ardx_Current_Folio_10Q

Table of Contents

IncreaseDecreaseInContractWithCustomerLiability

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549


FORM 10-Q


 

(Mark One)

 

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

 

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 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 August 5, 2019, was 62,800,869.

 

 

 

 

Table of Contents

ARDELYX, INC.

 

PAGE

PART I. FINANCIAL INFORMATION 

 

 

 

Item 1. Condensed Consolidated Financial Statements 

2

Condensed Balance Sheets as of June 30, 2019 (unaudited) and December 31, 2018 

2

Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and six months ended June 30, 2019 and 2018 (unaudited) 

3

Condensed Consolidated Statements of Changes in Stockholders' Equity for the three and six months ended June 30, 2019 and 2018 (unaudited) 

4

Condensed Consolidated Statements of Cash Flows for the three and six months ended June 30, 2019 and 2018 (unaudited) 

6

Notes to Condensed Consolidated Financial Statements (unaudited) 

7

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

24

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

32

Item 4. Controls and Procedures 

33

 

 

PART II. OTHER INFORMATION 

 

 

 

Item 1. Legal Proceedings 

35

Item 1A. Risk Factors 

35

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

70

Item 3. Defaults Upon Senior Securities 

70

Item 4. Mine Safety Disclosures 

71

Item 5. Other Information 

71

Item 6. Exhibits 

72

Signatures 

73

 

1

Table of Contents

PART I.            FINANCIAL INFORMATION

ITEM 1.            CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)

 

 

 

 

 

 

 

 

 

 

June 30, 

 

December 31, 

 

 

    

2019

    

2018

    

 

 

(Unaudited)

 

(1)

 

Assets

 

 

  

 

 

  

 

Current assets:

 

 

  

 

 

  

 

Cash and cash equivalents

 

$

89,626

 

$

78,768

 

Short-term investments

 

 

34,315

 

 

89,321

 

Accounts receivable

 

 

17

 

 

85

 

Unbilled license revenue

 

 

 —

 

 

5,000

 

Prepaid expenses and other current assets

 

 

3,283

 

 

3,197

 

Total current assets

 

 

127,241

 

 

176,371

 

Property and equipment, net

 

 

4,469

 

 

5,611

 

Right-of-use assets

 

 

4,919

 

 

 —

 

Other assets

 

 

1,351

 

 

1,350

 

Total assets

 

$

137,980

 

$

183,332

 

Liabilities and stockholders’ equity

 

 

  

 

 

  

 

Current liabilities:

 

 

  

 

 

  

 

Accounts payable

 

$

1,260

 

$

1,148

 

Accrued compensation and benefits

 

 

2,351

 

 

2,723

 

Uncharged license fees

 

 

 —

 

 

1,000

 

Current portion of operating lease liability

 

 

2,318

 

 

 —

 

Accrued and other liabilities

 

 

10,404

 

 

12,857

 

Total current liabilities

 

 

16,333

 

 

17,728

 

Operating lease liability, net of current portion

 

 

3,433

 

 

 —

 

Loan payable, long term

 

 

49,597

 

 

49,209

 

Other long-term liabilities

 

 

 —

 

 

582

 

Total liabilities

 

 

69,363

 

 

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 June 30, 2019 and December 31, 2018, respectively.

 

 

 —

 

 

 —

 

Common stock, $0.0001 par value; 300,000,000 shares authorized; 62,800,869 and 62,516,627 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively.

 

 

 6

 

 

 6

 

Additional paid-in capital

 

 

485,718

 

 

481,357

 

Accumulated deficit

 

 

(417,123)

 

 

(365,512)

 

Accumulated other comprehensive loss

 

 

16

 

 

(38)

 

Total stockholders’ equity

 

 

68,617

 

 

115,813

 

Total liabilities and stockholders’ equity

 

$

137,980

 

$

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.

2

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 June 30, 

 

Six Months Ended June 30, 

 

 

    

2019

    

2018

    

2019

    

2018

 

Revenues:

 

 

  

 

 

  

 

 

  

 

 

  

 

Licensing revenue

 

$

 —

 

$

 —

 

$

 —

 

$

2,320

 

Other revenue

 

 

18

 

 

30

 

 

18

 

 

30

 

Total revenues

 

 

18

 

 

30

 

 

18

 

 

2,350

 

Cost of revenue

 

 

 —

 

 

 —

 

 

 —

 

 

464

 

Gross profit

 

 

18

 

 

30

 

 

18

 

 

1,886

 

Operating expenses:

 

 

  

 

 

  

 

 

  

 

 

 

 

Research and development

 

$

19,475

 

$

16,046

 

$

39,856

 

$

29,396

 

General and administrative

 

 

5,371

 

 

6,138

 

 

10,488

 

 

12,329

 

Total operating expenses

 

 

24,846

 

 

22,184

 

 

50,344

 

 

41,725

 

Loss from operations

 

 

(24,828)

 

 

(22,154)

 

 

(50,326)

 

 

(39,839)

 

Interest expense

 

 

(1,451)

 

 

(692)

 

 

(2,885)

 

 

(692)

 

Other income (expense), net

 

 

812

 

 

557

 

 

1,602

 

 

1,227

 

Loss before provision for income taxes

 

 

(25,467)

 

 

(22,289)

 

 

(51,609)

 

 

(39,304)

 

Provision for income taxes

 

 

 —

 

 

 2

 

 

 2

 

 

 6

 

Net loss

 

$

(25,467)

 

$

(22,291)

 

$

(51,611)

 

$

(39,310)

 

Net loss per common share, basic and diluted

 

$

(0.41)

 

$

(0.42)

 

$

(0.82)

 

$

(0.78)

 

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

 

 

62,651,863

 

 

52,824,483

 

 

62,599,371

 

 

50,206,470

 

Comprehensive loss:

 

 

  

 

 

  

 

 

 

 

 

 

 

Net loss

 

 

(25,467)

 

 

(22,291)

 

$

(51,611)

 

$

(39,310)

 

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

 

 

 4

 

 

55

 

 

54

 

 

11

 

Comprehensive loss

 

$

(25,463)

 

$

(22,236)

 

$

(51,557)

 

$

(39,299)

 

 

See accompanying notes to Condensed Consolidated Financial Statements.

3

Table of Contents

 

ARDELYX, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months ended June 30, 2019

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

Three Months Ended June 30, 2019

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance as of March 31, 2019

 

62,600,443

 

$

 6

 

$

483,479

 

$

(391,656)

 

$

12

 

$

91,841

Issuance of common stock for services

 

113,136

 

 

 —

 

 

311

 

 

 —

 

 

 —

 

 

311

Issuance of common stock upon exercise of options

 

1,681

 

 

 —

 

 

 5

 

 

 —

 

 

 —

 

 

 5

Issuance of common stock upon vesting of restricted stock units

 

85,609

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

1,923

 

 

 —

 

 

 

 

 

1,923

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 4

 

 

 4

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(25,467)

 

 

 —

 

 

(25,467)

Balance as of June 30, 2019

 

62,800,869

 

$

 6

 

$

485,718

 

$

(417,123)

 

$

16

 

$

68,617

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

Six Months Ended June 30, 2019

 

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 for services

 

113,136

 

 

 —

 

 

311

 

 

 —

 

 

 —

 

 

311

Issuance of common stock upon exercise of options

 

2,451

 

 

 —

 

 

 7

 

 

 —

 

 

 —

 

 

 7

Issuance of common stock upon vesting of restricted stock units

 

85,609

 

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

 —

Stock-based compensation

 

 —

 

 

 —

 

 

3,845

 

 

 —

 

 

 —

 

 

3,845

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

54

 

 

54

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(51,611)

 

 

 —

 

 

(51,611)

Balance as of June 30, 2019

 

62,800,869

 

$

 6

 

$

485,718

 

$

(417,123)

 

$

16

 

$

68,617

 

 

See accompanying notes to Condensed Consolidated Financial Statements

 

 

4

Table of Contents

 

ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Six Months ended June 30, 2018

(in thousands, except share amounts)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

Three Months Ended June 30, 2018

 

Shares

    

Amount

    

Capital

    

Deficit

    

Income (Loss)

    

Equity

Balance as of March 31, 2018

 

47,603,568

 

$

 5

 

$

420,294

 

$

(291,233)

 

$

(91)

 

$

128,975

Issuance of common stock for services

 

75,183

 

 

 —

 

 

302

 

 

 —

 

 

 —

 

 

302

Stock-based compensation

 

 —

 

 

 —

 

 

2,603

 

 

 —

 

 

 —

 

 

2,603

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

55

 

 

55

Issuance of common stock upon underwritten public offering

 

14,375,000

 

 

 1

 

 

53,769

 

 

 —

 

 

 —

 

 

53,770

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(22,291)

 

 

 —

 

 

(22,291)

Balance as of June 30, 2018

 

62,053,751

 

$

 6

 

$

476,968

 

$

(313,524)

 

$

(36)

 

$

163,414

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

Other

 

Total

 

 

Common Stock

 

Paid-In

 

Accumulated

 

Comprehensive

 

Stockholders'

Six Months Ended June 30, 2018

 

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

Issuance of common stock for services

 

75,183

 

 

 —

 

 

302

 

 

 —

 

 

 —

 

 

302

Stock-based compensation

 

 —

 

 

 —

 

 

5,028

 

 

 —

 

 

 —

 

 

5,028

Other comprehensive income

 

 —

 

 

 —

 

 

 —

 

 

 —

 

 

11

 

 

11

Issuance of common stock upon underwritten public offering

 

14,375,000

 

 

 1

 

 

53,769

 

 

 —

 

 

 —

 

 

53,770

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

 

 —

 

 

 —

 

 

 —

 

 

4,000

 

 

 —

 

 

4,000

Net loss

 

 —

 

 

 —

 

 

 —

 

 

(39,310)

 

 

 —

 

 

(39,310)

Balance as of June 30, 2018

 

62,053,751

 

$

 6

 

$

476,968

 

$

(313,524)

 

$

(36)

 

$

163,414

 

See accompanying notes to Condensed Consolidated Financial Statements

 

5

Table of Contents

ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 

 

 

    

2019

    

2018

 

Operating activities

 

 

  

 

 

  

 

Net loss

 

$

(51,611)

 

$

(39,310)

 

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

 

 

 

 

 

  

 

Depreciation expense

 

 

1,353

 

 

1,343

 

Amortization of deferred financing costs

 

 

282

 

 

59

 

Amortization of deferred compensation for services

 

 

154

 

 

101

 

Amortization of premium on investment securities

 

 

(537)

 

 

(256)

 

Non-cash lease expense

 

 

891

 

 

 —

 

Stock-based compensation

 

 

3,845

 

 

5,028

 

Change in derivative liabilities

 

 

61

 

 

 —

 

Non-cash interest associated with debt discount accretion

 

 

231

 

 

54

 

Changes in operating assets and liabilities:

 

 

 

 

 

  

 

Accounts receivable and unbilled license revenue

 

 

5,068

 

 

10,766

 

Prepaid expenses and other assets

 

 

(56)

 

 

1,192

 

Accounts payable

 

 

(887)

 

 

(706)

 

Accrued compensation and benefits

 

 

(372)

 

 

(1,026)

 

Accrued and other liabilities

 

 

(3,155)

 

 

(2,064)

 

Net cash used in operating activities

 

 

(44,733)

 

 

(24,819)

 

Investing activities

 

 

  

 

 

  

 

Proceeds from maturities of investments

 

 

86,454

 

 

56,050

 

Sales and redemptions of investments

 

 

 —

 

 

850

 

Purchases of investments

 

 

(30,857)

 

 

(119,021)

 

Purchases of property and equipment

 

 

(211)

 

 

(55)

 

Net cash provided by (used in) investing activities

 

 

55,386

 

 

(62,176)

 

Financing activities

 

 

  

 

 

  

 

Proceeds from loan payable, net of issuance costs

 

 

 —

 

 

49,292

 

Proceeds from underwritten public offering, net of issuance costs

 

 

 —

 

 

53,770

 

Issuance of common stock upon exercise of options

 

 

 7

 

 

 —

 

Proceeds from issuance of common stock under stock plans

 

 

198

 

 

301

 

Net cash provided by financing activities

 

 

205

 

 

103,363

 

Net increase (decrease) in cash and cash equivalents

 

 

10,858

 

 

16,368

 

Cash and cash equivalents at beginning of period

 

 

78,768

 

 

75,383

 

Cash and cash equivalents at end of period

 

$

89,626

 

$

91,751

 

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.

6

Table of Contents

ARDELYX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Ardelyx, Inc. (the “Company,” “we,” “us” or “our”) 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 Phase 3 clinical program, including, the PHREEDOM trial, a second Phase 3 clinical trial evaluating tenapanor as a monotherapy treatment for hyperphosphatemia in patients with end-stage renal disease, or ESRD, who are on dialysis, and in the AMPLIFY trial, a Phase 3 clinical trial evaluating tenapanor’s efficacy in combination with 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 and six months ended June 30, 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 April 2018, have been prepared in accordance with U.S. GAAP. Intercompany transactions and balances have been eliminated upon consolidation.

 

Prior Period Errors

 

During the second quarter of 2019, errors were identified in our consolidated financial statements for the quarter ended March 31, 2019, for year ended December 31, 2018 and for each of the quarterly periods ended March 31, 2018, June 30, 2018 and September 30, 2018. The errors were related to the accounting for clinical trial accruals, and resulted in an overstatement of research and development expenses during these periods. Research and development expenses were overstated by $0.2 million, $0.9 million, $1.1 million, $1.4 million and $0.5 million for the three-month periods ended March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2018 and March 31, 2019, respectively. As of December 31, 2018, accrued and other liabilities was overstated by $3.6 million.

 

The Company analyzed the potential impact of these errors and concluded that while the accumulated errors were significant to the results for the three months ended June 30, 2019, a correction of the errors would not be material to any individual prior period, taking into account the requirements of the Securities and Exchange Commission (SEC) Staff

7

Table of Contents

Accounting Bulletin No. 108, Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements. In accordance with the authoritative guidance, management evaluated the materiality of the errors from a qualitative and quantitative perspective. Based on such evaluation, the Company concluded that correcting the cumulative errors for the year ended December 31, 2018 is expected to be immaterial to the currently estimated full year results for 2019 and a correction of the errors would not have a material impact on the periods ended March 31, 2018, June 30, 2018, September 30, 2018, December 31, 2018 and March 31, 2019 or affect the trend of financial results. Accordingly, during the second quarter of 2019, the Company reduced accrued and other liabilities by $4.1 million and recorded a cumulative adjustment of $4.1 million in the condensed consolidated statement of operations to reduce research and development expenses.

 

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.

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.

8

Table of Contents

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 had recorded the following: (i) 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 Kirin Co., Ltd., or KKC (formerly known as Kyowa Hakko Kirin Co., Ltd, or KHK), which was subsequently achieved by KKC and collected in February 2019, thereby reducing the unbilled license revenue balance to zero, (ii) uncharged license fees under current liabilities of $1.0 million representing the corresponding future payable related to AstraZeneca AB, or AstraZeneca, in accordance with the Company’s termination agreement with AstraZeneca, which, upon KKC achieving the milestone, was reclassified to accounts payable and subsequently paid to AstraZeneca during the three months ended June 30, 2019, and (iii) a related decrease in accumulated deficit of approximately $4.0 million as the new standard permitted revenue from milestones that possess certain criteria to be recognized earlier and also contained different recognition criteria related to milestones than under the previous standard, Revenue Recognition, Multiple-Element Arrangements - Licensing revenues, ASC 605. 

The Company enters into license 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.

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.

At each reporting period, the variable consideration related to the remaining development milestone payments is not included in the transaction price as these are fully constrained as of that period end date. As part of its evaluation of the constraint, the Company considers numerous factors, including that receipt of the milestones is outside the control of the Company and contingent upon success in future clinical trials and collaboration partner’s efforts.  Any variable consideration related to sales-based milestones (including royalties) will be recognized when the related sales occur as they were determined to relate predominantly to the license granted to the collaboration partner. The Company re-evaluates the transaction price in each reporting period and as uncertain events are resolved or other changes in circumstances occur.

9

Table of Contents

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 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, and instead we account for these as a single lease component.

Recent Accounting Pronouncements

New Accounting Pronouncements - Recently Adopted

On January 1, 2019, the Company adopted ASU 2018-07, Compensation – Stock Compensation (Topic 718). This update simplifies the accounting for share-based payments to non-employees by aligning it with the accounting guidance for share-based payments for employees. The ASU expands the scope of Topic 718, CompensationStock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees is substantially aligned. The adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

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

10

Table of Contents

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 started presenting the analysis of changes in stockholders’ equity starting in its Quarterly Report on Form 10-Q for the period ended March 31, 2019. 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):

 

 

 

 

 

 

 

 

 

 

    

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)

 

$

 —

11

Table of Contents

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 June 30, 2019 and the condensed consolidated statement of operations and comprehensive loss for the six months ended June 30, 2019 were affected (in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

    

As Reported under Topic 842

    

Under Topic 840

    

Effect of Change

Right-of-use assets

 

$

4,919

 

 —

 

$

4,919

Current portion of operating lease liability

 

 

2,318

 

 —

 

 

2,318

Operating lease liability, net of current portion

 

 

3,433

 

 —

 

 

3,433

Accrued and other liabilities

 

 

10,404

 

10,674

 

 

(270)

Other long-term liabilities

 

$

 —

 

431

 

$

(431)

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2019

 

    

As Reported under Topic 842

    

Under Topic 840

    

Effect of Change

Operating expenses:

 

 

  

 

  

 

 

  

General and administrative related to leases

 

$

1,296

 

1,164

 

$

132

 

 

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 November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808): Clarifying the Interaction between Topic 808 and Topic 606. The guidance clarifies that certain transactions between collaborative arrangement participants should be accounted for as revenue under Topic 606 when the collaborative arrangement participant is a customer. For the Company, the amendment will be effective January 1, 2020. The Company is evaluating the impact this guidance will have on its consolidated financial statements and related disclosures.

In August 2018, the FASB issued ASU No. 2018-15Intangibles (Topic 350): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract, which aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This new standard also requires customers to expense the capitalized implementation costs of a hosting arrangement that is a service contract over the term of the hosting arrangement. This ASU is effective for public companies for fiscal years beginning after December 15, 2019. This new standard can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is currently evaluating the impact of adoption of this ASU 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,

12

Table of Contents

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.

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, an amendment which modifies the measurement and recognition of credit losses for most financial assets and certain other instruments. The amendment updates the guidance for measuring and recording credit losses on financial assets measured at amortized cost by replacing the “incurred loss” model with an “expected loss” model. Accordingly, these financial assets will be presented at the net amount expected to be collected. The amendment also requires that credit losses related to available-for-sale debt securities be recorded as an allowance through net income rather than reducing the carrying amount under the current, other-than-temporary-impairment model. The guidance is effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years. Early adoption is permitted for annual periods after December 15, 2018. The Company is currently evaluating the impact of adoption of this ASU on its condensed consolidated financial statements.

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

 

 

NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS

Securities classified as cash, cash equivalents and short-term investments as of June 30, 2019 and December 31, 2018, are summarized below (in thousands). Estimated fair value is based on quoted market prices for these investments.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

June 30, 2019

 

 

 

 

Gross Unrealized

 

 

 

 

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

 

  

 

 

  

 

 

  

 

 

  

Cash

 

$

4,455

 

 

 —

 

 

 —

 

$

4,455

Money market funds

 

 

85,171

 

 

 —

 

 

 —

 

 

85,171

Total cash and cash equivalents

 

$

89,626

 

$

 —

 

$

 —

 

$

89,626

Short-term investments