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 SEPTEMBER 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 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 November 1, 2018, was 62,134,530.

 

 

 

 


 

Table of Contents

ARDELYX, INC.

 

PAGE

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Condensed Consolidated Financial Statements 

2

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

2

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

3

Condensed Consolidated Statements of Cash Flows for the nine months ended September 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 

19

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

27

Item 4. Controls and Procedures 

28

 

 

PART II. OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

29

Item 1A. Risk Factors 

29

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

64

Item 3. Defaults Upon Senior Securities 

64

Item 4. Mine Safety Disclosures 

64

Item 5. Other Information 

64

Item 6. Exhibits 

65

Signatures 

66

 

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Table of Contents

PART I.            FINANCIAL INFORMATION

ITEM 1.            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

 

 

(Unaudited)

 

(1)

Assets

 

 

  

 

 

  

Current assets:

 

 

  

 

 

  

Cash and cash equivalents

 

$

75,015

 

$

75,383

Short-term investments

 

 

111,391

 

 

58,593

Accounts receivable

 

 

167

 

 

10,796

Unbilled license revenue

 

 

5,000

 

 

 —

Prepaid expenses and other current assets

 

 

7,749

 

 

4,940

Total current assets

 

 

199,322

 

 

149,712

Property and equipment, net

 

 

5,996

 

 

8,032

Other assets

 

 

1,350

 

 

159

Total assets

 

$

206,668

 

$

157,903

Liabilities and stockholders’ equity

 

 

  

 

 

  

Current liabilities:

 

 

  

 

 

  

Accounts payable

 

$

2,269

 

$

3,933

Accrued compensation and benefits

 

 

2,306

 

 

3,229

Uncharged license fees

 

 

1,000

 

 

 —

Accrued and other liabilities

 

 

9,974

 

 

10,709

Total current liabilities

 

 

15,549

 

 

17,871

Loan payable, long term

 

 

49,020

 

 

 —

Other long-term liabilities

 

 

651

 

 

720

Total liabilities

 

 

65,220

 

 

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 September 30, 2018 and December 31, 2017, respectively.

 

 

 —

 

 

 —

Common stock, $0.0001 par value; 300,000,000 shares authorized; 62,106,121 and 47,534,979 shares issued and outstanding as of September 30, 2018 and December 31, 2017, respectively.

 

 

 6

 

 

 5

Additional paid-in capital

 

 

479,109

 

 

417,568

Accumulated deficit

 

 

(337,650)

 

 

(278,214)

Accumulated other comprehensive loss

 

 

(17)

 

 

(47)

Total stockholders’ equity

 

 

141,448

 

 

139,312

Total liabilities and stockholders’ equity

 

$

206,668

 

$

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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Table of Contents

ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended September 30, 

 

Nine Months Ended September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

Revenues:

 

 

  

 

 

  

 

 

  

 

 

  

 

Licensing revenue

 

$

 —

 

$

 —

 

$

2,320

 

$

 —

 

Other revenue

 

 

172

 

 

 —

 

 

202

 

 

 —

 

Total revenues

 

 

172

 

 

 —

 

 

2,522

 

 

 —

 

Cost of revenue

 

 

 2

 

 

 —

 

 

466

 

 

 —

 

Gross profit

 

 

170

 

 

 —

 

 

2,056

 

 

 —

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

  

 

Research and development

 

 

17,941

 

 

15,365

 

$

47,337

 

$

58,325

 

General and administrative

 

 

5,961

 

 

5,860

 

 

18,290

 

 

17,752

 

Total operating expenses

 

 

23,902

 

 

21,225

 

 

65,627

 

 

76,077

 

Loss from operations

 

 

(23,732)

 

 

(21,225)

 

 

(63,571)

 

 

(76,077)

 

Other (expense) income, net

 

 

(394)

 

 

501

 

 

141

 

 

1,624

 

Loss before provision for income taxes

 

 

(24,126)

 

 

(20,724)

 

 

(63,430)

 

 

(74,453)

 

Provision for income taxes

 

 

 —

 

 

 —

 

 

 6

 

 

 —

 

Net loss

 

$

(24,126)

 

$

(20,724)

 

$

(63,436)

 

$

(74,453)

 

Net loss per common share, basic and diluted

 

$

(0.39)

 

$

(0.44)

 

$

(1.17)

 

$

(1.57)

 

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

 

 

62,071,397

 

 

47,464,310

 

 

54,204,907

 

 

47,404,039

 

Comprehensive loss:

 

 

  

 

 

  

 

 

 

 

 

 

 

Net loss

 

 

(24,126)

 

 

(20,724)

 

$

(63,436)

 

$

(74,453)

 

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

 

 

19

 

 

30

 

 

30

 

 

61

 

Comprehensive loss

 

$

(24,107)

 

$

(20,694)

 

$

(63,406)

 

$

(74,392)

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

September 30, 

 

    

2018

    

2017

Operating activities

 

 

  

 

 

  

Net loss

 

$

(63,436)

 

$

(74,453)

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

 

 

 

 

 

  

Depreciation expense

 

 

2,005

 

 

1,965

Amortization of deferred financing costs

 

 

144

 

 

360

Amortization of deferred compensation for services

 

 

177

 

 

142

Amortization of premium on investment securities

 

 

(708)

 

 

57

Stock-based compensation

 

 

6,976

 

 

7,001

Change in derivative liabilities

 

 

56

 

 

 —

Non-cash interest expense relating to loan payable

 

 

164

 

 

 —

Changes in operating assets and liabilities:

 

 

 

 

 

  

Accounts receivable

 

 

10,629

 

 

 —

Prepaid expenses and other assets

 

 

(3,908)

 

 

(2,178)

Accounts payable

 

 

(1,609)

 

 

(3,182)

Accrued compensation and benefits

 

 

(923)

 

 

(439)

Accrued and other liabilities

 

 

(1,405)

 

 

839

Net cash used in operating activities

 

 

(51,838)

 

 

(69,888)

Investing activities

 

 

  

 

 

  

Proceeds from maturities of investments

 

 

95,450

 

 

109,923

Sales and redemptions of investments

 

 

850

 

 

16,857

Purchases of investments

 

 

(148,360)

 

 

(70,384)

Purchases of property and equipment

 

 

(24)

 

 

(2,327)

Net cash (used in) provided by investing activities

 

 

(52,084)

 

 

54,069

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

 

 

492

 

 

675

Net cash provided by financing activities

 

 

103,554

 

 

675

Net decrease in cash and cash equivalents

 

 

(368)

 

 

(15,144)

Cash and cash equivalents at beginning of period

 

 

75,383

 

 

74,598

Cash and cash equivalents at end of period

 

$

75,015

 

$

59,454

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 cardiorenal disease. 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. In September 2018, the Company submitted a New Drug Application, or NDA, to the United States Food and Drug Administration, or FDA, for tenapanor for the treatment of people with irritable bowel syndrome with constipation, or IBS-C.

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 nine months ended September 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, ASC 606, on a modified retrospective method as an adjustment to the opening balance of retained earnings of the annual reporting period. As a result of the adoption of the new standard, on January 1, 2018, the Company recorded the following: (i) 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, (ii) 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 (iii) 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 as the new standard contains different recognition criteria related to milestones than under the previous standard, Revenue Recognition, Multiple-Element Arrangements - Licensing revenues, ASC 605.  

The Company enters into licensing agreements which are within the scope of ASC 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.

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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; (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 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.

Derivatives and Hedging Activities

The Company accounts for its derivative instruments as either assets or liabilities on the condensed consolidated balance sheet and measures them at fair value. Derivatives are adjusted to fair value through other (expense) income, net in the condensed consolidated statements of operations and comprehensive loss.

Reclassification

Approximately $0.2 million in the nine months ended September 30, 2017, which was previously recorded within “Proceeds from issuance of common stock under stock plans” in Operating 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.

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Recent Accounting Pronouncements

New Accounting Pronouncements - Recently Adopted

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in quarterly reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, or CDI – Question 105.09, that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 5, 2018 and will present the analysis of changes in stockholders’ equity in its interim financial statements in its March 31, 2019 Form 10-Q. The Company does not anticipate that the adoption of these SEC amendments will have a material effect on the Company’s financial position, results of operations, cash flows or shareholders’ equity.

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.

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 September 30, 2018 and the Condensed Consolidated Statement of Income for the nine months ended September 30, 2018 were affected.

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

As Reported

    

Under Topic 605

    

Effect of Change

Total current assets

 

$

199,322

 

194,322

 

$

5,000

Total current liabilities

 

 

15,549

 

14,549

 

 

1,000

Accumulated deficit

 

 

(337,650)

 

(341,650)

 

 

4,000

 

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Nine Months Ended September 30, 2018

 

    

As Reported

    

Under Topic 605

    

Effect of Change

Revenue:

 

 

  

 

  

 

 

  

Licensing revenue

 

$

2,320

 

2,320

 

$

 —

Other revenue

 

 

202

 

202

 

 

 —

Cost of revenue

 

 

466

 

466

 

 

 —

 

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, with early adoption permitted. In July 2018, the FASB issued ASU 2018-11, related to another transition method in lease accounting. If elected, the transition method allows entities to initially apply the new leases standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We are evaluating the impact of the adoption of this standard on the consolidated financial statements. The Company plans to adopt the new guidance effective January 1, 2019, using a modified retrospective approach and based on initial assessment of ASU No.2016-02 as of September 30, 2018, the Company believes the largest impact to its balance sheet will be from recognizing a right of use asset and corresponding lease liability related to its property leases in Fremont and Boston. The Company is continuing to evaluate the full impact the adoption of Topic 842 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-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.

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 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 are to be applied retrospectively to all periods presented. ASU 2018-13 is effective for the Company for fiscal years beginning after December 15, 2019, 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.

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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 September 30, 2018 and December 31, 2017, are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Cash

 

$

2,787

 

 

 —

 

 

 —

 

$

2,787

Money market funds

 

 

66,235

 

 

 —

 

 

 —

 

 

66,235

Corporate bonds

 

 

1,999

 

 

 —

 

 

 —

 

 

1,999

Commercial paper

 

 

3,994

 

 

 —

 

 

 —

 

 

3,994

Total cash and cash equivalents

 

$

75,015

 

$

 —

 

$

 —

 

$

75,015

Short-term investments

 

 

  

 

 

  

 

 

 

 

 

  

U.S. treasury securities

 

 

7,959

 

 

 —

 

 

(2)

 

 

7,957

Corporate bonds

 

 

34,449

 

 

 —

 

 

(9)

 

 

34,440

Commercial paper

 

 

61,116

 

 

 —

 

 

(5)

 

 

61,111

Asset-backed securities

 

 

7,884

 

 

 —

 

 

(1)

 

 

7,883

Total short-term investments

 

$

111,408

 

$

 —

 

$

(17)

 

$

111,391

Total cash equivalents and investments

 

$

186,423

 

$

 —

 

$

(17)

 

$

186,406

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

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 September 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

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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 its 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 September 30, 2018, no investment was in a continuous unrealized loss position for more than one year and 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.

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.

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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2018

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

66,235

 

$

66,235

 

$

 —

 

$

 —

U.S. treasury securities

 

 

7,957

 

 

7,957

 

 

 —

 

 

 —

Corporate bonds

 

 

36,439

 

 

 —

 

 

36,439

 

 

 —

Commercial paper

 

 

65,105

 

 

 —

 

 

65,105

 

 

 —

Asset-backed securities

 

 

7,883

 

 

 —

 

 

7,883

 

 

 —

Total

 

$

183,619

 

$

74,192

 

$

109,427

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability for exit fee

 

$

556

 

$

 —

 

$

 —

 

$

556

Foreign currency derivative contracts

 

 

46

 

$

 —

 

$

46

 

$

 —

Total

 

$

602

 

$

 —

 

$

46

 

$

556

 

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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, 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 6. Borrowings”), 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 in respect of the Company or if the Company obtains both (i) FDA approval of tenapanor in the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) 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 May 16, 2028. 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 is recorded as a derivative liability and included in accrued and other liabilities on the accompanying consolidated balance sheet.  As of September 30, 2018, the estimated fair value of the Exit Fee was determined to be $556,000 and the derivative liability for Exit Fee increased by $10,000 from $546,000 as of June 30, 2018, primarily as a result of a change to the inputs of the calculation and the time value of money, which is presented as a component of change in derivative liabilities in the Company’s condensed consolidated statements of operations.

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 $0.1 million.

Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented as changes in derivative liabilities for Exit Fee in the Company's condensed consolidated statements of operations and were as follows for the nine months ended September 30, 2018 (in thousands):

 

 

 

 

 

 

Estimated Fair Value

 

 

of Derivative Liability

Balance of Level 3 Liabilities at December 31, 2017

 

$

 —

Initial estimated fair value of derivative liability for exit fee

 

 

546

Balance of Level 3 Liabilities at June 30, 2018

 

 

546

Change in estimated fair value of derivative liability for exit fee

 

 

10

Balance of Level 3 Liabilities at September 30, 2018

 

$

556

 

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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 September 30, 2018 and December 31, 2017, due to their short-term nature.

 

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS

 

Foreign Currency Exchange Rate Exposure

 

The Company uses forward foreign currency exchange contracts to secure a foreign currency exchange rate when a contract is executed involving payment in a foreign currency in order to minimize cash flow exposure to fluctuating exchange rates. Such exposure results from portions of the Company’s forecasted cash outflows being denominated in currencies other than the U.S. dollar, primarily the Swiss franc. The derivative instruments the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in their fair value are recorded in other (expense) income, net, on the Company's condensed consolidated statements of operations and comprehensive loss.

 

The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates and take into consideration the current creditworthiness of the counterparties. Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below.

 

The following table summarizes the Company’s forward foreign currency exchange contracts outstanding as of September 30, 2018 (notional amounts in thousands): 

 

 

 

 

 

 

 

 

 

    

 

    

Aggregate Notional

    

 

 

 

 

 

Amount in Foreign

 

 

Foreign Exchange Contracts

 

Number of Contracts

 

Currency

 

Maturity

Swiss francs

 

 2

 

6,002

 

Nov. 2018 - Mar. 2019

Total

 

 2

 

  

 

  

 

The maximum length of time over which the Company is hedging its exposure to changes in exchange rates is March 2019.

 

The derivative liability balance of $45,566 is recorded in accrued and other liabilities on the condensed consolidated balance sheet as of September 30, 2018, and the net loss associated with the Company's derivative instruments of $45,566 is recognized in other (expense) income, net on the condensed consolidated statement of operations and comprehensive loss for the three and nine months ended September 30, 2018. 

 

As of September 30, 2018, we had open forward foreign currency exchange contracts with notional amounts of $6.2 million. A hypothetical 10% strengthening in the Swiss francs exchange rates compared with the U.S. dollar relative to exchange rates at September 30, 2018 would have resulted in a reduction in the value received over the remaining life of these contracts of approximately $0.6 million and, if realized, would negatively affect earnings during the remaining life of the contracts.

 

 

NOTE 6.  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.

 

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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 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, in which case the Company is permitted to make interest-only payments on the Term Loan through December 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 in respect of the Company or if the Company obtains both (i) FDA approval of tenapanor in the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) 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 maintain unrestricted cash and cash equivalents of at least $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 September 30, 2018, the Company was in compliance with all of the covenants set forth in the Loan Agreement.

 

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 September 30, 2018, to the Company’s knowledge, there were no facts or circumstances in existence giving rise to an event of default.

 

As of September 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

 

 

(1,144)

Less: Unaccreted value of final fee

 

 

(1,811)

Loan payable, long term

 

$

49,020

 

 

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NOTE 7.  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 8. 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

 

Nine Months Ended

 

 

 

September 30, 

 

September 30, 

 

 

    

2018

    

2017

    

2018

    

2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development

 

$

880

 

$

916

 

$

2,770

 

$

3,361

 

General and administrative

 

 

1,068

 

 

1,186

 

 

4,206

 

 

3,640

 

Total

 

$

1,948

 

$

2,102

 

$

6,976

 

$

7,001

 

 

In January 2017, the Company granted 161,865 PRSUs to certain employees that vest upon the achievement of specified performance conditions, subject to the employees’ continued service relationship with the Company through the date of achievement. At September 30, 2018, 125,895 of these PRSUs were outstanding. None of the PRSUs vested during each of the three and nine months ended September 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 $0.1 million and $0.5 million of related expense during the three and nine months ended September 30, 2018, respectively.

In July 2018, the Company granted 903,374 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. At September 30, 2018, 903,374 of these PRSUs were outstanding. Based on the evaluation of the performance conditions at September 30, 2018, the Company has not recorded stock-based compensation expense for the three months ended September 30, 2018 related to these PRSUs. The Company will continue to evaluate the performance conditions for these PRSUs at each reporting period and will record compensation expense related to the PRSUs accordingly.

At September 30, 2018, the Company had $14.4 million, $1.2 million, $0.1 million and $0.1 million of total unrecognized compensation expense, net of estimated forfeitures, related to stock option grants, RSU grants, PRSU grants and the ESPP, respectively, that will be recognized over an average vesting period of 2.8 years, 1.7 years, 0.1 years and 0.4 years, respectively.

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Option Exercises

For each of the three and nine months ended September 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 nine months ended September 30, 2017, 4,833 and 33,159 options, respectively, were exercised to purchase shares of the Company’s common stock, with insignificant net proceeds to the Company.

Restricted Stock Units

For each of the three and nine months ended September 30, 2018, the Company issued zero shares, of its common stock upon vesting of RSUs or PRSUs to its employees.  For the three and nine months ended September 30, 2017, the Company issued zero and 15,188 shares, respectively, of its common stock due to vesting of RSUs.

Employee Stock Purchase Plan

In February 2018, the Company sold 68,589 shares of its common stock 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 August 2018, the Company sold 52,370 shares of its common stock under the ESPP. The shares were purchased by employees at a purchase price of $3.66 per share with proceeds to the Company of approximately $0.2 million.

Issuance of Common Stock for Services

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

NOTE 9. 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 nine months ended September 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

 

Nine Months Ended

 

 

September 30, 

 

September 30, 

 

    

2018

    

2017

    

2018

    

2017

Numerator:

 

 

  

 

 

  

 

 

  

 

 

  

Net loss

 

$

(24,126)

 

$

(20,724)

 

$

(63,436)

 

$

(74,453)

Denominator:

 

 

  

 

 

  

 

 

  

 

 

  

Weighted average common shares outstanding - basic and diluted

 

 

62,071,397

 

 

47,464,310

 

 

54,204,907

 

 

47,404,039

Net loss per share - basic and diluted

 

$

(0.39)

 

$

(0.44)

 

$

(1.17)

 

$

(1.57)

 

For the three and nine months ended September 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 8.3 million and 8.1 million, respectively.

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For the three and nine months ended September 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 7.0 million and 6.6 million, respectively.

 

NOTE 10. ACCRUED AND OTHER LIABILITIES

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

 

 

 

 

 

 

 

 

 

September 30, 

 

December 31, 

 

    

2018

    

2017

Accrued clinical and non-clinical expenses

 

$

6,792

 

$

5,447

Accrued contract manufacturing expenses

 

 

977

 

 

3,980

Accrued professional and consulting services

 

 

627

 

 

530

Derivative liability for exit fee

 

 

556

 

 

 —

Foreign currency derivative contract

 

 

46

 

 

 —

Other

 

 

976

 

 

752

 

 

$

9,974

 

$

10,709

 

 

NOTE 11. 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 and an increase 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, 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.

For the three and nine months ended September 30, 2018, $0.2 million of other revenue was recorded 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, and a negligible cost of revenue was recorded pursuant to the AstraZeneca Termination Agreement.

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. 

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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%.

For the three and nine months ended September 30, 2018, there was no revenue recorded 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.

For the three and nine months ended September 30, 2018, zero and $2.3 million of revenue, respectively, was recorded related to the Knight Agreement, and zero and $0.5 million of cost of revenue, respectively, was recorded pursuant to the AstraZeneca Termination Agreement. 

AstraZeneca

In June 2015, the Company entered into a termination agreement with AstraZeneca, or the AstraZeneca 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) $0.5 million related to the Knight Agreement recorded in the nine month period ended September 30, 2018 and (iii) $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 nine month period ended September 30, 2018 reflecting the amount that will be paid to AstraZeneca when KHK achieves the milestone.

NOTE 12. CONTINGENCIES