ardx_Current_Folio_10Q

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10‑Q


 

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2018

 

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, Suite 200

Fremont, California 94555

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIPCODE)

 

(510) 745‑1700

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)


 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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

☐ (do not check if a smaller reporting company)

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 August 2, 2018, was 62,053,751.

 

 

 

 


 

Table of Contents

ARDELYX, INC.

 

PAGE

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Condensed Consolidated Financial Statements 

2

Condensed Consolidated Balance Sheets as of June 30, 2018 (unaudited) and December 31, 2017 

2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2018 and 2017 (unaudited) 

3

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2018 and 2017 (unaudited) 

4

Notes to Condensed Consolidated Financial Statements (unaudited) 

5

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

18

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

26

Item 4. Controls and Procedures 

26

 

 

PART II. OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

27

Item 1A. Risk Factors 

27

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

61

Item 3. Defaults Upon Senior Securities 

62

Item 4. Mine Safety Disclosures 

62

Item 5. Other Information 

62

Item 6. Exhibits 

63

Signatures 

64

 

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PART I.            FINANCIAL INFORMATION

ITEM 1.            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

 

 

(Unaudited)

 

(1)

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

91,751

 

$

75,383

Short-term investments

 

 

120,980

 

 

58,593

Accounts receivable

 

 

30

 

 

10,796

Unbilled license revenue

 

 

5,000

 

 

 —

Prepaid expenses and other current assets

 

 

3,927

 

 

4,940

Total current assets

 

 

221,688

 

 

149,712

Property and equipment, net

 

 

6,689

 

 

8,032

Other assets

 

 

159

 

 

159

Total assets

 

$

228,536

 

$

157,903

Liabilities and stockholders’ equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

3,172

 

$

3,933

Accrued compensation and benefits

 

 

2,203

 

 

3,229

Uncharged license fees

 

 

1,000

 

 

 —

Accrued and other liabilities

 

 

9,234

 

 

10,709

Total current liabilities

 

 

15,609

 

 

17,871

Loan payable, long term

 

 

48,836

 

 

 —

Other long-term liabilities

 

 

677

 

 

720

Total liabilities

 

 

65,122

 

 

18,591

Commitments and contingencies

 

 

  

 

 

  

Stockholders’ equity:

 

 

  

 

 

  

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively.

 

 

 —

 

 

 —

Common stock, $0.0001 par value; 300,000,000 shares authorized; 62,053,751 and 47,534,979 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively.

 

 

 6

 

 

 5

Additional paid-in capital

 

 

476,968

 

 

417,568

Accumulated deficit

 

 

(313,524)

 

 

(278,214)

Accumulated other comprehensive loss

 

 

(36)

 

 

(47)

Total stockholders’ equity

 

 

163,414

 

 

139,312

Total liabilities and stockholders’ equity

 

$

228,536

 

$

157,903


(1)

Derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2017.

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenues:

 

 

  

 

 

  

 

 

  

 

 

  

 

Licensing revenue

 

$

 —

 

$

 —

 

$

2,320

 

$

 —

 

Other revenue

 

 

30

 

 

 —

 

 

30

 

 

 —

 

Total revenues

 

 

30

 

 

 —

 

 

2,350

 

 

 —

 

Cost of revenue

 

 

 —

 

 

 —

 

 

464

 

 

 —

 

Gross profit

 

 

30

 

 

 —

 

 

1,886

 

 

 —

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

 

16,046

 

 

20,572

 

$

29,396

 

$

42,960

 

General and administrative

 

 

6,138

 

 

5,846

 

 

12,329

 

 

11,892

 

Total operating expenses

 

 

22,184

 

 

26,418

 

 

41,725

 

 

54,852

 

Loss from operations

 

 

(22,154)

 

 

(26,418)

 

 

(39,839)

 

 

(54,852)

 

Other income (expense), net

 

 

(135)

 

 

697

 

 

535

 

 

1,123

 

Loss before provision for income taxes

 

 

(22,289)

 

 

(25,721)

 

 

(39,304)

 

 

(53,729)

 

Provision for income taxes

 

 

 2

 

 

 —

 

 

 6

 

 

 —

 

Net loss

 

$

(22,291)

 

$

(25,721)

 

$

(39,310)

 

$

(53,729)

 

Net loss per common share, basic and diluted

 

$

(0.42)

 

$

(0.54)

 

$

(0.78)

 

$

(1.13)

 

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

 

 

52,824,483

 

 

47,403,243

 

 

50,206,470

 

 

47,373,404

 

Comprehensive loss:

 

 

  

 

 

  

 

 

 

 

 

 

 

Net loss

 

 

(22,291)

 

 

(25,721)

 

$

(39,310)

 

$

(53,729)

 

Unrealized (loss) gain on available-for-sale securities, net of tax

 

 

55

 

 

 9

 

 

11

 

 

31

 

Comprehensive loss

 

$

(22,236)

 

$

(25,712)

 

$

(39,299)

 

$

(53,698)

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

June 30, 

 

    

2018

    

2017

Operating activities

 

 

  

 

 

  

Net loss

 

$

(39,310)

 

$

(53,729)

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

 

 

 

 

 

  

Depreciation expense

 

 

1,343

 

 

1,242

Amortization of deferred financing costs

 

 

 59

 

 

325

Amortization of deferred compensation for services

 

 

101

 

 

91

Amortization of premium on investment securities

 

 

(256)

 

 

 1

Stock-based compensation

 

 

5,028

 

 

4,899

Non-cash interest expense relating to loan payable

 

 

54

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

  

Accounts receivable

 

 

10,766

 

 

 —

Prepaid expenses and other assets

 

 

1,192

 

 

(2,961)

Accounts payable

 

 

(706)

 

 

(451)

Accrued compensation and benefits

 

 

(1,026)

 

 

(562)

Accrued and other liabilities

 

 

(2,064)

 

 

498

Net cash used in operating activities

 

 

(24,819)

 

 

(50,647)

Investing activities

 

 

  

 

 

  

Proceeds from maturities of investments

 

 

56,050

 

 

75,434

Sales and redemptions of investments

 

 

850

 

 

10,482

Purchases of investments

 

 

(119,021)

 

 

(44,748)

Purchases of property and equipment

 

 

(55)

 

 

(1,907)

Net cash (used in) provided by investing activities

 

 

(62,176)

 

 

39,261

Financing activities

 

 

  

 

 

  

Proceeds from loan payable, net of issuance costs

 

 

49,292

 

 

 —

Proceeds from underwritten public offering, net of issuance costs

 

 

53,770

 

 

 —

Proceeds from issuance of common stock under stock plans

 

 

301

 

 

424

Net cash provided by financing activities

 

 

103,363

 

 

424

Net decrease in cash and cash equivalents

 

 

16,368

 

 

(10,962)

Cash and cash equivalents at beginning of period

 

 

75,383

 

 

74,598

Cash and cash equivalents at end of period

 

$

91,751

 

$

63,636

Supplementary disclosure of non-cash financing information:

 

 

  

 

 

  

Issuance of derivative in connection with issuance of loan payable

 

$

546

 

$

 —

 

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Ardelyx, Inc., or “the Company,” is a specialized biopharmaceutical company focused on developing disruptive medicines for the treatment of renal diseases, which affect both the heart and the kidneys. Tenapanor, a first-in-class inhibitor of NHE3, is being evaluated in a second Phase 3 trial for the treatment of hyperphosphatemia in patients with end-stage renal disease, or ESRD, who are on dialysis. The Company is also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment of hyperkalemia as well as tenapanor for the treatment of people with irritable bowel syndrome with constipation, or IBS-C, for which the Company is preparing to submit a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, in the second half of 2018.

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

Basis of Presentation

These unaudited condensed consolidated financial statements and the related footnote information of the Company have been prepared pursuant to the requirements of the Securities and Exchange Commission, or the SEC, for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The results for the three and six months ended June 30, 2018, are not necessarily indicative of results to be expected for the entire year ending December 31, 2018, or future operating periods.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2017, included in the Company’s Annual Report on Form 10‑K filed with the SEC (the “2017 Form 10‑K”). The balance sheet at December 31, 2017, has been derived from the audited consolidated financial statements at that date, as filed with the 2017 Form 10‑K.

The accompanying condensed consolidated financial statements include the accounts of Ardelyx, Inc. and its wholly-owned subsidiary, Ardelyx Cayman Islands, which was placed into voluntary liquidation in December 2017, and have been prepared in accordance with U.S. GAAP. Intercompany transactions and balances have been eliminated in consolidation.

 

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. On an ongoing basis, management evaluates its estimates, including those related to recognition of revenue, clinical trial accruals, contract manufacturing accruals, 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.

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Accrued Research and Development Expenses

As part of the process of preparing its financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with its personnel to identify services that have been performed on its behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers submit its monthly invoices in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known to the Company at that time. The Company periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

·

contract research organizations, or CROs, in connection with clinical studies;

·

investigative sites in connection with clinical studies;

·

vendors related to product manufacturing, development and distribution of clinical supplies; and

·

vendors in connection with preclinical development activities.

The Company records expenses related to clinical studies and manufacturing development activities based on its estimates of the services received and efforts expended pursuant to contracts with multiple CROs and manufacturing vendors that conduct and manage these activities on its behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to the Company’s vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, the Company estimates the time period over which services will be performed, enrollment of subjects, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the Company’s estimate, the Company will adjust the accrued or prepaid expense balance accordingly. To date, there have been no material differences from the Company’s estimates to the amounts actually incurred.

Revenue Recognition

On January 1, 2018 the Company adopted the new standard for Revenue from Contracts with Customers, Topic 606, on a modified retrospective method as an adjustment to the opening balance of retained earnings of the annual reporting period. On January 1, 2018, the Company recorded an increase in current assets of $5.0 million representing a future receivable related to the first milestone under the Company’s license agreement with Kyowa Hakko Kirin Co., Ltd., or KHK,, which the Company believes is not materially at risk, an increase in current liabilities of $1.0 million representing a future payable related to the corresponding payment to AstraZeneca AB, or AstraZeneca,, in accordance with the Company’s termination agreement with AstraZeneca and a related decrease in its accumulated deficit of approximately $4.0 million as the new standard permits revenue from milestones that possess certain criteria to be recognized earlier of approximately $4.0 million as the new standard contains different recognition criteria related to milestones than under the previous standard, Revenue Recognition, Multiple-Element Arrangements, ASC 605, Licensing revenues.  

The Company enters into licensing agreements which are within the scope of Topic 606, under which it licenses certain rights to its product candidates to third parties.  The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; and future royalties on net sales of licensed products.  Each of these payments results in license, collaboration and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract;

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(ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation.  As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract.  The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Milestone Payments:  At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method.  Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved.  Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied.  At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price.  Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.

Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as options.  The Company assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations.  If the Company is entitled to additional payments when the customer exercises these options, any payments are recorded in license, collaboration and other revenues when the customer obtains control of the goods, which is upon delivery.

Royalties:  For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied).  To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

Reclassification

Approximately $0.2 million in the six months ended June 30, 2017, which was previously recorded within “Proceeds from issuance of common stock under stock plans” in Financing activities in the Statement of Cash Flows, has been reclassified as a Changes in operating assets and liabilities item “Prepaid expenses and other assets” within Operating activities.

Recent Accounting Pronouncements

New Accounting Pronouncements - Recently Adopted

In May 2014, the Financial Accounting Standards Board, or FASB, issued Accounting Standards Update, or ASU, No. 2014-09, which amends the guidance for accounting for revenue from contracts with customers.  This ASU supersedes the revenue recognition requirements in Topic 605, Revenue Recognition, and creates a new Topic 606, Revenue from Contracts with Customers.  In 2015 and 2016, the FASB issued additional ASUs related to Topic 606 that delayed the effective date of the guidance and clarified various aspects of the new revenue guidance, including principal versus agent considerations, identifying performance obligations, and licensing, and they include other improvements and practical expedients.  The Company adopted this new standard on January 1, 2018 using the modified retrospective transition method.

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Impact of Adoption

The Company, on adopting Topic 606 on January 1, 2018, has used the modified retrospective transition method with the cumulative effect of initially applying the standard as an adjustment to the opening balance of retained earnings of the annual reporting period that includes the date of initial application.  The following adjustments were recorded in the opening balance on January 1, 2018.

 

 

 

 

 

 

 

 

 

 

 

    

December 31, 

    

Adjustments

    

January 1,

 

 

2017

 

Due to Topic 606

 

2018

Total current assets

 

$

 —

 

5,000

 

$

5,000

Total current liabilities

 

 

 —

 

1,000

 

 

1,000

Accumulated deficit

 

$

 —

 

4,000

 

$

4,000

 

As a result of adopting Topic 606 on January 1, 2018, the following financial statement line items in the Company’s Condensed Consolidated Balance Sheet at June 30, 2018 and the Condensed Consolidated Statement of Income for the six months ended June 30, 2018 were affected.

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

As Reported

    

Under Topic 605

    

Effect of Change

Total current assets

 

$

221,688

 

216,688

 

$

5,000

Total current liabilities

 

 

15,609

 

14,609

 

 

1,000

Accumulated deficit

 

 

(313,524)

 

(317,524)

 

 

4,000

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2018

 

    

As Reported

    

Under Topic 605

    

Effect of Change

Revenue:

 

 

  

 

  

 

 

  

Licensing revenue

 

$

2,320

 

2,320

 

$

 —

Other revenue

 

 

30

 

30

 

 

 —

Cost of revenue

 

 

464

 

464

 

 

 —

 

In May 2017, FASB issued ASU No. 2017-09, Compensation-Stock Compensation (Topic 718) - Scope of Modification Accounting (ASU 2017-09). The amendments included in this update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this update will be applied prospectively to an award modified on or after the adoption date. On January 1, 2018, we adopted ASU 2017-09 and the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842), which replaces most current lease guidance when it becomes effective. This standard update intends to increase the transparency and improve comparability by requiring entities to recognize assets and liabilities on the balance sheet for all leases, with certain exceptions. The new standard states that a lessee will recognize a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the consolidated statements of operations. The new guidance will be effective for the Company starting in the first quarter of fiscal 2019. Early adoption is permitted. The Company plans to adopt the new guidance effective January 1, 2019, and is currently evaluating the effect that this guidance will have on its consolidated financial statements and related disclosures.

In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. ASU 2018-07 is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. ASU 2018-07 expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity-Based Payments to Non-

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Employees. ASU 2018-07 is effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year and early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements.

The Company has reviewed all other significant newly-issued accounting pronouncements and concluded that they either are not applicable to the Company’s operations or no material effect is expected on its condensed consolidated financial statements as a result of future adoption.

 

 

NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS

Securities classified as cash, cash equivalents and short-term investments as of June 30, 2018 and December 31, 2017, are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Cash

 

$

2,932

 

 

 —

 

 

 —

 

$

2,932

Money market funds

 

 

67,611

 

 

 —

 

 

 —

 

 

67,611

Corporate bonds

 

 

2,664

 

 

 

 

 

 —

 

 

2,664

Commercial paper

 

 

18,544

 

 

 —

 

 

 —

 

 

18,544

Total cash and cash equivalents

 

$

91,751

 

$

 —

 

$

 —

 

$

91,751

Short-term investments

 

 

  

 

 

  

 

 

 

 

 

  

U.S. treasury securities

 

 

8,459

 

 

 1

 

 

 —

 

 

8,460

Corporate bonds

 

 

38,788

 

 

 —

 

 

(31)

 

 

38,757

Commercial paper

 

 

64,642

 

 

 —

 

 

(2)

 

 

64,640

Asset-backed securities

 

 

9,126

 

 

 —

 

 

(3)

 

 

9,123

Total short-term investments

 

$

121,015

 

$

 1

 

$

(36)

 

$

120,980

Total cash equivalents and investments

 

$

212,766

 

$

 1

 

$

(36)

 

$

212,731

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Cash

 

$

5,882

 

$

 —

 

$

 —

 

$

5,882

Money market funds

 

 

68,651

 

 

 —

 

 

 —

 

 

68,651

Commercial paper

 

 

850

 

 

 —

 

 

 —

 

 

850

Total cash equivalents and investments

 

$

75,383

 

$

 —

 

$

 —

 

$

75,383

Short-term investments

 

 

  

 

 

  

 

 

  

 

 

  

U.S. treasury securities

 

$

3,994

 

 

 —

 

 

(1)

 

$

3,993

Corporate bonds

 

 

26,853

 

 

 —

 

 

(26)

 

 

26,827

Commercial paper

 

 

19,584

 

 

 —

 

 

(14)

 

 

19,570

Asset-backed securities

 

 

8,209

 

 

 —

 

 

(6)

 

 

8,203

Total short-term investments

 

$

58,640

 

$

 —

 

$

(47)

 

$

58,593

Total cash equivalents and investments

 

$

134,023

 

$

 —

 

$

(47)

 

$

133,976

 

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Cash equivalents consist of money market funds and other debt securities with original maturities of three months or less at the time of purchase, and the carrying amount is a reasonable approximation of fair value. The Company invests its cash in high quality securities of financial and commercial institutions. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in “accumulated other comprehensive loss” within stockholders’ equity on the Company’s condensed consolidated balance sheets. The Company uses the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in “other income, net” in the consolidated condensed statement of operations.

All available-for-sale securities held as of June 30, 2018, 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 its fair value is less than its carrying cost, in which case the Company would further review the investment to determine whether it 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 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 it cost basis. If an investment is other-than-temporarily impaired, the Company writes it down through the statement of operations to its fair value and establishes that value as a new cost basis for the investment. The Company did not identify any of its available-for-sale securities as other-than-temporarily impaired in any of the periods presented. As of June 30, 2018, no investment was in a continuous unrealized loss position for more than one year and the Company believes that is more likely than not the investments will be held until maturity or a forecasted recovery of fair value.

NOTE 4. FAIR VALUE MEASUREMENTS

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 measured on a recurring basis by level within the fair value hierarchy (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2018

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

67,611

 

$

67,611

 

$

 —

 

$

 —

U.S. treasury securities

 

 

8,460

 

 

8,460

 

 

 —

 

 

 —

Corporate bonds

 

 

41,421

 

 

 —

 

 

41,421

 

 

 —

Commercial paper

 

 

83,184

 

 

 —

 

 

83,184

 

 

 —

Asset-backed securities

 

 

9,123

 

 

 —

 

 

9,123

 

 

 —

Total

 

$

209,799

 

$

76,071

 

$

133,728

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability

 

$

546

 

$

 —

 

$

 —

 

$

546

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

68,651

 

$

68,651

 

$

 —

 

$

 —

U.S. treasury securities

 

 

3,993

 

 

3,993

 

 

 —

 

 

 —

Corporate bonds

 

 

26,827

 

 

 —

 

 

26,827

 

 

 —

Commercial paper

 

 

20,420

 

 

 —

 

 

20,420

 

 

 —

Asset-backed securities

 

 

8,203

 

 

 —

 

 

8,203

 

 

 —

Total

 

$

128,094

 

$

72,644

 

$

55,450

 

$

 —

 

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. government-sponsored agency bonds as Level 1. When quoted market prices are not available for the specific security, then the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The Company classifies corporate bonds, commercial paper and asset-backed securities as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. There were no transfers between Level 1 and Level 2 during the periods presented.

In May 2018, pursuant to the loan and security agreement with Solar Capital Ltd. and Western Alliance Bank (see Note 5), the Company entered into an Exit Fee Agreement under which the Company agreed to pay $1.5 million in cash, or the Exit Fee, upon any change of control transaction or if the Company obtains FDA approval of tenapanor in the treatment of hyperphosphatemia in ESRD patients on dialysis and FDA approval of tenapanor for the treatment of patients with IBS-C. Notwithstanding the prepayment or termination of the Term Loan, the Company’s obligation to pay the Exit Fee will expire 10 years from the Closing Date. The Company evaluated 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 was determined to be $546,000 and is recorded as a derivative liability and included in accrued and other liabilities on the accompanying consolidated balance sheet.

The fair value of the derivative liability was determined using a discounted cash flow analysis, and is classified as a Level 3 measurement within the fair value hierarchy since the Company’s valuation utilized significant unobservable inputs. Specifically, the key assumptions included in the calculation of the estimated fair value of the derivative instrument include: i) the Company’s estimates of both the probability and timing of a potential $1.5 million payment to Solar Capital Ltd. and Western Alliance Bank as a result of the FDA approvals, and ii) a discount rate which was derived from the Company's estimated cost of debt. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the derivative instrument and it is estimated that a 10% increase (decrease) in the probability of occurrence would result in a fair value fluctuation of approximately $55,000.

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The carrying amounts reflected in the balance sheets for cash equivalents, short-term investments, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values at both June 30, 2018 and December 31, 2017, due to their short-term nature.

 

NOTE 5.  BORROWINGS

 

Solar Capital and Western Alliance Bank Loan Agreement

 

On May 16, 2018, the Company entered into a loan and security agreement, or the Loan Agreement, with Solar Capital Ltd. and Western Alliance Bank, or collectively the Lenders.  The Loan Agreement provides for a $50.0 million term loan facility with a maturity date of November 1, 2022, or the Term Loan.  The full amount of the loan was funded on May 16, 2018.  The Company received net proceeds from the loan of approximately $49.3 million, after deducting the closing fee, legal expenses and issuance cost.

 

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 December 1, 2020 if 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, prior to June 1, 2020; otherwise, the Company is permitted to make interest-only payments on the Term Loan only through June 1, 2020.  Accordingly, beginning on either June 1, 2020 or December 1, 2020, as applicable, through the maturity date, the Company will be required to make monthly payments of interest plus repayment of the Term Loan in consecutive equal monthly installments of principal.  The Company paid a closing fee of 1% of the Term Loan, or $0.5 million, upon the closing of the Term Loan. 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 our intellectual property and certain other customary exclusions.  Additionally, in connection with the Term Loan, the Company entered into an Exit Fee Agreement, whereby the Company agreed to pay an exit fee in the amount of 3% of the Term Loan, or the Exit Fee, upon any change of control transaction or FDA approval of tenapanor in the treatment of hyperphosphatemia in ESRD patients on dialysis and FDA approval of tenapanor for the treatment of patients with IBS-C.  Notwithstanding the prepayment or termination of the Term Loan, the obligation to pay the Exit Fee will expire 10 years from the Closing Date.

 

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants. Additionally, if the Company elects to enter into an exclusive license agreement for the use of its intellectual property in the United States (other than for tenapanor for hyperphosphatemia or for our FXR and TGR5 agonist programs) and has not obtained the written consent of the Lenders to enter into such license agreement, the Company has agreed to not allow our unrestricted cash and cash equivalents to be less than $50.0 million, until the Company achieves its primary endpoint in the second Phase 3 study of tenapanor for the treatment of hyperphosphatemia in end-stage renal disease patients on dialysis. As of June 30, 2018, the Company was in compliance with the covenants.

 

In addition, the Loan Agreement 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 our 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 obligations owed under the Loan Agreement. As of June 30, 2018, there were no events of default.

 

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As of June 30, 2018, assuming the principal payments start on December 1, 2020, the Company’s future debt payment obligations towards the principal and final fee, excluding interest payments and exit fee, for the respective fiscal years are as follows (in thousands):

 

 

 

 

 

2018

    

$

 —

2019

 

 

 —

2020

 

 

2,083

2021

 

 

25,000

2022

 

 

24,892

Total principal and final fee payments

 

 

51,975

Less: Unamortized discount and debt issuance costs

 

 

(1,218)

Less: Unaccreted value of final fee

 

 

(1,921)

Loan payable, long term

 

$

48,836

 

 

NOTE 6.  SHAREHOLDERS EQUITY

 

On May 22, 2018, the Company entered into an underwriting agreement with Jefferies LLC and Leerink Partners LLC, as representatives of several underwriters, or collectively the Underwriters, pursuant to which the Company agreed to issue and sell 12,500,000 shares of its common stock, par value $0.0001 per share, or Common Stock, to the Underwriters, or the Offering. The shares were sold at a public offering price of $4.00 per share, and were purchased by the Underwriters from the Company at a price of $3.76 per Share. Under the terms of the underwriting agreement, the Company granted the Underwriters the option, for 30 days, to purchase up to 1,875,000 additional shares of Common Stock at the public offering price. 

 

On May 25, 2018, the Offering closed and the Company completed the sale and issuance of 12,500,000 shares of Common Stock. The Company received net proceeds from the Offering of approximately $46.7 million, after deducting the Underwriters’ discounts and commissions and offering expenses payable by the Company.  Subsequently, on June 25, 2018, the Underwriters exercised their option to purchase the full 1,875,000 shares of Common Stock at the public offering price of $4.00 per share that were purchased by the Underwriters from the Company at a price of $3.76 per Share and the Company received additional net proceeds of $7.1 million, after deducting the Underwriters’ commissions.  In aggregate, the Company completed the sale and issuance of 14,375,000 shares of Common Stock and received net proceeds from the Offering of approximately $53.8 million, after deducting the Underwriters’ discounts, commissions and offering expenses.

 

NOTE 7. STOCK-BASED COMPENSATION

The following table presents stock-based compensation expense recognized for stock options, restricted stock units, or RSUs, performance-based restricted stock units, or PRSUs, and the Company’s employee stock purchase program, or ESPP, in the Company’s statements of operations (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

 

June 30, 

 

June 30, 

 

 

    

2018

    

2017

    

2018

    

2017

    

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

983

 

$

1,414

 

$

1,890

 

$

2,445

 

General and administrative

 

 

1,620

 

 

1,376

 

 

3,138

 

 

2,454

 

Total

 

$

2,603

 

$

2,790

 

$

5,028

 

$

4,899

 

 

In January 2017, the Company granted PRSU awards to certain employees which vest upon the achievement of specified performance conditions, subject to the employees’ continued service relationship with the Company. None vested during the three and six months ended June 30, 2018 and 2017. However, the related compensation cost is recognized as an expense over the estimated vesting period when achievement of the milestone is considered probable. 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. The Company recognized $0.3 million and $0.4 million of related expense during the three and six months ended June 30, 2018, respectively.

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At June 30, 2018, the Company had $14.5 million, $1.6 million, $0.3 million and $0.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants, RSU grants, PRSUs and the ESPP, respectively, that will be recognized over an average vesting period of 2.7 years, 1.0 years, 0.3 years and 0.2 years, respectively.

Option Exercises

For the three and six months ended June 30, 2018, zero options were exercised to purchase shares of the Company's common stock, with zero net proceeds to the Company.    For the three and six months ended June 30, 2017, 9,025 and 28,326 options, respectively, were exercised to purchase shares of the Company’s common stock, with insignificant net proceeds to the Company.

Restricted Stock Units

For the three and six months ended June 30, 2018, the Company issued zero shares, of its common stock upon vesting of restricted stock units to its employees.    For the three and six months ended June 30, 2017, the Company issued zero and 15,188 shares, respectively, of the Company’s common stock due to vesting of restricted stock units resulting in insignificant net proceeds to the Company.

Employee Stock Purchase Plan

In February 2018, the Company sold 68,589 shares under the ESPP. The shares were purchased by employees at a purchase price of $4.38 per share with proceeds to the Company of approximately $0.3 million. In February 2017, the Company sold 42,845 shares under the ESPP. The shares were purchased by employees at a purchase price of $8.77 per share with proceeds to the Company of approximately $0.4 million.

Issuance of Common Stock for Services

For the three and six months ended June 30, 2018, the Company issued 75,183 shares of common stock to members of the board of directors who elected to receive stock in lieu of their cash fees under the Non-Employee Director Compensation Plan. The shares issued were valued at $0.3 million based on the fair value of the common stock on the date of grant. For the three and six months ended June 30, 2017, the Company issued 46,858 shares of common stock to members of the board of directors who elected to receive stock in lieu of their cash fees under the Non-Employee Director Compensation Plan. The shares issued were valued at $0.2 million based on the fair value of the common stock on the date of grant.

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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 and six months ended June 30, 2018 and 2017, all potential common shares were determined to be anti-dilutive. The following table sets forth the computation of net loss per common share (in thousands, except share and per share amounts):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

Six Months Ended

 

 

June 30, 

 

June 30, 

 

    

2018

    

2017

    

2018

    

2017

Numerator:

 

 

  

 

 

  

 

 

  

 

 

  

Net loss

 

$

(22,291)

 

$

(25,721)

 

$

(39,310)

 

$

(53,729)

Denominator:

 

 

  

 

 

  

 

 

  

 

 

  

Weighted average common shares outstanding - basic and diluted

 

 

52,824,483

 

 

47,403,243

 

 

50,206,470

 

 

47,373,404

Net loss per share - basic and diluted

 

$

(0.42)

 

$

(0.54)

 

$

(0.78)

 

$

(1.13)

 

For the three and six months ended June 30, 2018 the total number of securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because the effect would have been antidilutive was 7.9 million and 8.0 million, respectively.

For the three and six months ended June 30, 2017, the total number of securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because the effect would have been antidilutive was 6.6 million and 6.4 million, respectively.

 

NOTE 9. ACCRUED AND OTHER LIABILITIES

Accrued liabilities and other liabilities consist of the following (in thousands):

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

    

2018

    

2017

Accrued clinical and non-clinical expenses

 

$

5,518

 

$

5,447

Accrued contract manufacturing

 

 

1,958

 

 

3,980

Derivative liability

 

 

546

 

 

 —

Accrued professional and consulting services

 

 

368

 

 

530

Other

 

 

844

 

 

752

 

 

$

9,234

 

$

10,709

 

 

NOTE 10. COLLABORATION AND LICENSING AGREEMENTS

Kyowa Hakko Kirin Co., Ltd., or KHK

In November 2017, the Company entered into an exclusive license agreement with KHK, or the KHK Agreement, for the development, commercialization and distribution of tenapanor in Japan for cardiorenal indications. The Company assessed these arrangements in accordance with Topic 606 and concluded that the contract counterparty, KHK, is a customer. Under the terms of the KHK Agreement, the Company received $30.0 million in up-front license fees which was recognized as revenue when the agreement was executed. Based on the Company’s assessment, it identified that the license and the manufacturing supply services were its material performance obligations at the inception of the agreement, and as such each of the performance obligations are distinct.  Additionally, on January 1, 2018, the Company recorded an increase in current assets of $5.0 million as well as in current liabilities of $1.0 million related to the first milestone under the KHK Agreement which the Company believes is not materially at risk, reflecting revenues and cost of revenue,

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respectively, that would have been recognized in the fourth quarter 2017 if the Company had adopted Topic 606 prior to January 1, 2018.

In addition to the up-front license fee of $30.0 million, the Company may be entitled to receive up to $55.0 million in total development milestones and 8.5 billion yen in commercialization milestones, as well as reimbursement of cost plus a reasonable overhead for the supply of product and high-teen royalties on net sales throughout the term of the agreement.

The Company recorded $30,000 of other revenue for manufacturing supply of tenapanor and other materials to KHK for KHK’s product development and clinical trials in Japan, in accordance with the Company’s agreement with KHK, for the three and six months ended June 30, 2018.

Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd., or Fosun Pharma

In December 2017, the Company entered into an exclusive license agreement with Fosun Pharma, or the Fosun Agreement, for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia and irritable bowel syndrome with constipation, or IBS-C. The Company assessed these arrangements in accordance with Topic 606 and concluded that the contract counterparty, Fosun Pharma, is a customer. Under the terms of the Fosun Agreement, the Company received $12.0 million in up-front license fees which was recognized as revenue when the agreement was executed. Based on the Company’s assessment, it identified that the license and the manufacturing supply services were its material performance obligations at the inception of the agreement, and as such each of the performance obligations are distinct. 

In addition, the Company may be entitled to additional development and commercialization milestones of up to $113.0 million, as well as reimbursement of cost plus a reasonable overhead for the supply of product and tiered royalties on net sales ranging from the mid-teens to 20%.

There was no revenue recorded in the three and six month period ended June 30, 2018 related to the Fosun Agreement.

Knight Therapeutics, Inc., or Knight  

In March 2018, the Company entered into an exclusive license agreement with Knight Therapeutics, Inc., or the Knight Agreement, for the development, commercialization and distribution of tenapanor in Canada for hyperphosphatemia and IBS-C. The Company assessed these arrangements in accordance with Topic 606 and concluded that the contract counterparty, Knight, is a customer. Based on the Company’s assessment, it identified that the license and the manufacturing supply services were its material performance obligations at the inception of the agreement, and as such each of the performance obligations are distinct.

Under the terms of the agreement, the Company is eligible to receive up to CAD 25 million in total payments including an up-front payment and development and sales milestones, reimbursement of supply costs on a schedule specifying cost per tablet, with a reasonable mark up for overhead, as well as double-digit tiered royalties on net sales.

There was no revenue recorded in the three month period ended June 30, 2018 related to the Knight Agreement. In the six month period ended June 30, 2018, there was $2.3 million of revenue recorded related to the Knight Agreement and $0.5 million of cost of revenue pursuant to the AstraZeneca Termination Agreement. 

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AstraZeneca

In June 2015, the Company entered into a termination agreement with AstraZeneca, or the Termination Agreement, pursuant to which the Company remains liable to pay AstraZeneca license fees for (i) future royalties at a royalty rate of 10% of net sales of tenapanor or other NHE3 products by the Company or its licensees, and (ii) 20% of non-royalty revenue received from a new collaboration partner should the Company elect to license, or otherwise provide rights to develop and commercialize tenapanor or another NHE3 inhibitor, up to a maximum of $75.0 million in aggregate for (i) and (ii). To date in aggregate, the Company has recognized $9.9 million of the $75.0 million, recorded as cost of revenue comprising (i) $6.0 million and $2.4 million related to the KHK Agreement and Fosun Agreement, respectively, recorded in 2017 (ii) $1.0 million related to the KHK Agreement associated with a future milestone which the Company believes is not materially at risk for which the Company recorded an increase in current liabilities in the six month period ended June 30, 2018 reflecting the future payable to AstraZeneca and (iii) $0.5 million related to the Knight Agreement recorded in the six month period ended June 30, 2018.

NOTE 11. CONTINGENCIES

From time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.

 

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ITEM 2.       MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10‑K for the year ended December 31, 2017. This discussion and analysis and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors.” These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason. Unless the context requires otherwise, the terms “Ardelyx,” “Company,” “we,” “us,” and “our” refer to Ardelyx, Inc.

About Ardelyx

We are a specialized biopharmaceutical company focused on developing first-in-class, disruptive medicines for the treatment of renal diseases, which affect both the heart and the kidneys. This includes patients with end-stage renal disease, or ESRD, who suffer from elevated serum phosphorus, or hyperphosphatemia; and patients with chronic kidney disease, or CKD, and/or heart failure who have elevated serum potassium, or hyperkalemia. We have also developed a number of programs directed toward treating gastrointestinal, or GI, disorders, including the treatment of irritable bowel syndrome with constipation, or IBS-C.

Our portfolio is led by the development of tenapanor, a first-in-class inhibitor of NHE3. In our renal pipeline, tenapanor is being evaluated in a second Phase 3 trial for the treatment of hyperphosphatemia in patients with ESRD who are on dialysis. We are also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment of hyperkalemia.

We have also developed tenapanor for the treatment of people with irritable bowel syndrome with constipation, or IBS-C. In 2017, we completed the T3MPO program for this indication, including two Phase 3 studies, both of which achieved statistical significance for the primary endpoint, and a long-term safety extension study. Based on the results of the T3MPO clinical program in IBS-C, we currently plan to submit our first NDA to FDA in the second half of 2018 for tenapanor for the treatment of IBS-C.

We have developed a proprietary drug discovery and design platform to discover targets found in the GI tract that regulate processes in the body and design products candidates that act upon those targets to take advantage of the gut’s ability to communicate with other organs.

Since commencing operations in October 2007, substantially all our efforts have been dedicated to our research and development activities, including developing our clinical product candidate tenapanor and developing our proprietary drug discovery and design platform. We have not generated any revenues from product sales and have no products approved for commercialization.

On May 16, 2018, we entered into a loan and security agreement, or the Loan Agreement, with Solar Capital Ltd. and Western Alliance Bank.  The Loan Agreement provides for a $50.0 million term loan facility with a maturity date of November 1, 2022.  The full amount of the loan was funded on May 16, 2018.  We received net proceeds from the loan of $49.3 million, after deducting the closing fee, legal expenses and issuance cost.

On May 25, 2018, we completed an underwritten public offering of 12,500,000 shares of our common stock at a price to the public of $4.00 per share,  that were purchased by the Underwriters from the Company at a price of $3.76 per Share, and on June 25, 2018, we sold an additional 1,875,000 shares of our common stock at a price to the public of $4.00 per share,  that were purchased by the Underwriters from the Company at a price of $3.76 per Share, following the full exercise of the underwriters’ option to purchase additional  shares of common stock.  We received net proceeds from the offering of $53.8 million, after deducting the underwriting discounts,  commissions and offering expenses.

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We expect to incur operating losses for the foreseeable future as we prepare for the development and commercialization of tenapanor, including costs associated with completing the on-going Phase 3 development program for tenapanor for the treatment of hyperphosphatemia in patients with ESRD on dialysis, as well as the advancement of our research programs into the preclinical stage and the progression of our early stage research. To date, we have funded our operations from the sale and issuance of common stock, convertible preferred stock, funds from our former collaboration partnerships with AstraZeneca AB, or AstraZeneca, and Sanofi SA, or Sanofi, and funds from our recent license agreements with Kyowa Hakko Kirin Co., Ltd., or KHK, Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd., or Fosun Pharma, and Knight Therapeutics Inc., or Knight.

Financial Operations Overview

Revenue

We have not generated any revenue from product sales. Our past revenue performance is not necessarily indicative of results to be expected for the entire year ending December 31, 2018, or future operating periods. Our non-product revenue cannot always be predicted since it is dependent upon achievement of certain milestones. See “NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES” for further detail.

During the first quarter of 2018, we executed license agreements with Knight for the development, commercialization and distribution of tenapanor for hyperphosphatemia and IBS-C in Canada. Under the terms of the Knight license agreements, the Company received a nonrefundable payment of CAD 3 million, or U.S. $2.3 million, in up-front license fees, which was recorded as revenue when the contracts were executed. The agreement also provides for development and commercialization milestone payments, which will be recorded as revenue when we achieve the underlying milestone.

On January 1, 2018 we adopted the new standard for Revenue from Contracts with Customers, Topic 606, on a modified retrospective method as an adjustment to the opening balance of retained earnings of the annual reporting period. On January 1, 2018, we recorded an increase in current assets of $5.0 million reflecting a future receivable related to the first milestone under our license with KHK, which we believe is not materially at risk, an increase in current liabilities of $1.0 million reflecting a future payable related to the corresponding payment to AstraZeneca, in accordance with our termination agreement with AstraZeneca and a related decrease in its accumulated deficit of approximately $4.0 million as the new standard permits revenue from certain milestones to be recognized earlier of approximately $4.0 million as the new standard contains different recognition criteria related to milestones than under the previous standard, Topic 605.

Cost of Revenue 

Cost of revenue currently represents payments due to AstraZeneca, who under the terms of a termination agreement entered into in 2015 are entitled to (i) future royalties at a royalty rate of 10% of net sales of tenapanor or other NHE3 products by us or our licensees, and (ii) 20% of non-royalty revenue received from a new collaboration partner should we elect to license, or otherwise provide rights to develop and commercialize tenapanor or another NHE3 inhibitor, up to a maximum of $75.0 million in aggregate for (i) and (ii). We recognize these expenses as cost of revenue when we recognize the revenue that generates our liability for these license payments. To date in aggregate, we have recognized $9.9 million of the $75.0 million, recorded as cost of revenue comprising (i) $6.0 million and $2.4 million related to the KHK Agreement and Fosun Agreement, respectively, recorded in 2017 (ii) $1.0 million related to the KHK Agreement associated with a future milestone which we believe is not materially at risk for which we recorded an increase in current liabilities in the six month period ended June 30, 2018 reflecting the future payable to AstraZeneca and (iii) $0.5 million related to the Knight Agreement recorded in the six month period ended June 30, 2018.

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Research and Development Expenses

We recognize all research and development expenses as they are incurred to support the discovery, development and manufacturing of our product candidates. Research and development expenses consist of the following:

·

external research and development expenses incurred under agreements with consultants, third-party CROs and investigative sites where a substantial portion of our clinical studies are conducted, and with contract manufacturing organizations where our clinical supplies are produced;

·

expenses associated with supplies and materials consumed in connection with our research operations;

·

employee-related expenses, which include salaries, bonuses, benefits, travel and stock-based compensation;

·

other costs associated with regulatory, clinical and non-clinical development activities; and

·

facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization expense, information technology expense and other supplies.

We expect to continue to make substantial investments in research and development activities as we progress the development of tenapanor, as well as our other product candidates, advance our research programs into the preclinical stage and continue our early stage research. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates, including tenapanor. Additionally, if marketing approval is received for tenapanor for the treatment of IBS-C, we may not be successful in securing one or more collaboration partners to commercialize tenapanor in the United States and other territories. The probability of success of each of the product candidates may be affected by numerous factors, including preclinical data, clinical data, market acceptance, sufficient third-party coverage or reimbursement, our ability to access capital on acceptable terms, competition, manufacturing capability and commercial viability.

We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, ongoing assessment as to each product candidate’s commercial potential, and our ability to access capital on acceptable terms. We will need to raise additional capital and will seek additional collaboration partnerships in order to complete the development and commercialization of tenapanor. If we are unable to access capital on a timely basis and on terms that are acceptable to us, we may be forced to restructure certain aspects of our business or identify and complete one or more strategic collaborations or other transactions in order to fund the development or commercialization of tenapanor or certain of our product candidates through the use of alternative structures.

General and Administrative

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation. Other general and administrative expenses include facility related costs and professional fees for legal, accounting, investor relations and other consulting services.

We anticipate that our general and administrative expenses will increase in the future primarily because of (i) increased pre-commercial activities and personnel costs to support the potential launch of tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) expenses related to costs of operating as a public company primarily preparing for future integrated audits.

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Provision for Income Taxes

The provision for income taxes was insignificant for the three and six months ended June  30, 2018 and zero for the three and six months ended June 30, 2017.   We expect to generate a net loss for the year ending December 31, 2018. Our deferred tax assets continue to be fully offset by a valuation allowance.

The Tax Cuts and Jobs Act ("TCJA") makes broad and complex changes to the U.S. tax code, including, but not limited to, reducing the U.S. federal corporate tax rate from 35% to 21%, effective January 1, 2018. The Company was able to determine a reasonable estimate of certain effects of the TCJA and has therefore recognized the provisional tax impacts related to the revaluation of deferred tax assets and liabilities. The Securities and Exchange Commission has provided accounting and reporting guidance that allows the Company to report provisional amounts within a measurement period of up to one year from the date of enactment due to the complexities inherent in adopting the TCJA. The ultimate impact may differ from provisional amounts, possibly materially, due to, among other things, additional analysis, changes in interpretations and assumptions the Company has made, additional regulatory guidance that may be issued, and actions the Company may take as a result of the TCJA. As of June 30, 2018, the Company still considers its accounting for the impacts of the new law to be provisional and will continue to assess the impact of the recently enacted tax law on its business and condensed consolidated financial statements over the next six months.

Critical Accounting Polices and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to research and development expense, accruals and stock-based compensation to be critical policies. Other than the implementation of Topic 606 there have been no changes to our critical accounting policies since we filed our 2017 Form 10-K with the SEC on March 14, 2018. For a description of our critical accounting policies, please refer to our Form 10-K we filed with the SEC on March 14, 2018.

RESULTS OF OPERATIONS

Three and six months ended June 30, 2018 and 2017

Revenue 

Revenue for the three and six months ended June 30, 2018, as compared to the same period in the prior year, was as follows (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 

 

Six Months Ended June 30, 

 

    

2018

    

2017

    

2018

    

2017

Licensing revenue

 

$

 —

 

$

 

$

2,320

 

$

 —

Other revenue

 

 

30

 

 

 

 

30

 

 

 —

Total revenues

 

 

30