” “will,” “would” and similar expressions are intended to identify forward-looking statements, although not all forward-looking statements contain these identifying words. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements and you should not place undue reliance on our forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in the forward-looking statements that we make. These forward-looking statements involve risks and uncertainties that could cause our actual results to differ materially from those in the forward-looking statements, including, without limitation, the risks set forth in Part II, Item 1A, “Risk Factors” in this Quarterly Report. The forward-looking statements are applicable only as of the date on which they are made, and we do not assume any obligation to update any forward-looking statements.

Overview

We are a clinical stage biopharmaceutical company focused on developing novel therapies designed to change the standard of care for urological pathologies. We have an innovative and broad pipeline of product candidates that we believe can overcome the deficiencies of current treatment options for a variety of urological conditions with a focus on uro-oncology. Our lead product candidates, UGN-101 and UGN-102, are proprietary formulations of the chemotherapy drug mitomycin, a generic drug, which is currently used off-label in the U.S. for urothelial cancer treatment only in a water-based formulation as an adjuvant, or supplemental post-surgery, therapy. We are developing our product candidates as chemoablation agents, which means they are designed to remove tumors by non-surgical means, to treat several forms of non-muscle invasive urothelial cancer, including low-grade upper tract urothelial cancer (“LG UTUC”), and intermediate risk low-grade bladder cancer, including non-muscle invasive bladder cancer (“LG NMIBC”). We believe that UGN-101 and UGN-102, which are both local drug therapies, have the potential to significantly improve patients’ quality of life by replacing costly, sub-optimal and burdensome tumor resection and kidney removal surgeries as the first-line standard of care. UGN-101 and UGN-102 may also reduce the need for bladder and upper urinary tract surgeries, including removal of the upper urinary tract, which is a major surgical procedure typically performed when local endoscopic tumor resection fails to control the disease progression. Additionally, we believe that our product candidates, which are based on novel formulations of drugs previously approved for other indications, may qualify for streamlined regulatory pathways to market approval.  

We estimate that the annual treatable population of LG UTUC in the United States is approximately 6,000 to 7,000; the annual treatable population of intermediate risk LG NMIBC is approximately 80,000.

Our lead product candidates, UGN-101 and UGN-102, are formulated using our proprietary reverse thermal hydrogel (“RTGel”) technology. We believe that RTGel-based drug formulations, which provide for the sustained release of an active drug, may improve the efficacy of treatment of various types of urothelial cancer with an acceptable safety profile that permits the natural flow of fluids from the kidney via the urinary tract to the bladder. Our formulations are designed to achieve this by increasing the dwell time as well as the tissue exposure of the active drug throughout the organ. Consequently, we believe that RTGel-based drug formulations may enable us to overcome the anatomical and physiological challenges that have historically contributed to the lack of drug development for the treatment of urothelial cancer and other urological pathologies. No drugs have ever been approved by the U.S. Food and Drug Administration (“FDA”) for the treatment of LG UTUC, and no drugs have been approved by the FDA for the treatment of intermediate risk LG NMIBC in more than 15 years.

UGN-101:

In the first quarter of 2017, we commenced the OLYMPUS trial, a pivotal, open-label, single-arm Phase 3 clinical trial of UGN-101 for the treatment of LG UTUC. OLYMPUS is a prospective, single-arm study designed to assess the efficacy, safety, and tolerability of treatment with UGN-101 instilled in the upper urinary system of patients with noninvasive, LG UTUC. The primary efficacy endpoint is the complete response (“CR”) rate, defined as the percentage of patients with a CR at the primary disease evaluation (“PDE”) visit, which occurs approximately four to five weeks following the sixth weekly instillation. In addition, patients who achieve a CR at the PDE visit will be followed over the subsequent 12 months for durability of response.  

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Eligible consenting patients were treated with UGN-101 once weekly for a total of six times in a retrograde fashion. Patients who demonstrated CR were to be treated with UGN-101 once monthly as a maintenance therapy for a total of 11 instillations or up to the first recurrence, whichever came first. An independent Data Monitoring Committee (“DMC”) was assigned to this study. Safety, and efficacy data are monitored periodically by the DMC as detailed in the DMC charter.

The OLYMPUS trial is being conducted in the United States and Israel. The study completed enrollment in November 2018 with 74 patients enrolled, and 71 patients treated.

Results from a final analysis of the primary endpoint for the OLYMPUS trial were presented at the Company’s Investor Day event on September 24, 2019 and showed that investigational UGN-101 (mitomycin gel) for instillation demonstrated a 59 percent CR rate in patients with LG UTUC. Findings were consistent with previously presented results.

The final analysis of the primary endpoint showed that in the OLYMPUS intent-to-treat population, 42 of the 71 patients (59 percent) achieved a CR. Forty-one patients entered follow-up, which is still ongoing. Durability of response was estimated by Kaplan-Meier to be 89 percent at 6 months and 84 percent at 12 months after PDE. The estimated median time-to-recurrence was 13.0 months. Thirty four of the 71 patients treated in the study were initially characterized by the treating physician as having endoscopically unresectable tumor at baseline. Twenty of 34 patients (59 percent) achieved a CR at the PDE assessment and 12-month durability was identical for this subgroup.

In OLYMPUS, the most common treatment emergent adverse events include ureteric stenosis (43.7%), urinary tract infection (32.4%), haematuria (31.0%), flank pain (29.6%), nausea (23.9%), dysuria (21.1%), renal impairment (19.7%) and vomiting (19.7%).  

The most common treatment emergent serious adverse events are presented in the table below:

We have obtained Orphan Drug, Fast Track and Breakthrough Therapy Designations for UGN-101 for the treatment of patients with LG UTUC. We initiated a rolling submission of the UGN-101 New Drug Application, or NDA, using the 505(b)(2) pathway through submission of nonclinical data to the FDA in December 2018. We recently completed the NDA submission process and are waiting for the acceptance of the NDA by the FDA.

We have initiated a retreatment protocol as an extension to OLYMPUS.  This trial is designed to evaluate the efficacy and safety of retreatment with UGN-101 in patients treated in the OLYMPUS trial who were found to be a CR at the PDE 1 Visit and were subsequently found to have a documented recurrence of LG UTUC during follow up.

UGN-102:

UGN-102 is our sustained-release formulation of mitomycin that we are developing for the treatment of intermediate risk LG NMIBC as a first-line non-surgical chemoablation alternative to TURBT. We have recently completed enrollment in an open-label, single-arm Phase 2b clinical trial to evaluate the efficacy and safety of UGN-102 for the treatment of patients with intermediate risk LG NMIBC. This study is being conducted in the United States and Israel.

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UGN-201:

Our clinical stage pipeline also includes UGN-201, our proprietary immunotherapy formulation of imiquimod, a product candidate for the treatment of high-grade NMIBC, which may include CIS. UGN-201 is a novel, liquid formulation of imiquimod, a generic toll-like receptor 7 (“TLR7”), agonist. Toll-like receptor agonists play a key role in initiating the innate immune response system. We believe that the combination of UGN-201 with additional immunotherapy drugs, such as immune checkpoint inhibitors could represent a valid alternative to the current standard of care for the post-TURBT adjuvant treatment of high-grade NMIBC.

Other Partnered Programs:

We have combined a proprietary novel RTGel formulation with BOTOX^®, a branded drug, and we believe that the combination can potentially serve as an effective treatment option for patients suffering from overactive bladder. In October 2016, we announced the licensing of the worldwide rights to this RTGel formulation in combination with neurotoxins, including BOTOX, to Allergan Pharmaceuticals International Limited (“Allergan”), a wholly owned subsidiary of Allergan plc (the “Allergan Agreement”). In August 2017, we announced that Allergan had submitted an Investigational New Drug application (“IND”) to the FDA in order to be able to commence clinical trials in the United States using RTGel in combination with BOTOX. In October 2017, Allergan commenced a Phase 2 clinical trial of our proprietary formulation of RTGel combined with BOTOX for the treatment of overactive bladder.

Our Research and Development and License Agreements

In October 2016, the Company entered into the Allergan Agreement and granted Allergan an exclusive worldwide license to research, develop, manufacture and commercialize pharmaceutical products that contain RTGel and clostridial toxins (including BOTOX), alone or in combination with certain other active ingredients, referred to as the Licensed Products, which are approved for the treatment of adults with overactive bladder who cannot use or do not adequately respond to anticholinergics. Additionally, the Company granted Allergan a non-exclusive, worldwide license to use certain of the Company’s trademarks as required for Allergan to practice its exclusive license with respect to the Licensed Products.

Under the Allergan Agreement, Allergan is solely responsible, at its expense, for developing, obtaining regulatory approvals for and commercializing, on a worldwide basis, pharmaceutical products that contain RTGel and clostridial toxins (including BOTOX), alone or in combination with certain other active ingredients (collectively, the “Licensed Products”). Allergan is obligated to pay us a tiered royalty in the low single digits based on worldwide annual net sales of Licensed Products, subject to certain reductions for the market entry of competing products and/or loss of our patent coverage of Licensed Products. We are responsible for payments to any third party for certain RTGel-related third-party intellectual properties.

In November 2019, we entered into a license agreement with the Agenus Inc. (“Agenus”). Pursuant to the agreement, Agenus granted us an exclusive, worldwide license (not including Argentina, Brazil, Chile, Colombia, Peru, Venezuela and their respective territories and possessions), royalty-bearing, sublicensable license under Agenus’s intellectual property rights to develop, make, use, sell, import, and otherwise commercialize products incorporating a proprietary antibody of Agenus known as AGEN1884 for the treatment of cancers of the urinary tract via intravesical delivery. AGEN1884 is an anti-CTLA-4 antagonist that is currently being evaluated by Agenus as a monotherapy in PD-1 refractory patients, and in combination with Agenus’ anti-PD-1 antibody (AGEN2034) in solid tumors. UGN-201 is a TLR-7/8 agonist that is in early stage development for high grade non-muscle invasive bladder cancer (HG NMIBC).  

Based on nonclinical studies conducted by us, UGN-201 in combination with anti-CTLA-4 antagonists have shown encouraging results for the potential treatment of HG NMIBC. We intend to initiate further research and development work in HG NMIBC in the fourth quarter of 2019.

Under the terms of the agreement, we paid Agenus an upfront fee of $10.0 million and have agreed to pay Agenus up to $115.0 million upon achieving certain clinical development and regulatory milestones, up to $85.0 million upon achieving certain commercial milestones, and royalties on net sales of licensed products in the 14%-20% range. We are solely responsible for costs and development, obtaining all regulatory approvals, and commercialization of the licensed products after receiving the regulatory approval to do so.

For additional information regarding our research and development license and collaboration agreements, see Note 9 to our condensed consolidated financial statements appearing elsewhere in this Quarterly Report.

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Follow-on Public Offering

In January 2019, we completed an underwritten public offering of 4,207,317 of our ordinary shares, including 548,780 shares sold pursuant to the full exercise of the underwriters’ option to purchase additional shares, at a price to the public of $41.00 per share.  The net proceeds to us from the offering were approximately $161.4 million, after deducting the underwriting discounts and commissions and payment of offering expenses.

Components of Operating Results

Revenues

We do not currently have any products approved for sale and, to date, we have not recognized any revenues from sales of our product candidates, UGN-101, UGN-102 or UGN-201. For the three and nine months ended September 30, 2019 and 2018, we recognized revenues of $0 and $18,000 and of $0.3 million and $1.1 million from RTGel sales under the Allergan Agreement, respectively. In the future, we may generate revenue from a combination of product sales, if approved, reimbursements, up-front payments, milestone payments and royalties in connection with the Allergan Agreement and future collaborations. We expect that any revenue we generate will fluctuate from quarter to quarter as a result of the timing and amount of license fees, milestone and other payments, and the amount and timing of payments that we receive upon the sale of our products, if approved, to the extent any are successfully commercialized. If we fail to achieve clinical success and/or to obtain regulatory approval of any of our product candidates in a timely manner, our ability to generate future revenue will be impaired.

Research and Development Expenses, Net

Research and development expenses, net consist primarily of:

We expense all research and development costs as incurred. In light of the fact that our employees and internal resources may be engaged in projects for multiple programs at any time, our focus is on total research and development expenditures, and we do not allocate our internal research and development expenses by project.

We estimate nonclinical study and clinical trial expenses based on the services performed pursuant to contracts with research institutions and contract research organizations that conduct and manage nonclinical studies and clinical trials on our behalf based on actual time and expenses incurred by them.

We accrue for costs incurred as the services are being provided by monitoring the status of the trial or project and the invoices received from our external service providers. We adjust our accrual as actual costs become known. Where at risk contingent milestone payments are due to third parties under research and development and collaboration agreements, the milestone payment obligations are expensed when the milestone results are achieved.

We have received grants under the Israeli Law for the Encouragement of Industrial Research, Development and Technological Innovation, 5754-1984 (the “R&D Law”), from the Israel Innovation Authority in Israel (the “IIA”), formerly known as the Office of the Chief Scientist of the Ministry of Economy and Industry, an independent and impartial public entity, for some of our development programs. As of September 30, 2019, we had received grants in the aggregate amount of $2.1 million.

The IIA may also impose certain conditions on any arrangement under which it permits us to transfer IIA-funded technology outside of the State of Israel. Furthermore, the consideration available to our shareholders in a transaction involving the transfer outside of the State of Israel of IIA-funded technology (such as a merger or similar transaction) may be reduced by any amounts that we are required to pay to IIA. The restrictions under the R&D Law will continue to apply even after we have repaid the full amount of royalties due to the IIA. If we fail to satisfy the conditions of the R&D Law, we may be required to refund the amounts of the grants previously received, together with interest and penalties.

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A recipient of a grant from the IIA is obligated to pay royalties generally at a rate of 3% to 5% on revenues from sales of products developed in whole or in part with IIA-funded technology, up to the amount of the grant related to any such products plus accrued interest. As of September 30, 2019, we have paid $0.8 million in royalties due to the IIA, which has been recorded in cost of revenues in our condensed consolidated results of operations for the year ended December 31, 2018. Under the R&D Law, a company that received grants from the IIA may not transfer IIA-funded technology or manufacture products developed with IIA-funded technology outside of the State of Israel without first obtaining the approval of the IIA. We may be required to pay increased royalties of up to 300% of the amount of the original grant and other amounts; if we do not receive such approvals, we may be required to pay significant penalties. Under applicable accounting rules, we deduct the IIA grants from research and development expenses as the applicable costs are incurred. We also had a nonclinical collaboration with Allergan into which we initially entered into in February 2014. We deduct amounts received from the nonclinical collaboration with Allergan from our research and development expenses as the applicable costs are incurred. As a result, our research and development expenses are shown on our financial statements net of the IIA grants and amounts received from the nonclinical collaboration.

We are currently focused on advancing our product candidates, and our future research and development expenses will depend on their clinical success. Research and development expenses will continue to be significant and will increase over at least the next several years as we continue to develop our product candidates and conduct nonclinical studies and clinical trials of our product candidates.

Research and development activities are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later-stage clinical trials. We do not believe that it is possible at this time to accurately project total expenses required for us to reach commercialization of our product candidates. Due to the inherently unpredictable nature of nonclinical and clinical development, we are unable to estimate with certainty the costs we will incur and the timelines that will be required in the continued development and approval of our product candidates. Clinical and nonclinical development timelines, the probability of success and development costs can differ materially from expectations. In addition, we cannot forecast which product candidates may be subject to future collaborations, if and when such arrangements will be entered into, if at all, and to what degree such arrangements would affect our development plans and capital requirements. We expect our research and development expenses to increase over the next several years as our clinical programs progress and as we seek to initiate clinical trials of additional product candidates. We also expect to incur increased research and development expenses as we selectively identify and develop additional product candidates.

The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors that include, but are not limited to, the following: