IncreaseDecreaseInContractWithCustomerLiability
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
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:
(Exact Name of Registrant as Specified in Its Charter)
(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification No) |
(Address of Principal Executive Offices) (Zip Code)
(
(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 | ||
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.
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).
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 | ☐ | ☒ | |
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
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
ARDELYX, INC.
1
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 |
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Current assets: |
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Cash and cash equivalents | $ | | $ | | |||
Short-term investments |
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Unbilled revenue | | | |||||
Prepaid expenses and other current assets |
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Total current assets |
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Property and equipment, net |
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Right-of-use assets | | | |||||
Other assets |
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Total assets | $ | | $ | | |||
Liabilities and stockholders’ equity |
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Current liabilities: |
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Accounts payable | $ | | $ | | |||
Accrued compensation and benefits |
| |
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Current portion of operating lease liability | | | |||||
Loan payable, current portion | — | | |||||
Deferred revenue | | | |||||
Accrued expenses and other current liabilities |
| |
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Total current liabilities |
| |
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Operating lease liability, net of current portion | — | | |||||
Loan payable, net of current portion | | | |||||
Total liabilities |
| |
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Commitments and contingencies (Note 11) |
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Stockholders’ equity: |
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Preferred stock, $ |
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Common stock, $ |
| |
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Additional paid-in capital |
| |
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Accumulated deficit |
| ( |
| ( | |||
Accumulated other comprehensive income |
| |
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Total stockholders’ equity |
| |
| | |||
Total liabilities and stockholders’ equity | $ | | $ | |
The accompanying notes are an integral part of these condensed financial statements.
2
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: |
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| ||||
Licensing revenue | $ | — | $ | | $ | | $ | | |||||
Collaborative development revenue | | — | | — | |||||||||
Other revenue | | | | | |||||||||
Total revenues | | | | | |||||||||
Operating expenses: |
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Cost of revenue |
| — |
| |
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Research and development | | | | | |||||||||
General and administrative |
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| |
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Total operating expenses |
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| |
| |
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Loss from operations |
| ( |
| ( |
| ( |
| ( | |||||
Interest expense | ( | ( | ( | ( | |||||||||
Other income, net |
| |
| |
| |
| | |||||
Loss before provision for income taxes |
| ( |
| ( |
| ( |
| ( | |||||
Provision for income taxes |
| — |
| |
| — |
| | |||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Net loss per common share, basic and diluted | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Shares used in computing net loss per share - basic and diluted |
| |
| |
| |
| | |||||
Comprehensive loss: |
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| |||||||
Net loss | $ | ( | $ | ( | $ | ( | $ | ( | |||||
Unrealized (losses) gains on available-for-sale securities |
| ( |
| ( |
| |
| | |||||
Comprehensive loss | $ | ( | $ | ( | $ | ( | $ | ( |
The accompanying notes are an integral part of these condensed financial statements.
3
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 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Issuance of common stock under employee stock purchase plan |
| |
| — |
| |
| — |
| — |
| | |||||
Issuance of common stock upon exercise of options |
| |
| — |
| |
| — |
| — |
| | |||||
Issuance of common stock upon vesting of restricted stock units |
| |
| — |
| — |
| — |
| — |
| — | |||||
Stock-based compensation | — | — | | — | | ||||||||||||
Unrealized losses on available-for-sale securities |
| — |
| — |
| — |
| — |
| ( |
| ( | |||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance as of September 30, 2020 |
| | $ | | $ | | $ | ( | $ | | $ | |
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 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Issuance of common stock under employee stock purchase plan |
| |
| — |
| |
| — |
| — |
| | |||||
Issuance of common stock for services |
| |
| — |
| |
| — |
| — |
| | |||||
Issuance of common stock upon exercise of options |
| |
| — |
| |
| — |
| — |
| | |||||
Issuance of common stock upon vesting of restricted stock units |
| |
| — |
| — |
| — |
| — |
| — | |||||
Stock-based compensation |
| — |
| — |
| |
| — |
| — |
| | |||||
Unrealized gains on available-for-sale securities |
| — |
| — |
| — |
| — |
| |
| | |||||
Net loss |
| — |
| — |
| — |
| ( |
| — |
| ( | |||||
Balance as of September 30, 2020 |
| | $ | | $ | | $ | ( | $ | | $ | |
The accompanying notes are an integral part of these condensed financial statements.
4
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 | | $ | | $ | | $ | ( | $ | | $ | | ||||||
Issuance of common stock under employee stock purchase plan | |
| — |
| |
| — |
| — | | |||||||
Issuance of common stock upon exercise of options | |
| — |
| |
| — |
| — | | |||||||
Stock-based compensation | — | — | | — | | ||||||||||||
Unrealized losses on available-for-sale securities | — |
| — |
| — |
| — |
| ( | ( | |||||||
Net loss | — |
| — |
| — |
| ( |
| — | ( | |||||||
Balance as of September 30, 2019 | | $ | | $ | | $ | ( | $ | | $ | |
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 | | $ | | $ | | $ | ( | $ | ( | $ | | ||||||
Issuance of common stock under employee stock purchase plan |
| |
| — |
| |
| — |
| — | | ||||||
Issuance of common stock for services |
| |
| — |
| |
| — |
| — | | ||||||
Issuance of common stock upon exercise of options |
| |
| — |
| |
| — |
| — | | ||||||
Issuance of common stock upon vesting of restricted stock units |
| |
| — |
| — |
| — |
| — | — | ||||||
Stock-based compensation |
| — |
| — |
| |
| — |
| — | | ||||||
Unrealized gains on available-for-sale securities |
| — |
| — |
| — |
| — |
| | | ||||||
Net loss |
| — |
| — |
| — |
| ( |
| — | ( | ||||||
Balance as of September 30, 2019 | | $ | | $ | | $ | ( | $ | | $ | |
The accompanying notes are an integral part of these condensed financial statements.
5
ARDELYX, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
Nine Months Ended September 30, | |||||||
| 2020 |
| 2019 | ||||
Operating activities |
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Net loss | $ | ( | $ | ( | |||
Adjustments to reconcile net loss to net cash used in operating activities: |
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Depreciation expense |
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Amortization of deferred financing costs |
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Amortization of deferred compensation for services |
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Amortization of premium on investment securities |
| ( |
| ( | |||
Non-cash lease expense | | | |||||
Stock-based compensation |
| |
| | |||
Change in derivative liabilities | | | |||||
Non-cash interest associated with debt discount accretion | | | |||||
Changes in operating assets and liabilities: |
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|
| ||||
Unbilled revenue |
| — |
| | |||
Prepaid expenses and other assets |
| ( |
| ( | |||
Accounts payable |
| |
| | |||
Accrued compensation and benefits |
| ( |
| | |||
Lease liabilities | ( | ( | |||||
Accrued and other liabilities |
| ( |
| ( | |||
Deferred revenue |
| ( |
| — | |||
Net cash used in operating activities |
| ( |
| ( | |||
Investing activities |
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| |||
Proceeds from maturities of investments |
| |
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Purchases of investments |
| ( |
| ( | |||
Purchases of property and equipment |
| ( |
| ( | |||
Net cash (used in) provided by investing activities |
| ( |
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Financing activities |
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| |||
Proceeds from issuance of common stock under equity incentive and stock purchase plans | | | |||||
Net cash provided by financing activities |
| |
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Net (decrease) increase in cash and cash equivalents |
| ( |
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Cash and cash equivalents at beginning of period |
| |
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Cash and cash equivalents at end of period | $ | | $ | | |||
Supplementary disclosure of cash flow information: |
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Income taxes paid | $ | | $ | | |||
Supplementary disclosure of non-cash activities: |
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| |||
Right-of-use assets obtained in exchange for lease obligations | $ | — | $ | |
The accompanying notes are an integral part of these condensed financial statements.
6
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
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 $
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.
7
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.
8
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: |
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Money market funds | $ | | $ | — | $ | — | $ | | ||||
Commercial paper |
| |
| — |
| — |
| | ||||
Cash |
| |
| — |
| — |
| | ||||
Total cash and cash equivalents |
| |
| — |
| — |
| | ||||
Short-term investments |
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Commercial paper | $ | | $ | | $ | ( | $ | | ||||
Corporate bonds |
| |
| |
| ( |
| | ||||
U.S. government-sponsored agency bonds | | | — | | ||||||||
Asset-backed securities |
| |
| |
| — |
| | ||||
U.S. treasury notes |
| |
| |
| — |
| | ||||
Total short-term investments |
| |
| |
| ( |
| | ||||
Total cash equivalents and short-term investments | $ | | $ | | $ | ( | $ | |
December 31, 2019 | ||||||||||||
Gross Unrealized | ||||||||||||
| Amortized Cost |
| Gains |
| Losses |
| Fair Value | |||||
Cash and cash equivalents: |
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| ||||
Money market funds | $ | | $ | — | $ | — | $ | | ||||
Commercial paper |
| |
| |
| — |
| | ||||
Corporate bonds |
| |
| — |
| — |
| | ||||
Cash |
| |
| — |
| — |
| | ||||
Total cash and cash equivalents |
| |
| |
| — |
| | ||||
Short-term investments |
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| |||||
Commercial paper | $ | | $ | | $ | — | $ | | ||||
Corporate bonds |
| |
| |
| ( |
| | ||||
Asset-backed securities |
| |
| — |
| — |
| | ||||
Total short-term investments |
| |
| |
| ( |
| | ||||
Total cash equivalents and short-term investments | $ | | $ | | $ | ( | $ | |
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
9
unrealized loss position for more than
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.
10
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 |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Assets: |
|
|
|
|
|
|
|
| ||||
Money market funds | $ | | $ | | $ | — | $ | — | ||||
Commercial paper |
| |
| — |
| |
| — | ||||
Corporate bonds |
| |
| — |
| |
| — | ||||
U.S. government-sponsored agency bonds | | | ||||||||||
Asset-backed securities |
| |
| — |
| |
| — | ||||
U.S. treasury notes |
| |
| |
| — |
| — | ||||
Total | $ | | $ | | $ | | $ | — | ||||
Liabilities: | ||||||||||||
Derivative liability for Exit Fee | $ | | $ | — | $ | — | $ | | ||||
Total | $ | | $ | — | $ | — | $ | |
December 31, 2019 | ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
Assets: |
|
|
|
|
|
|
|
| ||||
Money market funds | $ | | $ | | $ | — | $ | — | ||||
Commercial paper |
| |
| — |
| |
| — | ||||
Corporate bonds |
| |
| — |
| |
| — | ||||
Asset-backed securities |
| |
| — |
| |
| — | ||||
Total | $ | | $ | | $ | | $ | — | ||||
Liabilities: | ||||||||||||
Derivative liability for Exit Fee | $ | | $ | — | $ | — | $ | | ||||
Total | $ | | $ | — | $ | — | $ | |
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 $
11
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
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 | $ | | $ | | |||
Change in estimated fair value of derivative liability | | | |||||
Fair value of Exit Fee derivative liability at September 30 | $ | | $ | |
NOTE 5. BORROWING