ardx_Current_Folio_10Q

Table of Contents

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2020

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM               TO

 

COMMISSION FILE NUMBER: 001‑36485


ARDELYX, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)


 

DELAWARE

26‑1303944

(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)

(I.R.S. EMPLOYER
IDENTIFICATION NUMBER)

 

34175 Ardenwood Boulevard,

Fremont, California 94555

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIP CODE)

 

(510) 745‑1700

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)


 

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

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001

 

ARDX

 

The Nasdaq Global Market

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

 

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

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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

Accelerated filer

 

 

 

 

Non-accelerated filer

☐ 

Smaller reporting company

 

 

 

Emerging growth company

 

 

 

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

 

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

 

The number of issued and outstanding shares of the registrant’s Common Stock, $0.0001 par value per share, as of May 4,  2020,  was 89,056,759.

 

 

 

 

Table of Contents

ARDELYX, INC.

 

PAGE

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Condensed Financial Statements 

2

Condensed Balance Sheets as of March 31, 2020 (unaudited) and December 31, 2019 

2

Condensed Statements of Operations and Comprehensive Loss for the three months ended March 31, 2020 and 2019 (unaudited) 

3

Condensed Statements of Changes in Stockholders' Equity for the three months ended March 31, 2020 and 2019 (unaudited) 

4

Condensed Statements of Cash Flows for the three months ended March 31, 2020 and 2019 (unaudited) 

5

Notes to Condensed Financial Statements (unaudited) 

6

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

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

25

Item 4. Controls and Procedures 

26

 

 

PART II. OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

26

Item 1A. Risk Factors 

26

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

62

Item 3. Defaults Upon Senior Securities 

63

Item 4. Mine Safety Disclosures 

63

Item 5. Other Information 

63

Item 6. Exhibits 

64

Signatures 

65

 

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PART I.            FINANCIAL INFORMATION

ITEM 1.            CONDENSED FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2020

    

2019

    

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

105,895

 

$

181,133

 

Short-term investments

 

 

117,312

 

 

66,379

 

Unbilled revenue

 

 

750

 

 

750

 

Prepaid expenses and other current assets

 

 

4,625

 

 

3,800

 

Total current assets

 

 

228,582

 

 

252,062

 

Property and equipment, net

 

 

2,968

 

 

3,436

 

Right-of-use assets

 

 

3,468

 

 

3,970

 

Other assets

 

 

304

 

 

314

 

Total assets

 

$

235,322

 

$

259,782

 

Liabilities and stockholders’ equity

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

1,012

 

$

2,187

 

Accrued compensation and benefits

 

 

1,951

 

 

4,453

 

Current portion of operating lease liability

 

 

2,715

 

 

2,608

 

Loan payable, current portion

 

 

7,437

 

 

1,183

 

Deferred revenue

 

 

3,366

 

 

4,541

 

Accrued expenses and other current liabilities

 

 

6,936

 

 

7,248

 

Total current liabilities

 

 

23,417

 

 

22,220

 

Operating lease liability, net of current portion

 

 

1,355

 

 

2,076

 

Loan payable, net of current portion

 

 

42,793

 

 

48,831

 

Total liabilities

 

 

67,565

 

 

73,127

 

Commitments and contingencies (Note 10)

 

 

  

 

 

  

 

Stockholders’ equity:

 

 

  

 

 

  

 

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 300,000,000 shares authorized; 89,035,096 and 88,817,741 shares issued and outstanding as of March 31, 2020 and December 31, 2019, respectively.

 

 

 9

 

 

 9

 

Additional paid-in capital

 

 

650,617

 

 

647,078

 

Accumulated deficit

 

 

(482,825)

 

 

(460,452)

 

Accumulated other comprehensive (loss) income

 

 

(44)

 

 

20

 

Total stockholders’ equity

 

 

167,757

 

 

186,655

 

Total liabilities and stockholders’ equity

 

$

235,322

 

$

259,782

 

 

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

2

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ARDELYX, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

    

2020

    

2019

    

 

Revenues:

 

 

  

 

 

  

 

 

Collaborative development revenue

 

$

1,175

 

$

 —

 

 

Other revenue

 

 

38

 

 

 —

 

 

Total revenues

 

 

1,213

 

 

 —

 

 

Operating expenses:

 

 

  

 

 

  

 

 

Research and development

 

 

15,844

 

 

20,381

 

 

General and administrative

 

 

7,138

 

 

5,117

 

 

Total operating expenses

 

 

22,982

 

 

25,498

 

 

Loss from operations

 

 

(21,769)

 

 

(25,498)

 

 

Interest expense

 

 

(1,357)

 

 

(1,434)

 

 

Other income, net

 

 

753

 

 

790

 

 

Loss before provision for income taxes

 

 

(22,373)

 

 

(26,142)

 

 

Provision for income taxes

 

 

 —

 

 

 2

 

 

Net loss

 

$

(22,373)

 

$

(26,144)

 

 

Net loss per common share, basic and diluted

 

$

(0.25)

 

$

(0.42)

 

 

Shares used in computing net loss per share - basic and diluted

 

 

88,880,658

 

 

62,546,295

 

 

Comprehensive loss:

 

 

  

 

 

  

 

 

Net loss

 

 

(22,373)

 

 

(26,144)

 

 

Unrealized (losses) gains on available-for-sale securities

 

 

(64)

 

 

50

 

 

Comprehensive loss

 

$

(22,437)

 

$

(26,094)

 

 

 

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

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ARDELYX, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

(in thousands, except share amounts)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance as of December 31, 2019

 

88,817,741

 

$

 9

 

$

647,078

 

$

(460,452)

 

$

20

 

$

186,655

Issuance of common stock under employee stock purchase plan

 

75,804

 

 

 —

 

 

375

 

 

 —

 

 

 —

 

 

375

Issuance of common stock upon exercise of options

 

141,551

 

 

 —

 

 

216

 

 

 —

 

 

 —

 

 

216

Stock-based compensation

 

 —

 

 

 —

 

 

2,948

 

 

 —

 

 

 

 

 

2,948

Unrealized losses on available-for-sale securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(64)

 

 

(64)

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(22,373)

 

 

 —

 

 

(22,373)

Balance as of March 31, 2020

 

89,035,096

 

$

 9

 

$

650,617

 

$

(482,825)

 

$

(44)

 

$

167,757

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

 

 

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance as of December 31, 2018

 

62,516,627

 

$

 6

 

$

481,357

 

$

(365,512)

 

$

(38)

 

$

115,813

Issuance of common stock under employee stock purchase plan

 

83,046

 

 

 —

 

 

198

 

 

 —

 

 

 —

 

 

198

Issuance of common stock upon exercise of options

 

770

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

 2

Stock-based compensation

 

 —

 

 

 

 

 

1,922

 

 

 —

 

 

 

 

 

1,922

Unrealized gains on available-for-sale securities

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

50

 

 

50

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(26,144)

 

 

 —

 

 

(26,144)

Balance as of March 31, 2019

 

62,600,443

 

$

 6

 

$

483,479

 

$

(391,656)

 

$

12

 

$

91,841

 

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

 

4

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ARDELYX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2020

    

2019

 

Operating activities

 

 

  

 

 

  

 

Net loss

 

$

(22,373)

 

$

(26,144)

 

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

 

 

 

 

 

 

 

Depreciation expense

 

 

492

 

 

675

 

Amortization of deferred financing costs

 

 

112

 

 

120

 

Amortization of deferred compensation for services

 

 

89

 

 

76

 

Amortization of premium on investment securities

 

 

(138)

 

 

(301)

 

Non-cash lease expense

 

 

502

 

 

439

 

Stock-based compensation

 

 

2,948

 

 

1,922

 

Change in derivative liabilities

 

 

82

 

 

37

 

Non-cash interest associated with debt discount accretion

 

 

127

 

 

113

 

Changes in operating assets and liabilities:

 

 

 

 

 

  

 

Unbilled revenue

 

 

 —

 

 

5,000

 

Prepaid expenses and other assets

 

 

(928)

 

 

411

 

Accounts payable

 

 

(1,174)

 

 

777

 

Accrued compensation and benefits

 

 

(2,502)

 

 

(1,089)

 

Lease liabilities

 

 

(614)

 

 

 —

 

Accrued and other liabilities

 

 

(394)

 

 

1,051

 

Deferred revenue

 

 

(1,175)

 

 

 —

 

Net cash used in operating activities

 

 

(24,946)

 

 

(16,913)

 

Investing activities

 

 

  

 

 

  

 

Proceeds from maturities of investments

 

 

4,000

 

 

55,020

 

Purchases of investments

 

 

(54,858)

 

 

(24,874)

 

Purchases of property and equipment

 

 

(25)

 

 

(165)

 

Net cash (used in) provided by investing activities

 

 

(50,883)

 

 

29,981

 

Financing activities

 

 

  

 

 

  

 

Proceeds from issuance of common stock under stock plans

 

 

375

 

 

198

 

Issuance of common stock upon exercise of options

 

 

216

 

 

 2

 

Net cash provided by financing activities

 

 

591

 

 

200

 

Net (decrease) increase in cash and cash equivalents

 

 

(75,238)

 

 

13,268

 

Cash and cash equivalents at beginning of period

 

 

181,133

 

 

78,768

 

Cash and cash equivalents at end of period

 

$

105,895

 

$

92,036

 

Supplementary disclosure of cash flow information:

 

 

  

 

 

  

 

Income taxes paid

 

$

 —

 

$

 2

 

Supplementary disclosure of non-cash activities:

 

 

  

 

 

  

 

Right-of-use assets obtained in exchange for lease obligations

 

$

 —

 

$

5,810

 

 

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

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ARDELYX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

(tabular amounts in thousands, except share and per share amounts and where otherwise noted)

 

NOTE 1.  ORGANIZATION AND BASIS OF PRESENTATION

Ardelyx, Inc. (the “Company,” “we,” “us” or “our”) is a specialized biopharmaceutical company focused on developing innovative first-in-class medicines to improve treatment for people with kidney and cardiovascular diseases.

The Company operates in one business segment, which is the research and development of biopharmaceutical products.

Basis of Presentation

These condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted. These condensed financial statements have been prepared on the same basis as the Company’s most recent annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary to present fairly the Company’s financial position at March 31, 2020 and results of operations, changes in stockholders’ equity, and cash flows for the interim periods ended March 31, 2020 and 2019.

The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K the year ended December 31, 2019. The results for the three months ended March 31, 2020, are not necessarily indicative of results to be expected for the entire year ending December 31, 2020, or any other interim period or future year.

 

Prior Period Errors

 

In connection with our review of our financial statements as of and for the six months ended June 30, 2019, we corrected errors related to the accounting for clinical trial accruals that had resulted in an overstatement of research and development expenses during the three months ended March 31, 2019 and during the year ended December 31, 2018. Specifically, management concluded that the Company’s research and development expenses recorded during the three months ended March 31, 2019 and during year ended December 31, 2018 had been overstated by $0.5 million and $3.6 million, respectively, and that the Company’s accrued expenses and other current liabilities for these periods had been overstated by the same amounts.

 

Management analyzed the potential impact of these errors in accordance with the SEC’s Staff Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements, and concluded that while the errors were significant to the Company’s financial statements as of and for the six months ended June 30, 2019, a correction of the errors would not have been material to each quarter or the full year results for 2019 and 2018 nor affect the trend of financial results. Accordingly, during the second quarter of 2019, the Company reduced accrued and other liabilities by $4.1 million and recorded a cumulative adjustment of $4.1 million in the condensed statement of operations to reduce research and development expenses.

 

Liquidity

As of March 31, 2020, the Company had cash, cash equivalents and short-term investments of approximately $223.2 million. The Company believes its current available cash, cash equivalents and short-term investments will be sufficient

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to fund the Company’s planned expenditures and meet its obligations for at least 12 months following May 7, 2020, which is the date that these condensed financial statements are being issued.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the financial statements and accompanying notes thereto. On an ongoing basis, management evaluates its estimates, including those related to recognition of revenue, clinical trial accruals, contract manufacturing accruals, the fair value of assets and liabilities, income taxes and stock-based compensation. Management bases its estimates on historical experience and on various other market-specific and relevant assumptions that management believes to be reasonable under the circumstances. Actual results could materially differ from those estimates.

 

 

Summary of Significant Accounting Policies

There have been no changes to the significant accounting policies disclosed in the Company’s most recent Annual Report on Form 10‑K.

Recently Adopted Accounting Pronouncements

In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606 (“ASU 2018-18”), which clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under the FASB’s Accounting Standards Codification (“ASC”) No. 606, Revenue from Contracts with Customers (“ASC 606”) when the collaborative arrangement participant is a customer. The Company adopted ASU 2018-18 on January 1, 2020, and the adoption of this standard did not have a material impact on the Company’s financial statements. 

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework— Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which considers cost and benefits and removes, modifies and adds disclosure requirements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements and the narrative description of measurement uncertainty is to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments were to be applied retrospectively to all periods presented. The Company adopted ASU 2018-13 on January 1, 2020, and the adoption of this standard did not have a material impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In December 2019, the FASB issued ASU No. 2019-12 Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes, which removes certain exceptions for intra period allocations, recognizing deferred taxes for investments and calculating income taxes in interim periods. This ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for tax goodwill and allocating taxes to members of a consolidated group. The guidance is effective for the Company for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. Management is currently assessing the impact of this standard on the Company’s financial statements.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, an amendment which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an

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allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. For smaller reporting companies the guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. Management is currently assessing the impact of this standard on the Company’s financial statements.

 

 

 

NOTE 2.  CASH, CASH EQUIVALENTS AND SHORT-TERM INVESTMENTS

Securities classified as cash, cash equivalents and short-term investments as of March 31, 2020 and December 31, 2019, are summarized below.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

100,755

 

$

 —

 

$

 —

 

$

100,755

Commercial paper

 

 

3,999

 

 

 —

 

 

 —

 

 

3,999

Cash

 

 

1,141

 

 

 —

 

 

 —

 

 

1,141

Total cash and cash equivalents

 

 

105,895

 

 

 —

 

 

 —

 

 

105,895

Short-term investments

 

 

  

 

 

  

 

 

 

 

 

  

Commercial paper

 

$

53,605

 

$

106

 

$

 —

 

$

53,711

Corporate bonds

 

 

49,245

 

 

10

 

 

(133)

 

 

49,122

Asset-backed securities

 

 

10,510

 

 

 —

 

 

(52)

 

 

10,458

U.S. treasury notes

 

 

3,996

 

 

25

 

 

 —

 

 

4,021

Total short-term investments

 

 

117,356

 

 

141

 

 

(185)

 

 

117,312

Total cash equivalents and short-term investments

 

$

223,251

 

$

141

 

$

(185)

 

$

223,207

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

147,208

 

$

 —

 

$

 —

 

$

147,208

Commercial paper

 

 

19,357

 

 

 3

 

 

 —

 

 

19,360

Corporate bonds

 

 

11,441

 

 

 —

 

 

 —

 

 

11,441

Cash

 

 

3,124

 

 

 —

 

 

 —

 

 

3,124

Total cash and cash equivalents

 

 

181,130

 

 

 3

 

 

 —

 

 

181,133

Short-term investments

 

 

  

 

 

  

 

 

 

 

 

  

Commercial paper

 

$

36,667

 

$

14

 

$

 —

 

$

36,681

Corporate bonds

 

 

21,690

 

 

 6

 

 

(3)

 

 

21,693

Asset-backed securities

 

 

8,005

 

 

 —

 

 

 —

 

 

8,005

Total short-term investments

 

 

66,362

 

 

20

 

 

(3)

 

 

66,379

Total cash equivalents and short-term investments

 

$

247,492

 

$

23

 

$

(3)

 

$

247,512

 

All available-for-sale securities held as of March 31, 2020 had contractual maturities of less than one year. The Company’s available-for-sale securities are subject to a periodic impairment review. The Company considers a debt security to be impaired when the fair value of that security is less than its carrying cost, in which case the Company would further evaluate the investment to determine whether the security is other-than-temporarily impaired. When the Company evaluates an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition or creditworthiness of the issuer and any changes thereto, intent to sell, and whether it is more likely than not the Company will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired, the Company writes the

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investment down through the statement of operations to its fair value and establishes that value as the new cost basis for the investment. Management has determined that none of the Company’s available-for-sale securities were other-than-temporarily impaired in any of the periods presented, and as of March 31, 2020, no investment was in a continuous unrealized loss position for more than one year.  As such, the Company believes that it is more likely than not that the investments will be held until maturity or a forecasted recovery of fair value.

While our investment policy requires that we only invest in highly-rated securities and limit our exposure to any single issuer, the COVID-19 pandemic may materially affect the financial conditions of issuers, which could result in a default by one or more issuers or result in downgrades below our minimum credit rating requirements.

 

 

NOTE 3.  FAIR VALUE MEASUREMENTS

The Company’s financial instruments consist of cash and cash equivalents, short-term investments, prepaid expenses, other current assets, accounts payable, accrued expenses, and the Term Loan, as defined and discussed in Note 5. Fair value estimates of these instruments are made at a specific point in time based on relevant market information. These estimates may be subjective in nature and involve uncertainties and matters of significant judgment. The carrying amounts of financial instruments such as cash and cash equivalents, prepaid expenses, other current assets, accounts payable and accrued expenses approximate the related fair values due to the short maturities of these instruments. Based on prevailing borrowing rates available to the Company for loans with similar terms, the Company believes the fair value of the Term Loan, considering level 2 inputs, approximates this instrument’s carrying value.

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs.

 

The three-level hierarchy for the inputs to valuation techniques is briefly summarized as follows:

Level 1   –    Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by the Company at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money market funds, U.S. treasuries and trading securities with quoted prices on active markets.

Level 2   –    Valuations based on inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Examples of assets and liabilities utilizing Level 2 inputs are corporate bonds, commercial paper, certificates of deposit and over-the-counter derivatives.

Level 3   –    Valuations based on unobservable inputs in which there is little or no market data, which require the Company to develop its own assumptions.

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The following table sets forth the fair value of the Company’s financial assets and liabilities that are measured or disclosed on a recurring basis:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2020

 

    

Total
Fair Value

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

100,755

 

$

100,755

 

$

 —

 

$

 —

Commercial paper

 

 

57,710

 

 

 —

 

 

57,710

 

 

 —

Corporate bonds

 

 

49,122

 

 

 —

 

 

49,122

 

 

 —

Asset-backed securities

 

 

10,458

 

 

 —

 

 

10,458

 

 

 —

U.S. treasury notes

 

 

4,021

 

 

4,021

 

 

 —

 

 

 —

Total

 

$

222,066

 

$

104,776

 

$

117,290

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability for Exit Fee

 

$

1,051

 

$

 —

 

$

 —

 

$

1,051

Total

 

$

1,051

 

$

 —

 

$

 —

 

$

1,051

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2019

 

    

Total
Fair Value

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

147,208

 

$

147,208

 

$

 —

 

$

 —

Commercial paper

 

 

56,041

 

 

 —

 

 

56,041

 

 

 —

Corporate bonds

 

 

33,134

 

 

 —

 

 

33,134

 

 

 —

Asset-backed securities

 

 

8,005

 

 

 —

 

 

8,005

 

 

 —

Total

 

$

244,388

 

$

147,208

 

$

97,180

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability for Exit Fee

 

$

969

 

$

 —

 

$

 —

 

$

969

Total

 

$

969

 

$

 —

 

$

 —

 

$

969

 

Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds, U.S. treasury securities and U.S. treasury notes as Level 1. When quoted market prices are not available for the specific security, the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The Company classifies corporate bonds, commercial paper, asset-backed securities and foreign currency derivative contracts as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securities or derivative liabilities such as the Exit Fee, as defined and discussed in Note 4, are classified as Level 3. There were no transfers between Level 1 and Level 2 during the periods presented.

 

 

NOTE 4.  DERIVATIVE LIABILITY

 

In May 2018, in connection with entering into the Loan Agreement, as defined and discussed in Note 5, the Company entered into an agreement pursuant to which the Company agreed to pay $1.5 million in cash (the “Exit Fee”) upon any change of control transaction in respect of the Company or if the Company obtains both (i) U.S. Food and Drug Administration (“FDA”) approval of tenapanor for the treatment of hyperphosphatemia in chronic kidney disease (“CKD”) patients on dialysis and (ii) FDA approval of tenapanor for the treatment of patients with irritable bowel syndrome with constipation (“IBS-C”), which was obtained on September 12, 2019 when the FDA approved IBSRELA® (tenapanor), a 50 milligram, twice daily oral pill for the treatment of IBS-C in adults (the “Exit Fee Agreement”). Notwithstanding the prepayment or termination of the Term Loan, as defined and discussed in Note 5, the Company’s obligation to pay the Exit Fee will expire on May 16, 2028. The Company concluded that the Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the Exit Fee is recorded as a derivative liability and included in accrued expenses and other current liabilities on the accompanying condensed balance sheets.

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The fair value of the derivative liability was determined using a discounted cash flow analysis, and the key assumptions included in the calculation of the estimated fair value of the derivative liability include: (i) the Company’s estimates of both the probability and timing of payment of the Exit Fee to Solar Capital Ltd. and Western Alliance Bank as a result of the FDA approvals and (ii) a variable discount rate. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the derivative liability, and it is estimated that a 10% increase or decrease in the probability of occurrence would result in a fair value fluctuation of approximately $0.1 million.

Changes in fair value, which are presented as other income, net, in the Company's condensed statements of operations, were as follows:

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

 

 

2020

 

 

2019

 

Fair value of Exit Fee derivative liability at January 1

 

$

969

 

$

533

 

Change in estimated fair value of derivative liability

 

 

82

 

 

37

 

Fair value of Exit Fee derivative liability at March 31

 

$

1,051

 

$

570

 

 

 

NOTE 5.  BORROWING

 

Solar Capital and Western Alliance Bank Loan Agreement

 

On May 16, 2018, the Company entered into a loan and security agreement (the “Loan Agreement”), with Solar Capital Ltd. and Western Alliance Bank (collectively the “Lenders”). The Loan Agreement provides for a $50.0 million term loan facility with a maturity date of November 1, 2022 (the “Term Loan”).

 

Borrowings under the Term Loan bear interest at a floating per annum rate equal to 7.45% plus the one-month LIBOR.  The Company is permitted to make interest-only payments on the Term Loan through June 1, 2020, unless prior to that date the Company achieves its primary endpoint in the Phase 3 study of tenapanor for the treatment of hyperphosphatemia in end-stage renal disease patients on dialysis (the “Phase 3 Endpoint”), in which case the Company is permitted to make interest-only payments on the Term Loan until December 1, 2020. On December 3, 2019, the Company reported positive topline results for PHREEDOM, a long-term Phase 3 study evaluating the efficacy and safety of tenapanor as monotherapy for the treatment of hyperphosphatemia in patients with CKD on dialysis. The Lenders are in agreement that these positive data from the Phase 3 PHREEDOM study meet the definition of the Phase 3 Endpoint. Accordingly, beginning on December 1, 2020 and through the maturity date, in addition to monthly interest payments, the Company will be required to make monthly principal payments in equal monthly installments of approximately $2.1 million.  

 

The Company paid a closing fee of 1% of the Term Loan, or $0.5 million, upon the closing of the Term Loan, and the Company is obligated to pay a final fee equal to 3.95% of the Term Loan upon the earliest to occur of the maturity date, the acceleration of the Term Loan, the prepayment or repayment of the Term Loan or the termination of the Loan Agreement. The Company may voluntarily prepay the outstanding Term Loan, subject to a prepayment premium of (i) 3% of the principal amount of the Term Loan if prepaid prior to or on the first anniversary of the Closing Date, (ii) 2% of the principal amount of the Term Loan if prepaid after the first anniversary of the Closing Date through and including the second anniversary of the Closing Date, or (iii) 1% of the principal amount of the Term Loan if prepaid after the second anniversary of the Closing Date and prior to the maturity date. The Term Loan is secured by substantially all the Company’s assets, except for the Company’s intellectual property and certain other customary exclusions. Additionally, in connection with the Term Loan, the Company entered into the Exit Fee Agreement, as discussed in Note 4.

 

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants. As of March 31, 2020, the Company was in compliance with all of the covenants set forth in the Loan Agreement.

 

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The Loan Agreement also contains customary events of default that entitle the Lender to cause the Company’s indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against the Company and the collateral securing the Term Loan, including the Company’s cash. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4.0% per annum will apply to all amounts owed under the Loan Agreement. As of March 31, 2020, to the Company’s knowledge, there were no facts or circumstances in existence that would give rise to an event of default.

 

As of March 31, 2020, the Company’s future payment obligations related to the Term Loan, excluding interest payments and the Exit Fee, are as follows:

 

 

 

 

 

 

Remainder of 2020

 

$

2,083

2021

 

 

25,000

2022

 

 

24,892

Total principal and final fee payments

 

 

51,975

Less: Unamortized discount and debt issuance costs

 

 

(652)

Less: Unaccreted value of final fee

 

 

(1,093)

Loan payable

 

 

50,230

Less: Loan payable, current portion

 

 

7,437

Loan payable, net of current portion

 

$

42,793

 

 

 

NOTE 6.  LEASES 

 

All of the Company’s leases, which primarily include the right to use office and laboratory space, are operating leases, and certain of the leases have both lease and non-lease components.  The Company has elected to account for each separate lease component and the non-lease components associated with that lease component as a single lease component for all classes of underlying assets.

The following table provides additional details related to our facility leases, as presented in the Company’s condensed balance sheet as of March 31, 2020:

 

 

 

 

 

 

 

 

 

 

 

 

Facilities

 

 

 

 

Right of use assets

 

$

3,468

 

 

 

 

 

 

Current portion of lease liabilities

 

 

2,715

 

Operating lease liability, net of current portion

 

 

1,355

 

Total

 

$

4,070

 

 

 

 

 

 

Weighted-average remaining life (years)

 

 

1.5

 

Weighted-average discount rate

 

 

12.99

%

 

Other information related to the Company’s facilities lease is as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

2020

    

2019

Operating lease expense

 

$

648

 

$

648

Cash paid for operating lease

 

$

760

 

$

614

 

 

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The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities as of March 31, 2020:

 

 

 

 

 

Remainder of 2020

 

$

2,306

2021

 

 

2,183

Total undiscounted operating lease payments

 

 

4,489

Imputed interest expenses

 

 

(419)

Total operating lease liabilities

 

 

4,070

Less: Current portion of operating lease liability

 

 

2,715

Operating lease liability, net of current portion

 

$

1,355

 

 

 

NOTE 7.  EQUITY INCENTIVE PLANS

 

Stock Option Plan

During the three months ended March 31, 2020, options were granted to employees to purchase 1,919,789 shares. The weighted-average grant-date estimated fair value of options granted during the three months ended March 31, 2020 was $5.27. The estimated grant date fair value of employee stock options was calculated using the Black-Scholes option-pricing model, based on the following weighted-average assumptions:

 

 

 

 

 

 

Three Months Ended March 31, 

 

    

2020

Expected term (years)

 

6.00

 

Expected volatility

 

83.62

%  

Risk-free interest rate

 

1.68

%  

Dividend yield

 

 —

%  

 

During the three months ended March 31, 2020 and 2019, options were exercised to purchase 141,551 and 770 shares, respectively, of the Company's common stock, resulting in approximately $0.2 million and insignificant net proceeds to the Company in the three months ended March 31, 2020 and 2019, respectively. 

 

Restricted Stock Units (“RSUs”)

In July 2018, the Company granted 903,374 performance-based restricted stock units (“PRSUs”) to its employees that vest upon the achievement of certain performance conditions, subject to the employees’ continued service relationship with the Company through the achievement date. As of March 31, 2020, 849,328 of these PRSUs were outstanding and none of these PRSUs were vested.  Based on the evaluation of the performance conditions, the Company recorded stock-based compensation expense of $0.9 million and zero for the three months ended March 31, 2020 and 2019, respectively. The related compensation cost is recognized as an expense ratably over the estimated vesting period. The expense recognized for these awards is based on the grant date fair value of the Company’s common stock multiplied by the number of units granted.

No RSUs or PRSUs were granted during the three months ended March 31, 2020 or 2019.  Similarly, no common shares were issued upon vesting of time-based RSUs during these periods.

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Employee Stock Purchase Plan

In February 2020, the Company sold 75,804 shares of its common stock under the Company’s employee stock purchase program (“ESPP”). The shares were purchased by employees at a purchase price of $4.95 per share with proceeds to the Company of approximately $0.4 million.

Stock-Based Compensation

Stock-based compensation expense recognized for stock options, RSUs, PRSUs and the Company’s ESPP are recorded as operating expenses in the Company’s condensed statements of operations and comprehensive loss, as follows:

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 

 

 

    

2020

    

2019

    

 

 

 

 

 

 

 

 

Research and development

 

$

1,058

 

$

760

 

General and administrative

 

 

1,890

 

 

1,162

 

Total

 

$

2,948

 

$

1,922

 

 

As of March 31, 2020, the Company’s total unrecognized stock-based compensation expense, net of estimated forfeitures, and average remaining vesting period, included the following:

 

 

 

 

 

 

 

 

 

    

Unrecognized Compensation Expense

    

 

Average Remaining Vesting Period (Years)

Stock options

 

$

13,401

 

 

3.0

PRSUs

 

$

602

 

 

0.4

ESPP

 

$

194

 

 

0.4

 

NOTE 8.  NET LOSS PER SHARE

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock-based awards and warrants. Diluted net loss per common share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options, and unvested restricted common stock and stock units. As the Company had net losses for the three months ended March 31, 2020 and 2019, all potential common shares were determined to be anti-dilutive. The following table sets forth the computation of net loss per common share: