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 MARCH 31, 2019

 

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)


 

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

 

 

 

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common Stock, par value $0.0001

 

ARDX

 

The Nasdaq Global Market

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

 

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

 

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

 

Large accelerated filer

Accelerated filer

 

 

 

 

Non-accelerated filer

☐ 

Smaller reporting company

 

 

 

Emerging growth company

 

 

 

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

 

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

 

The number of issued and outstanding shares of the registrant’s Common Stock, $0.0001 par value per share, as of May 2, 2019, was 62,600,443.

 

 

 

 


 

Table of Contents

ARDELYX, INC.

 

PAGE

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Condensed Consolidated Financial Statements 

2

Condensed Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018 

2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018 (unaudited) 

3

Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2019 and 2018 (unaudited) 

4

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited) 

5

Notes to Condensed Consolidated Financial Statements (unaudited) 

6

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

21

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

28

Item 4. Controls and Procedures 

29

 

 

PART II. OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

30

Item 1A. Risk Factors 

30

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

65

Item 3. Defaults Upon Senior Securities 

66

Item 4. Mine Safety Disclosures 

66

Item 5. Other Information 

66

Item 6. Exhibits 

67

Signatures 

68

 

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PART I.            FINANCIAL INFORMATION

ITEM 1.            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

March 31, 

 

December 31, 

 

 

    

2019

    

2018

    

 

 

(Unaudited)

 

(1)

 

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

92,036

 

$

78,768

 

Short-term investments

 

 

59,524

 

 

89,321

 

Accounts receivable

 

 

 7

 

 

85

 

Unbilled license revenue

 

 

 —

 

 

5,000

 

Prepaid expenses and other current assets

 

 

2,745

 

 

3,197

 

Total current assets

 

 

154,312

 

 

176,371

 

Property and equipment, net

 

 

5,102

 

 

5,611

 

Right-of-use assets

 

 

5,371

 

 

 —

 

Other assets

 

 

1,350

 

 

1,350

 

Total assets

 

$

166,135

 

$

183,332

 

Liabilities and stockholders’ equity

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

2,925

 

$

1,148

 

Accrued compensation and benefits

 

 

1,634

 

 

2,723

 

Uncharged license fees

 

 

 —

 

 

1,000

 

Current portion of operating lease liability

 

 

2,102

 

 

 —

 

Accrued and other liabilities

 

 

14,165

 

 

12,857

 

Total current liabilities

 

 

20,826

 

 

17,728

 

Operating lease liability, net of current portion

 

 

4,069

 

 

 —

 

Loan payable, long term

 

 

49,399

 

 

49,209

 

Other long-term liabilities

 

 

 —

 

 

582

 

Total liabilities

 

 

74,294

 

 

67,519

 

Commitments and contingencies

 

 

  

 

 

  

 

Stockholders’ equity:

 

 

  

 

 

  

 

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 300,000,000 shares authorized; 62,600,443 and 62,516,627 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively.

 

 

 6

 

 

 6

 

Additional paid-in capital

 

 

483,479

 

 

481,357

 

Accumulated deficit

 

 

(391,656)

 

 

(365,512)

 

Accumulated other comprehensive loss

 

 

12

 

 

(38)

 

Total stockholders’ equity

 

 

91,841

 

 

115,813

 

Total liabilities and stockholders’ equity

 

$

166,135

 

$

183,332

 


(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, 2018.

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 March 31, 

 

 

    

2019

    

2018

 

Revenues:

 

 

  

 

 

  

 

Licensing revenue

 

$

 —

 

$

2,320

 

Cost of revenue

 

 

 —

 

 

464

 

Gross profit

 

 

 —

 

 

1,856

 

Operating expenses:

 

 

  

 

 

 

 

Research and development

 

$

20,381

 

$

13,350

 

General and administrative

 

 

5,117

 

 

6,191

 

Total operating expenses

 

 

25,498

 

 

19,541

 

Loss from operations

 

 

(25,498)

 

 

(17,685)

 

Interest expense

 

 

(1,434)

 

 

 —

 

Other income (expense), net

 

 

790

 

 

670

 

Loss before provision for income taxes

 

 

(26,142)

 

 

(17,015)

 

Provision for income taxes

 

 

 2

 

 

 4

 

Net loss

 

$

(26,144)

 

$

(17,019)

 

Net loss per common share, basic and diluted

 

$

(0.42)

 

$

(0.36)

 

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

 

 

62,546,295

 

 

47,559,366

 

Comprehensive loss:

 

 

 

 

 

 

 

Net loss

 

$

(26,144)

 

$

(17,019)

 

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

 

 

50

 

 

(44)

 

Comprehensive loss

 

$

(26,094)

 

$

(17,063)

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2019

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

 

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance as of December 31, 2018

 

62,516,627

 

$

 6

 

$

481,357

 

$

(365,512)

 

$

(38)

 

$

115,813

Issuance of common stock under employee stock purchase plan

 

83,046

 

 

 —

 

 

198

 

 

 —

 

 

 —

 

 

198

Issuance of common stock upon exercise of options

 

770

 

 

 —

 

 

 2

 

 

 —

 

 

 —

 

 

 2

Stock-based compensation

 

 —

 

 

 

 

 

1,922

 

 

 —

 

 

 

 

 

1,922

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

50

 

 

50

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(26,144)

 

 

 —

 

 

(26,144)

Balance as of March 31, 2019

 

62,600,443

 

$

 6

 

$

483,479

 

$

(391,656)

 

$

12

 

$

91,841

 

See accompanying notes to Condensed Consolidated Financial Statements

 

 

 

ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2018

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

 

 

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance as of December 31, 2017

 

47,534,979

 

$

 5

 

$

417,568

 

$

(278,214)

 

$

(47)

 

$

139,312

Issuance of common stock under employee stock purchase plan

 

68,589

 

 

 —

 

 

301

 

 

 —

 

 

 —

 

 

301

Stock-based compensation

 

 —

 

 

 —

 

 

2,425

 

 

 —

 

 

 —

 

 

2,425

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

(44)

 

 

(44)

Adoption of ASU No. 2014-09 on January 1, 2018

 

 —

 

 

 —

 

 

 —

 

 

4,000

 

 

 —

 

 

4,000

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(17,019)

 

 

 —

 

 

(17,019)

Balance as of March 31, 2018

 

47,603,568

 

$

 5

 

$

420,294

 

$

(291,233)

 

$

(91)

 

$

128,975

 

See accompanying notes to Condensed Consolidated Financial Statements

 

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Three Months Ended

 

 

 

March 31, 

 

 

    

2019

    

2018

 

Operating activities

 

 

  

 

 

  

 

Net loss

 

$

(26,144)

 

$

(17,019)

 

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

 

 

 

 

 

  

 

Depreciation expense

 

 

675

 

 

674

 

Amortization of deferred financing costs

 

 

120

 

 

14

 

Amortization of deferred compensation for services

 

 

76

 

 

50

 

Amortization of premium on investment securities

 

 

(301)

 

 

(75)

 

Non-cash lease expense

 

 

439

 

 

 —

 

Stock-based compensation

 

 

1,922

 

 

2,425

 

Change in derivative liabilities

 

 

37

 

 

 —

 

Non-cash interest associated with debt discount accretion

 

 

113

 

 

 —

 

Changes in operating assets and liabilities:

 

 

 

 

 

  

 

Accounts receivable and unbilled license revenue

 

 

5,078

 

 

10,796

 

Prepaid expenses and other assets

 

 

333

 

 

2,005

 

Accounts payable

 

 

777

 

 

(2,117)

 

Accrued compensation and benefits

 

 

(1,089)

 

 

(1,612)

 

Accrued and other liabilities

 

 

1,051

 

 

(1,945)

 

Net cash used in operating activities

 

 

(16,913)

 

 

(6,804)

 

Investing activities

 

 

  

 

 

  

 

Proceeds from maturities of investments

 

 

55,020

 

 

37,085

 

Sales and redemptions of investments

 

 

 —

 

 

850

 

Purchases of investments

 

 

(24,874)

 

 

(39,015)

 

Purchases of property and equipment

 

 

(165)

 

 

(55)

 

Net cash provided by (used in) investing activities

 

 

29,981

 

 

(1,135)

 

Financing activities

 

 

  

 

 

  

 

Issuance of common stock upon exercise of options

 

 

 2

 

 

 —

 

Proceeds from issuance of common stock under stock plans

 

 

198

 

 

301

 

Net cash provided by financing activities

 

 

200

 

 

301

 

Net increase (decrease) in cash and cash equivalents

 

 

13,268

 

 

(7,638)

 

Cash and cash equivalents at beginning of period

 

 

78,768

 

 

75,383

 

Cash and cash equivalents at end of period

 

$

92,036

 

$

67,745

 

 

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 first-in-class medicines to improve treatment choices for people with cardiorenal diseases. Tenapanor, a first-in-class inhibitor of NHE3, is being evaluated in a second Phase 3 clinical trial for the treatment of hyperphosphatemia in patients with end-stage renal disease, or ESRD, who are on dialysis and in an additional Phase 3 clinical trial as an adjunctive therapy with phosphate binders for hyperphosphatemia in ESRD patients who are on dialysis and inadequately controlled by phosphate binders. The Company is also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment of hyperkalemia. In November 2018, the Company’s New Drug Application, or NDA, for tenapanor for the treatment of people with irritable bowel syndrome with constipation, or IBS-C, was accepted for substantive review by the United States Food and Drug Administration, or FDA.

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 months ended March 31, 2019, are not necessarily indicative of results to be expected for the entire year ending December 31, 2019, 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, 2018, included in the Company’s Annual Report on Form 10‑K filed with the SEC (the “2018 Form 10‑K”). The balance sheet at December 31, 2018, has been derived from the audited consolidated financial statements at that date, as filed with the 2018 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 dissolved in 2018, have been prepared in accordance with U.S. GAAP. Intercompany transactions and balances have been eliminated upon 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) a  unbilled license revenue under 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, that KHK achieved in February 2019, (ii) a uncharged license fees under 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.  As of March 31, 2019, based on KHK’s achievement of the milestone in February 2019, the balance related to unbilled license revenue was adjusted to zero.  Correspondingly, the $1.0 million balance related to uncharged license fees, that the Company owed to AstraZeneca, was reclassed to accounts payable and fully paid to AstraZeneca in the second quarter of 2019.  

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

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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; (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 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.

Leases

 

We determine if an arrangement is a lease at the inception of the arrangement. Operating leases are included in right-of-use assets, current portion of operating lease liability, and operating lease liability, net of current portion in our condensed balance sheets. Right-of-use assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. Operating lease right-of-use assets and liabilities are recognized at the lease commencement date based on the present value of lease payments over the lease term. In determining the present value of lease payments, we use our incremental borrowing rate based on the information

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available at the lease commencement date. The operating lease right-of-use assets also include any lease payments made and exclude lease incentives. Our lease terms may include options to extend or terminate the lease when it is reasonably certain that we will exercise any such options. Lease expense is recognized on a straight-line basis over the expected lease term.

 

On January 1, 2019, we adopted ASU No. 2016-02, Leases (Topic 842) using the optional transition method to initially account for the impact of the adoption with a cumulative adjustment to accrued and other liabilities and other long-term liabilities.  We elected the package of practical expedients, which among other things, allowed us not to reassess the following: whether any expired or existing contracts were considered or contained leases; the lease classification for any expired or existing leases; or initial direct costs for any existing leases. For our building leases, we also elected the practical expedient not to separate lease and non-lease components such as common area maintenance charges, instead account as a single lease component.

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 is presenting the analysis of changes in stockholders’ equity starting in this Quarterly Report on Form 10-Q. The adoption of these SEC amendments did not have a material effect on the Company’s financial position, results of operations, cash flows or shareholders’ equity.

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02), as amended, which generally requires lessees to recognize operating and financing lease liabilities and corresponding right-of-use assets on the balance sheet and to provide enhanced disclosures surrounding the amount, timing and uncertainty of cash flows arising from leasing arrangements. In July 2018, the FASB issued ASU No. 2018-11, Leases (Topic 842): Targeted Improvements, or ASU No. 2018-11. In issuing ASU No. 2018-11, the FASB is permitting another transition method for ASU 2016-02, which allows the transition to the new lease standard by recognizing a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. We elected the transition method and package of practical expedients permitted under the transition guidance, which allowed us to carryforward our historical lease classification, our assessment on whether a contract is or contains a lease, and our initial direct costs for any leases that exist prior to adoption of the new standard. We also elected to combine lease and non-lease components and to keep leases with an initial term of 12 months or less off the balance sheet and recognize the associated lease payments in the statements of operations on a straight-line basis over the lease term. We adopted the ASU on January 1, 2019 using a modified retrospective approach and recorded a right-of-use asset and a corresponding lease liability to account for our facility lease as a cumulative-effect adjustment to the opening balance of accrued and other liabilities and other long-term liabilities in the period of adoption.

Impact of Adoption

The Company, on adopting ASU 2016-02 - Leases (Topic 842) on January 1, 2019, has used the modified retrospective approach with the cumulative effect of initially applying the standard as an adjustment to the opening balance of accrued and other liabilities and other long-term liabilities. The following adjustments were recorded in the opening balance on January 1, 2019 (in thousands):

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December 31, 

    

Adjustments

    

January 1,

 

 

2018

 

Due to Topic 842

 

2019

Right-of-use assets

 

$

 —

 

5,810

 

$

5,810

Current portion of operating lease liability

 

 

 —

 

1,892

 

 

1,892

Operating lease liability, net of current portion

 

 

 —

 

4,684

 

 

4,684

Accrued and other liabilities

 

 

12,857

 

(184)

 

 

12,673

Other long-term liabilities

 

$

582

 

(582)

 

$

 —

As a result of adopting Topic 842 on January 1, 2019, the following financial statement line items in the Company’s condensed balance sheet at March 31, 2019 and the condensed consolidated statement of income for the three months ended March 31, 2019 were affected (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

As Reported under Topic 842

    

Under Topic 840

    

Effect of Change

Right-of-use assets

 

$

5,371

 

 —

 

$

5,371

Current portion of operating lease liability

 

 

2,102

 

 —

 

 

2,102

Operating lease liability, net of current portion

 

 

4,069

 

 —

 

 

4,069

Accrued and other liabilities

 

 

14,165

 

14,392

 

 

(227)

Other long-term liabilities

 

$

 —

 

507

 

$

(507)

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended March 31, 2019

 

    

As Reported under Topic 842

    

Under Topic 840

    

Effect of Change

Operating expenses:

 

 

  

 

  

 

 

  

General and administrative related to leases

 

$

648

 

582

 

$

66

 

 

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. On January 1, 2019, we adopted ASU 2018-07 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 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,

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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 March 31, 2019 and December 31, 2018, are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Cash

 

$

7,019

 

 

 —

 

 

 —

 

$

7,019

Money market funds

 

 

83,521

 

 

 —

 

 

 —

 

 

83,521

Commercial paper

 

 

1,496

 

 

 —

 

 

 —

 

 

1,496

Total cash and cash equivalents

 

$

92,036

 

$

 —

 

$

 —

 

$

92,036

Short-term investments

 

 

  

 

 

  

 

 

 

 

 

  

U.S. treasury notes

 

 

2,283

 

 

 —

 

 

 —

 

 

2,283

U.S. treasury securities

 

 

2,279

 

 

 1

 

 

 —

 

 

2,280

Corporate bonds

 

 

20,110

 

 

 2

 

 

 —

 

 

20,112

Commercial paper

 

 

30,559

 

 

 5

 

 

 —

 

 

30,564

Asset-backed securities

 

 

4,281

 

 

 4

 

 

 —

 

 

4,285

Total short-term investments

 

$

59,512

 

$

12

 

$

 —

 

$

59,524

Total cash equivalents and investments

 

$

151,548

 

$

12

 

$

 —

 

$

151,560

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2018

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Cash

 

$

3,733

 

$

 —

 

$

 —

 

$

3,733

Money market funds

 

 

73,238

 

 

 —

 

 

 —

 

 

73,238

Commercial paper

 

 

1,797

 

 

 —

 

 

 —

 

 

1,797

Total cash equivalents and investments

 

$

78,768

 

$

 —

 

$

 —

 

$

78,768

Short-term investments

 

 

  

 

 

  

 

 

  

 

 

  

U.S. treasury securities

 

$

3,996

 

 

 —

 

 

 —

 

$

3,996

Corporate bonds

 

 

34,611

 

 

 —

 

 

(21)

 

 

34,590

Commercial paper

 

 

41,371

 

 

 —

 

 

(14)

 

 

41,357

Asset-backed securities

 

 

9,381

 

 

 —

 

 

(3)

 

 

9,378

Total short-term investments

 

$

89,359

 

$

 —

 

$

(38)

 

$

89,321

Total cash equivalents and investments

 

$

168,127

 

$

 —

 

$

(38)

 

$

168,089

 

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 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 (expense), net, in the consolidated condensed statement of operations.

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All available-for-sale securities held as of March 31, 2019, 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 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 March 31, 2019, 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):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

March 31, 2019

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

83,521

 

$

83,521

 

$

 —

 

$

 —

U.S. treasury notes

 

 

2,283

 

 

2,283

 

 

 —

 

 

 —

U.S. treasury securities

 

 

2,280

 

 

2,280

 

 

 —

 

 

 —

Corporate bonds

 

 

20,112

 

 

 —

 

 

20,112

 

 

 —

Commercial paper

 

 

32,060

 

 

 —

 

 

32,060

 

 

 —

Asset-backed securities

 

 

4,285

 

 

 —

 

 

4,285

 

 

 —

Total

 

$

144,541

 

$

88,084

 

$

56,457

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability for exit fee

 

$

570

 

$

 —

 

$

 —

 

$

570

Total

 

$

570

 

$

 —

 

$

 —

 

$

570

 

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December 31, 2018

 

    

Total

    

Level 1

    

Level 2

    

Level 3

Assets:

 

 

  

 

 

  

 

 

  

 

 

  

Money market funds

 

$

73,238

 

$

73,238

 

$

 —

 

$

 —

U.S. treasury securities

 

 

3,996

 

 

3,996

 

 

 —

 

 

 —

Corporate bonds

 

 

34,590

 

 

 —

 

 

34,590

 

 

 —

Commercial paper

 

 

43,154

 

 

 —

 

 

43,154

 

 

 —

Asset-backed securities

 

 

9,378

 

 

 —

 

 

9,378

 

 

 —

Total

 

$

164,356

 

$

77,234

 

$

87,122

 

$

 —

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

Derivative liability for exit fee

 

$

533

 

$

 —

 

$

 —

 

$

533

Foreign currency derivative contracts

 

 

52

 

$

 —

 

$

52

 

$

 —

Total

 

$

585

 

$

 —

 

$

52

 

$

533

 

Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds, U.S. treasury securities and U.S. treasury notes as Level 1. When quoted market prices are not available for the specific security, the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The Company classifies corporate bonds, commercial paper, asset-backed securities and foreign currency derivative contracts as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securities 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 condensed balance sheet.  As of March 31, 2019, the estimated fair value of the Exit Fee was determined to be $570,000, an increase of $37,000 compared with $533,000, the estimated fair value as of December 31, 2018, primarily as a result of changes to the inputs in the calculation including the estimated timing of payment and the time value of money, which are 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 other income (expense), net, in the Company's condensed consolidated statements of operations and were as follows for the three months ended March 31, 2019 (in thousands):

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Estimated Fair Value

 

 

 

of Derivative Liability

 

Balance of Level 3 Liabilities at December 31, 2018

 

$

533

 

Change in estimated fair value of derivative liability for exit fee

 

 

37

 

Balance of Level 3 Liabilities at March 31, 2019

 

$

570

 

 

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 March 31, 2019 and December 31, 2018, due to their short-term nature.

 

 

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS