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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 September 30, 2020

OR

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

For the transition period from               to

Commission file number: 001-36485

ARDELYX, INC.

(Exact Name of Registrant as Specified in Its Charter)

DELAWARE

26-1303944

(State or Other Jurisdiction of Incorporation or Organization)

(I.R.S. Employer Identification No)

34175 Ardenwood Boulevard,

Fremont, California 94555

(Address of Principal Executive Offices) (Zip Code)

(510) 745-1700

(Registrant’s Telephone Number, Including Area Code)

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

Title of each class

Trading Symbol(s)

Name of each exchange on which registered

Common Stock, par value $0.0001

ARDX

The Nasdaq Global Market

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

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

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

Large accelerated filer

Accelerated filer

Non-accelerated filer

 

Smaller reporting company

Emerging growth company

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

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

The number of issued and outstanding shares of the registrant’s Common Stock, $0.0001 par value per share, as of November 2, 2020, was 90,248,465.

Table of Contents

ARDELYX, INC.

PAGE

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

2

Condensed Balance Sheets (unaudited)

2

Condensed Statements of Operations and Comprehensive Loss (unaudited)

3

Condensed Statements of Changes in Stockholders' Equity (unaudited)

4

Condensed Statements of Cash Flows (unaudited)

6

Notes to Condensed Financial Statements (unaudited)

7

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

20

Item 3. Quantitative and Qualitative Disclosures About Market Risk

30

Item 4. Controls and Procedures

31

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

32

Item 1A. Risk Factors

32

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

69

Item 3. Defaults Upon Senior Securities

70

Item 4. Mine Safety Disclosures

70

Item 5. Other Information

70

Item 6. Exhibits

71

Signatures

72

1

Table of Contents

PART I.            FINANCIAL INFORMATION

ITEM 1.            FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED BALANCE SHEETS

(Unaudited)

(in thousands, except share and per share amounts)

September 30, 

December 31, 

    

2020

    

2019

    

Assets

 

  

 

  

 

Current assets:

 

  

 

  

 

Cash and cash equivalents

$

91,009

$

181,133

Short-term investments

 

94,488

 

66,379

Unbilled revenue

750

750

Prepaid expenses and other current assets

 

7,546

 

3,800

Total current assets

 

193,793

 

252,062

Property and equipment, net

 

2,111

 

3,436

Right-of-use assets

2,402

3,970

Other assets

 

249

 

314

Total assets

$

198,555

$

259,782

Liabilities and stockholders’ equity

 

  

 

  

Current liabilities:

 

  

 

  

Accounts payable

$

2,490

$

2,187

Accrued compensation and benefits

 

3,722

 

4,453

Current portion of operating lease liability

2,770

2,608

Loan payable, current portion

1,183

Deferred revenue

885

4,541

Accrued expenses and other current liabilities

 

6,667

 

7,248

Total current liabilities

 

16,534

 

22,220

Operating lease liability, net of current portion

2,076

Loan payable, net of current portion

50,681

48,831

Total liabilities

 

67,215

 

73,127

Commitments and contingencies (Note 11)

 

  

 

  

Stockholders’ equity:

 

  

 

  

Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.

 

 

Common stock, $0.0001 par value; 300,000,000 shares authorized; 90,243,409 and 88,817,741 shares issued and outstanding as of September 30, 2020 and December 31, 2019, respectively.

 

9

 

9

Additional paid-in capital

 

657,130

 

647,078

Accumulated deficit

 

(525,889)

 

(460,452)

Accumulated other comprehensive income

 

90

 

20

Total stockholders’ equity

 

131,340

 

186,655

Total liabilities and stockholders’ equity

$

198,555

$

259,782

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

2

Table of Contents

ARDELYX, INC.

CONDENSED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(Unaudited)

(in thousands, except share and per share amounts)

Three Months Ended September 30, 

Nine Months Ended September 30, 

    

2020

    

2019

    

2020

    

2019

Revenues:

 

  

 

  

 

  

 

  

 

Licensing revenue

$

$

3,000

$

706

$

3,000

Collaborative development revenue

1,356

3,656

Other revenue

1,357

13

1,400

31

Total revenues

2,713

3,013

5,762

3,031

Operating expenses:

 

  

 

  

 

  

 

  

Cost of revenue

 

 

600

 

141

 

600

Research and development

12,240

17,580

46,948

57,436

General and administrative

 

7,634

 

6,922

 

21,810

 

17,410

Total operating expenses

 

19,874

 

25,102

 

68,899

 

75,446

Loss from operations

 

(17,161)

 

(22,089)

 

(63,137)

 

(72,415)

Interest expense

(1,202)

(1,443)

(3,785)

(4,328)

Other income, net

 

255

 

294

 

1,485

 

1,896

Loss before provision for income taxes

 

(18,108)

 

(23,238)

 

(65,437)

 

(74,847)

Provision for income taxes

 

 

301

 

 

303

Net loss

$

(18,108)

$

(23,539)

$

(65,437)

$

(75,150)

Net loss per common share, basic and diluted

$

(0.20)

$

(0.37)

$

(0.73)

$

(1.20)

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

 

89,365,798

 

62,828,513

 

89,109,772

 

62,676,591

Comprehensive loss:

 

  

 

  

 

 

Net loss

$

(18,108)

$

(23,539)

$

(65,437)

$

(75,150)

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

 

(227)

 

(12)

 

70

 

42

Comprehensive loss

$

(18,335)

$

(23,551)

$

(65,367)

$

(75,108)

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

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ARDELYX, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Nine Months ended September 30, 2020

(Unaudited)

(in thousands, except share amounts)

Three Months Ended September 30, 2020

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Accumulated

Comprehensive

Stockholders'

    

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Equity

Balance as of June 30, 2020

89,140,563

$

9

$

653,805

$

(507,781)

$

317

$

146,350

Issuance of common stock under employee stock purchase plan

 

94,127

 

 

459

 

 

 

459

Issuance of common stock upon exercise of options

 

142,191

 

 

339

 

 

 

339

Issuance of common stock upon vesting of restricted stock units

 

866,528

 

 

 

 

 

Stock-based compensation

2,527

2,527

Unrealized losses on available-for-sale securities

 

 

 

 

 

(227)

 

(227)

Net loss

 

 

 

 

(18,108)

 

 

(18,108)

Balance as of September 30, 2020

 

90,243,409

$

9

$

657,130

$

(525,889)

$

90

$

131,340

Nine Months Ended September 30, 2020

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Accumulated

Comprehensive

Stockholders'

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Equity

Balance as of December 31, 2019

88,817,741

$

9

$

647,078

$

(460,452)

$

20

$

186,655

Issuance of common stock under employee stock purchase plan

 

169,931

 

 

834

 

 

 

834

Issuance of common stock for services

 

42,403

 

 

310

 

 

 

310

Issuance of common stock upon exercise of options

 

346,806

 

 

759

 

 

 

759

Issuance of common stock upon vesting of restricted stock units

 

866,528

 

 

 

 

 

Stock-based compensation

 

 

 

8,149

 

 

 

8,149

Unrealized gains on available-for-sale securities

 

 

 

 

 

70

 

70

Net loss

 

 

 

 

(65,437)

 

 

(65,437)

Balance as of September 30, 2020

 

90,243,409

$

9

$

657,130

$

(525,889)

$

90

$

131,340

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

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ARDELYX, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Nine Months ended September 30, 2019

(Unaudited)

(in thousands, except share amounts)

Three Months Ended September 30, 2019

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Accumulated

Comprehensive

Stockholders'

Shares

    

Amount

    

Capital

    

Deficit

    

Income

    

Equity

Balance as of June 30, 2019

62,800,869

$

6

$

485,718

$

(417,123)

$

16

$

68,617

Issuance of common stock under employee stock purchase plan

77,698

 

 

200

 

 

200

Issuance of common stock upon exercise of options

4,513

 

 

13

 

 

13

Stock-based compensation

3,879

3,879

Unrealized losses on available-for-sale securities

 

 

 

 

(12)

(12)

Net loss

 

 

 

(23,539)

 

(23,539)

Balance as of September 30, 2019

62,883,080

$

6

$

489,810

$

(440,662)

$

4

$

49,158

Nine Months Ended September 30, 2019

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Accumulated

Comprehensive

Stockholders'

Shares

    

Amount

    

Capital

    

Deficit

    

(Loss) Income

    

Equity

Balance as of December 31, 2018

62,516,627

$

6

$

481,357

$

(365,512)

$

(38)

$

115,813

Issuance of common stock under employee stock purchase plan

 

160,744

 

 

397

 

 

397

Issuance of common stock for services

 

113,136

 

 

311

 

 

311

Issuance of common stock upon exercise of options

 

6,964

 

 

21

 

 

21

Issuance of common stock upon vesting of restricted stock units

 

85,609

 

 

 

 

Stock-based compensation

 

 

 

7,724

 

 

7,724

Unrealized gains on available-for-sale securities

 

 

 

 

 

42

42

Net loss

 

 

 

 

(75,150)

 

(75,150)

Balance as of September 30, 2019

62,883,080

$

6

$

489,810

$

(440,662)

$

4

$

49,158

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

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ARDELYX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

Nine Months Ended September 30, 

    

2020

    

2019

Operating activities

 

  

 

  

 

Net loss

$

(65,437)

$

(75,150)

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

 

 

Depreciation expense

 

1,399

 

1,993

Amortization of deferred financing costs

 

416

 

550

Amortization of deferred compensation for services

 

235

 

231

Amortization of premium on investment securities

 

(241)

 

(666)

Non-cash lease expense

1,568

1,356

Stock-based compensation

 

8,149

 

7,724

Change in derivative liabilities

290

246

Non-cash interest associated with debt discount accretion

393

353

Changes in operating assets and liabilities:

 

 

  

Unbilled revenue

 

 

5,000

Prepaid expenses and other assets

 

(3,748)

 

(3,068)

Accounts payable

 

303

 

541

Accrued compensation and benefits

 

(731)

 

81

Lease liabilities

(1,914)

(1,301)

Accrued and other liabilities

 

(871)

 

(3,237)

Deferred revenue

 

(3,656)

 

Net cash used in operating activities

 

(63,845)

 

(65,347)

Investing activities

 

  

 

  

Proceeds from maturities of investments

 

79,402

 

115,484

Purchases of investments

 

(107,200)

 

(36,325)

Purchases of property and equipment

 

(74)

 

(325)

Net cash (used in) provided by investing activities

 

(27,872)

 

78,834

Financing activities

 

  

 

  

Proceeds from issuance of common stock under equity incentive and stock purchase plans

1,593

418

Net cash provided by financing activities

 

1,593

 

418

Net (decrease) increase in cash and cash equivalents

 

(90,124)

 

13,905

Cash and cash equivalents at beginning of period

 

181,133

 

78,768

Cash and cash equivalents at end of period

$

91,009

$

92,673

Supplementary disclosure of cash flow information:

 

  

 

  

Income taxes paid

$

1

$

2

Supplementary disclosure of non-cash activities:

 

  

 

  

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

$

$

5,810

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

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ARDELYX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

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

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

Basis of Presentation

These condensed financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) and pursuant to the requirements of the Securities and Exchange Commission (“SEC”) for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. GAAP have been condensed or omitted. These condensed financial statements have been prepared on the same basis as the Company’s most recent annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary to present fairly the Company’s financial position at September 30, 2020 and results of operations, changes in stockholders’ equity, and cash flows for the interim periods ended September 30, 2020 and 2019.

The accompanying condensed financial statements and related financial information should be read in conjunction with the audited financial statements and the related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2019. The results for the three and nine months ended September 30, 2020 are not necessarily indicative of results to be expected for the entire year ending December 31, 2020, or for any other interim period or future year.

Liquidity

As of September 30, 2020, the Company had cash, cash equivalents and short-term investments of approximately $185.5 million. The Company believes its current available cash, cash equivalents and short-term investments will be sufficient to fund the Company’s planned expenditures and meet its obligations for at least 12 months following the filing of this Report on Form 10-Q.

Use of Estimates

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

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Summary of Significant Accounting Policies

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

Recent Accounting Pronouncements

Recently Adopted Accounting Pronouncements

In December 2019, as part of its initiative to reduce complexity in the accounting standards, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which eliminates certain exceptions related to the approach for intra-period tax allocation, the methodology for calculating income taxes in an interim period and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also clarifies and simplifies other aspects of the accounting for income taxes. The standard is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company early adopted ASU 2019-12 on April 1, 2020 and this adoption had no material impact on the Company’s financial position or results of operations.

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

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

In March 2020, the FASB issued ASU No. 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, which provides temporary optional guidance to companies impacted by the transition away from the London Interbank Offered Rate (“LIBOR”). The guidance provides certain expedients and exceptions to applying GAAP in order to lessen the potential accounting burden when contracts, hedging relationships, and other transactions that reference LIBOR as a benchmark rate are modified. This guidance was effective upon issuance and expires on December 31, 2022. The Company adopted ASU 2020-04 on April 1, 2020, and the adoption of this standard did not have a material impact on the Company’s financial statements.

Recent Accounting Pronouncements Not Yet Adopted

In 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. For smaller reporting companies the guidance is effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years. Early adoption is permitted. Management is currently assessing the impact of this standard on the Company’s financial statements.

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

Securities classified as cash, cash equivalents and short-term investments as of September 30, 2020 and December 31, 2019 are summarized below.

September 30, 2020

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

83,011

$

$

$

83,011

Commercial paper

 

6,499

 

 

 

6,499

Cash

1,499

1,499

Total cash and cash equivalents

91,009

91,009

Short-term investments

 

  

 

  

 

 

  

Commercial paper

$

41,625

$

30

$

(1)

$

41,654

Corporate bonds

39,219

58

(3)

39,274

U.S. government-sponsored agency bonds

9,334

3

9,337

Asset-backed securities

 

3,221

 

2

 

 

3,223

U.S. treasury notes

 

999

 

1

 

 

1,000

Total short-term investments

94,398

94

(4)

94,488

Total cash equivalents and short-term investments

$

185,407

$

94

$

(4)

$

185,497

December 31, 2019

Gross Unrealized

    

Amortized Cost

    

Gains

    

Losses

    

Fair Value

Cash and cash equivalents:

 

  

 

  

 

  

 

  

Money market funds

$

147,208

$

$

$

147,208

Commercial paper

 

19,357

 

3

 

 

19,360

Corporate bonds

 

11,441

 

 

 

11,441

Cash

 

3,124

 

 

 

3,124

Total cash and cash equivalents

181,130

3

181,133

Short-term investments

 

  

 

  

 

 

  

Commercial paper

$

36,667

$

14

$

$

36,681

Corporate bonds

 

21,690

 

6

 

(3)

 

21,693

Asset-backed securities

 

8,005

 

 

 

8,005

Total short-term investments

66,362

20

(3)

66,379

Total cash equivalents and short-term investments

$

247,492

$

23

$

(3)

$

247,512

All available-for-sale securities held as of September 30, 2020 had contractual maturities of less than one year. The Company’s available-for-sale securities are subject to a periodic impairment review. The Company considers a debt security to be impaired when the fair value of that security is less than its carrying cost, in which case the Company would further evaluate the investment to determine whether the security is other-than-temporarily impaired. When the Company evaluates an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition or creditworthiness of the issuer and any changes thereto, intent to sell, and whether it is more likely than not the Company will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired, the Company writes the investment down through the statement of operations to its fair value and establishes that value as the new cost basis for the investment. Management has determined that none of the Company’s available-for-sale securities were other-than-temporarily impaired in any of the periods presented, and as of September 30, 2020, no investment was in a continuous

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unrealized loss position for more than one year. As such, the Company believes that it is more likely than not that the investments will be held until maturity or a forecasted recovery of fair value.

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

NOTE 3. FAIR VALUE MEASUREMENTS

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

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

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

Level 1   –    Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by the Company at the reporting date.

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.

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

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

September 30, 2020

    

Total
Fair Value

    

Level 1

    

Level 2

    

Level 3

Assets:

 

  

 

  

 

  

 

  

Money market funds

$

83,011

$

83,011

$

$

Commercial paper

 

48,153

 

 

48,153

 

Corporate bonds

 

39,274

 

 

39,274

 

U.S. government-sponsored agency bonds

9,337

9,337

Asset-backed securities

 

3,223

 

 

3,223

 

U.S. treasury notes

 

1,000

 

1,000

 

 

Total

$

183,998

$

93,348

$

90,650

$

Liabilities:

Derivative liability for Exit Fee

$

1,259

$

$

$

1,259

Total

$

1,259

$

$

$

1,259

December 31, 2019

    

Total
Fair Value

    

Level 1

    

Level 2

    

Level 3

Assets:

 

  

 

  

 

  

 

  

Money market funds

$

147,208

$

147,208

$

$

Commercial paper

 

56,041

 

 

56,041

 

Corporate bonds

 

33,134

 

 

33,134

 

Asset-backed securities

 

8,005

 

 

8,005

 

Total

$

244,388

$

147,208

$

97,180

$

Liabilities:

Derivative liability for Exit Fee

$

969

$

$

$

969

Total

$

969

$

$

$

969

Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds, U.S. government-sponsored agency bonds and U.S. treasury notes as Level 1. When quoted market prices are not available for the specific security, the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The Company classifies corporate bonds, commercial paper, asset-backed securities and foreign currency derivative contracts as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securities or derivative liabilities such as the Exit Fee, as defined and discussed in Note 4, are classified as Level 3.

NOTE 4.  DERIVATIVE LIABILITY

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

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

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

Nine Months Ended September 30, 

2020

2019

Fair value of Exit Fee derivative liability at January 1

$

969

$

533

Change in estimated fair value of derivative liability

290

246

Fair value of Exit Fee derivative liability at September 30

$

1,259