SEC Filing | Ardelyx, Inc.

View:

ardx-20220930

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, 2022


☐			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)

400 Fifth Avenue, Suite 210, Waltham, Massachusetts 02451

(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 October 31, 2022, was 187,459,645.

Table of Contents

NOTE REGARDING FORWARD-LOOKING STATEMENTS

Unless the context requires otherwise, in this Quarterly Report on Form 10-Q the terms “Ardelyx”, “we,” “us,” “our” and “the Company” refer to Ardelyx, Inc.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terminology such as “aim,” “anticipate,” “assume,” “believe,” “continue,” “could,” “due,” “estimate,” “expect,” “goal,” “intend,” “may,” “objective,” “plan,” “predict,” “potential,” “positioned,” “seek,” “should,” “target,” “will,” “would,” and other similar expressions that are predictions of or indicate future events and future trends, or the negative of these terms or other comparable terminology. These forward-looking statements include, but are not limited to, statements about:

•our expectations regarding our participation in a Cardiovascular and Renal Drugs Advisory Committee on November 16, 2022 (“Advisory Committee”) meeting in connection with the formal dispute resolution (“FDR”) process commenced in response to the Complete Response Letter (“CRL”) received from the U.S. Food and Drug Administration (“FDA”) relating to our new drug application (“NDA”) for XPHOZAH® (tenapanor) for the control of serum phosphorus in adult patients with chronic kidney disease on dialysis (“CKD”) (the “Hyperphosphatemia Indication”);

•our plans to address our operating cash flow requirements with our current cash and investments, cash generated from the sales of IBSRELA®, our potential receipt of anticipated milestones from our collaboration partners, our potential receipt of anticipated payments from our Japanese collaboration partner under the second amendment to our License Agreement; our ability to access the capital markets, as well as through the implementation of cash preservation activities to reduce or defer discretionary spending;

•our plans with respect to RDX013 and RDX020; and

•estimates of our expenses, future revenue, capital requirements, our needs for additional financing and our ability to obtain additional capital.

Factors that could cause actual results or conditions to differ from those anticipated by these and other forward-looking statements include those more fully described in the “ITEM 1A. RISK FACTORS” section and elsewhere in this Quarterly Report on Form 10-Q. Except as required by law, we assume no obligation to update any forward-looking statement publicly, or to revise any forward-looking statement to reflect events or developments occurring after the date of this Quarterly Report on Form 10-Q, even if new information becomes available in the future. Thus, you should not assume that our silence over time means that actual events are bearing out as expressed or implied in any such forward-looking statement.

SUMMARY OF PRINCIPAL RISKS ASSOCIATED WITH OUR BUSINESS

•We have incurred significant losses since our inception and will incur losses in the future, which makes it difficult for us to assess our future viability; although our financial statements have been prepared on a going concern basis, our current level of cash and investments alone is not sufficient to meet our operating plans for the next twelve months, raising substantial doubt regarding our ability to continue as a going concern.

•We will require substantial additional financing for the foreseeable future as we invest in the commercialization of IBSRELA and prepare for and participate in a Cardiovascular and Renal Drugs Advisory Committee (“Advisory Committee”) meeting scheduled for November 16, 2022. The Advisory Committee meeting is being convened in connection with the formal dispute resolution (“FDR”) process we commenced in response to the Complete Response Letter (“CRL”) received from the U.S. Food and Drug Administration (“FDA”) relating to our new drug application (“NDA”) for XPHOZAH (tenapanor) for the control of serum phosphorus in adult patients with chronic kidney disease (“CKD”) on dialysis (“Hyperphosphatemia Indication”). The inability to access necessary capital when needed on acceptable terms, or at all, could force us to reduce our efforts to commercialize IBSRELA or, delay, limit, reduce or terminate our efforts to seek and obtain approval for XPHOZAH for the Hyperphosphatemia Indication, or if approved, the commercialization of XPHOZAH. .

•Our failure to meet the continued listing requirements of The Nasdaq Global Market ("Nasdaq") could result in a de-listing of our common stock.

•We have generated limited revenue from product sales and may never be profitable.

Table of Contents

•We are substantially dependent on the successful launch and commercialization of IBSRELA for IBS-C, and there is no guarantee that we will achieve sufficient market acceptance for IBSRELA; secure adequate coverage and reimbursement for IBSRELA; or generate sufficient revenue from product sales of IBSRELA.

•We are pursuing regulatory approval for tenapanor for the Hyperphosphatemia Indication. There can be no assurances that we will be successful in obtaining such regulatory approval.

•Even if we are successful in obtaining regulatory approval for tenapanor for the Hyperphosphatemia Indication, the expense and time required to do so could adversely impact our ability to successfully commercialize XPHOZAH for the Hyperphosphatemia Indication.

•IBSRELA, and/or, if approved and commercialized, XPHOZAH, may cause undesirable side effects or have other properties that could limit the commercial success of the product.

•As a company, we have limited experience in the marketing, sale and distribution of pharmaceutical products; and there are significant risks in building and managing a commercial organization.

•Third-party payor coverage and reimbursement status of newly-commercialized products are uncertain. Failure to obtain or maintain adequate coverage and reimbursement for IBSRELA and, if approved, for XPHOZAH could limit our ability to market those products and decrease our ability to generate revenue.

•We rely completely on third parties to manufacture IBSRELA and XPHOZAH. If they are unable to comply with applicable regulatory requirements, unable to source sufficient raw materials, experience manufacturing or distribution difficulties or are otherwise unable to manufacture sufficient quantities to meet demand, our commercialization of IBSRELA, and, if approved and commercialized, of XPHOZAH, and our future development efforts for tenapanor may be materially harmed.

•Our operating activities may be restricted as a result of covenants related to the indebtedness under our loan and security agreement and we may be required to repay the outstanding indebtedness in an event of default, which could have a materially adverse effect on our business.

NOTE REGARDING TRADEMARKS

ARDELYX®, IBSRELA®, and XPHOZAH® are trademarks of Ardelyx. All other trademarks, trade names and service marks appearing in this Quarterly Report on Form 10-Q are the property of their respective owners.

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

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)


	September 30, 2022		December 31, 2021
	(Unaudited)
Assets
Current assets:
Cash and cash equivalents	$	61,628	$	72,428
Short-term investments	28,995		44,261
Accounts receivable	5,208		502
Inventory	1,250		—
Prepaid commercial manufacturing	16,145		9,406
Prepaid expenses and other current assets	6,649		7,052
Total current assets	119,875		133,649
Right-of-use assets	10,182		12,752
Property and equipment, net	1,294		2,362

Other assets	13,321		1,150
Total assets	$	144,672	$	149,913
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	3,113	$	4,277
Accrued compensation and benefits	7,165		5,422
Current portion of long-term debt	26,541		32,264
Current portion of operating lease liability	3,791		3,492
Deferred revenue	4,003		—
Accrued expenses and other current liabilities	7,338		7,366
Total current liabilities	51,951		52,821
Operating lease liability, net of current portion	6,878		9,748

Deferred revenue, non-current	8,560		4,727
Deferred royalty obligation related to the sale of future royalties	10,422		—
Total liabilities	77,811		67,296
Commitments and contingencies (Note 15)
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.	—		—
Common stock, $0.0001 par value; 300,000,000 shares authorized; 187,399,645 and 130,182,535 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively.	19		13
Additional paid-in capital	857,788		795,540
Accumulated deficit	(790,832)		(712,930)
Accumulated other comprehensive loss	(114)		(6)
Total stockholders’ equity	66,861		82,617
Total liabilities and stockholders’ equity	$	144,672	$	149,913

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

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,
	2022		2021		2022		2021
Revenues:
Product sales, net	$	4,885	$	—	$	6,899	$	—
Product supply revenue	92		285		1,058		411
Licensing revenue	9		2		23		5,007
Collaborative development revenue	—		886		—		3,650
Total revenues	4,986		1,173		7,980		9,068
Operating expenses:
Cost of revenue	732		—		955		1,000
Research and development	7,467		23,695		26,059		70,172
Selling, general and administrative	18,667		19,714		56,868		56,969
Total operating expenses	26,866		43,409		83,882		128,141
Loss from operations	(21,880)		(42,236)		(75,902)		(119,073)
Interest expense	(886)		(1,216)		(2,409)		(3,518)
Non-cash interest expense related to the sale of future royalties	(831)		—		(841)		—
Other income (expense), net	704		(134)		1,258		664
Loss before provision for income taxes	(22,893)		(43,586)		(77,894)		(121,927)
Provision for income taxes	—		1		8		4
Net loss	$	(22,893)	$	(43,587)	$	(77,902)	$	(121,931)
Net loss per common share, basic and diluted	$	(0.14)	$	(0.42)	$	(0.53)	$	(1.21)
Shares used in computing net loss per share - basic and diluted	165,104,789		104,144,606		147,319,818		100,480,156
Comprehensive loss:
Net loss	$	(22,893)	$	(43,587)	$	(77,902)	$	(121,931)
Unrealized (losses) gains on available-for-sale securities	(5)		(1)		(108)		7
Comprehensive loss	$	(22,898)	$	(43,588)	$	(78,010)	$	(121,924)

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

Table of Contents

ARDELYX, INC.

CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three and Nine Months ended September 30, 2022 and 2021

(Unaudited)

(in thousands, except shares)


	Three Months Ended September 30, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Shares	Amount
Balance as of June 30, 2022	153,797,834	$	15	$	821,075	$	(767,939)	$	(109)	$	53,042
Issuance of common stock under employee stock purchase plan	181,256	—		112		—		—		112
Issuance of common stock for services	711,675	—		390		—		—		390

Issuance of common stock upon vesting of restricted stock units	95,555	—		—		—		—		—

Issuance of common stock in at the market offering	32,613,325	4		34,363		—		—		34,367
Stock-based compensation	—	—		1,848		—		—		1,848
Unrealized losses on available-for-sale securities	—	—		—		—		(5)		(5)
Net loss	—	—		—		(22,893)		—		(22,893)
Balance as of September 30, 2022	187,399,645	$	19	$	857,788	$	(790,832)	$	(114)	$	66,861


	Nine Months Ended September 30, 2022
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Shares	Amount
Balance as of December 31, 2021	130,182,535	$	13	$	795,540	$	(712,930)	$	(6)	$	82,617
Issuance of common stock under employee stock purchase plan	308,356	—		195		—		—		195
Issuance of common stock for services	711,675	—		390		—		—		390

Issuance of common stock upon vesting of restricted stock units	3,091,697	—		—		—		—		—

Issuance of common stock in at the market offering	53,105,382	6		52,839		—		—		52,845
Stock-based compensation	—	—		8,824		—		—		8,824
Unrealized losses on available-for-sale securities	—	—		—		—		(108)		(108)
Net loss	—	—		—		(77,902)		—		(77,902)
Balance as of September 30, 2022	187,399,645	$	19	$	857,788	$	(790,832)	$	(114)	$	66,861

Table of Contents


	Three Months Ended September 30, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Shares	Amount
Balance as of June 30, 2021	102,967,017	$	10	$	750,664	$	(633,109)	$	4	$	117,569
Issuance of common stock under employee stock purchase plan	284,456	—		341		—		—		341
Issuance of common stock for services	25,989	—		190		—		—		190
Issuance of common stock upon exercise of options	126,004	—		21		—		—		21
Issuance of common stock upon vesting of restricted stock units	34,410	—		—		—		—		—
Taxes paid for net share settlement of equity awards	—	—		(106)		—		—		(106)
Issuance of common stock in at the market offering	3,333,708	1		4,742		—		—		4,743
Stock-based compensation	—	—		2,262		—		—		2,262
Unrealized losses on available-for-sale securities	—	—		—		—		(1)		(1)
Net loss	—	—		—		(43,587)		—		(43,587)
Balance as of September 30, 2021	106,771,584	$	11	$	758,114	$	(676,696)	$	3	$	81,432


	Nine Months Ended September 30, 2021
	Common Stock			Additional Paid-In Capital		Accumulated Deficit		Accumulated Other Comprehensive Income		Total Stockholders' Equity
	Shares	Amount
Balance as of December 31, 2020	93,599,975	9		680,872		(554,765)		(4)		$	126,112
Issuance of common stock under employee stock purchase plan	386,664	—		819		—		—		819
Issuance of common stock for services	25,989	—		190		—		—		190
Issuance of common stock upon exercise of options	331,310	—		584		—		—		584
Issuance of common stock upon vesting of restricted stock units	114,194	—		—		—		—		—
Taxes paid for net share settlement of equity awards	—	—		(106)		—		—		(106)
Issuance of common stock in at the market offering	12,313,452	2		67,187		—		—		67,189
Stock-based compensation	—	—		8,568		—		—		8,568
Unrealized gains on available-for-sale securities	—	—		—		—		7		7
Net loss	—	—		—		(121,931)		—		(121,931)
Balance as of September 30, 2021	106,771,584	$	11	$	758,114	$	(676,696)	$	3	$	81,432

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

Table of Contents

ARDELYX, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

(in thousands)

Table of Contents


	Nine Months Ended September 30,
	2022		2021
Operating activities
Net loss	$	(77,902)	$	(121,931)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization expense	1,035		2,312
Non-cash lease expense	2,570		2,257
Stock-based compensation	8,824		8,568
Change in derivative liabilities	54		(696)
Debt refinancing costs	102		—
Gain on sale of equipment	(1,260)		—
Non-cash interest expense	1,055		212
Changes in operating assets and liabilities:

Accounts receivable	(4,706)		(287)
Inventory	(9,774)		—
Prepaid commercial manufacturing	(10,549)		(4,954)
Prepaid expenses and other assets	754		1,027
Accounts payable	(1,164)		(1,363)
Accrued compensation and benefits	1,743		(902)
Operating lease liabilities	(2,571)		(2,033)
Accrued and other liabilities	(375)		5,411
Deferred revenue	7,836		(703)
Net cash used in operating activities	(84,328)		(113,082)
Investing activities
Proceeds from maturities and redemptions of investments	59,000		103,550
Purchases of investments	(43,824)		(72,736)
Proceeds from sale of property and equipment	1,798		—
Purchases of property and equipment	—		(1,962)
Net cash provided by investing activities	16,974		28,852
Financing activities
Proceeds from 2022 Loan, net of issuance costs	26,971		—
Repayment of 2018 Loan, net of settlement costs	(33,038)		—
Proceeds from the sale of future royalties, net of issuance costs	9,581		—



Proceeds from issuance of common stock in at the market offering, net of issuance costs	52,845		67,189
Proceeds from issuance of common stock under equity incentive and stock purchase plans	195		1,403
Payments for taxes related to net share settlement of equity awards	—		(106)

Net cash provided by financing activities	56,554		68,486
Net decrease in cash and cash equivalents	(10,800)		(15,744)
Cash and cash equivalents at beginning of period	72,428		91,032
Cash and cash equivalents at end of period	$	61,628	$	75,288
Supplementary disclosure of cash flow information:
Cash paid for interest	$	2,079	$	2,920
Cash paid for income taxes	$	6	$	4
Supplementary disclosure of non-cash activities:
Right-of-use assets obtained in exchange for lease obligations	$	—	$	14,379
Issuance of common stock for services	$	390	$	190
Issuance of derivative in connection with issuance of loan payable	$	375	$	—

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

Table of Contents

ARDELYX, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

(Unaudited)

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

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

Ardelyx, Inc. (the “Company,” “we,” “us” or “our”) is a biopharmaceutical company founded with a mission to discover, develop and commercialize innovative first-in-class medicines that meet significant unmet medical needs.

We operate in one business segment, which is the development and commercialization 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 our most recent annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal recurring adjustments necessary to present fairly our financial position, results of operations, changes in stockholders’ equity, and cash flows for the interim periods presented.

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 our Annual Report on Form 10-K for the year ended December 31, 2021. The results for the three and nine months ended September 30, 2022 are not necessarily indicative of results to be expected for the entire year ending December 31, 2022, or for any other interim period or future year.

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.

Liquidity

As of September 30, 2022, we had cash and investments of approximately $90.6 million. We have incurred operating losses since inception and our accumulated deficit as of September 30, 2022 is $790.8 million. Our current level of cash and investments alone is not sufficient to meet our plans for the next twelve months following the issuance of these financial statements. These factors raise substantial doubt regarding our ability to continue as a going concern for a period of one year from the issuance of these financial statements. We plan to address our operating cash flow requirements with our current cash and investments, cash generated from sales of IBSRELA, our potential receipt of anticipated milestones from our collaboration partners, our potential receipt of anticipated payments from our Japanese collaboration partner under the second amendment to our License Agreement, our ability to access the capital markets, as well as through the implementation of cash preservation activities to reduce or defer discretionary spending.

There are no assurances that our efforts to meet our operating cash flow requirements will be successful. If our current cash and investments as well as our plans to meet our operating cash flow requirements are not sufficient to fund necessary expenditures and meet our obligations for at least the next twelve months following the issuance of these financial statements, our liquidity, financial condition and business prospects will be materially affected. These financial statements have been prepared on a going concern basis and do not include any adjustments to the amounts and classification of assets and liabilities that may be necessary in the event that we can no longer continue as a going concern.

Table of Contents

Summary of Significant Accounting Policies

Our significant accounting policies are described in Note 1 to our audited financial statements for the fiscal year ended December 31, 2021, included in our Annual Report on Form 10-K. Our significant accounting policies for the three and nine months ended September 30, 2022 also included the policies discussed below related to accounts receivable, inventory, revenue and cost of revenue for commercial product sales. With the exception of those noted below, there have been no material changes in our significant accounting policies as previously disclosed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021.

Accounts Receivable

Accounts receivable is reported net of allowances for returns, chargebacks and contractual off-invoice and prompt-pay discounts offered to our customers. Our estimate of the allowance for doubtful accounts is based on an evaluation of the aging of our receivables. Trade receivable balances are written off against the allowance when it is probable that the receivable will not be collected. To date, we have determined that an allowance for doubtful accounts is not required. As of September 30, 2022 our accounts receivable balance is comprised of $0.5 million from our collaboration agreements and $4.7 million from commercial customers. As of December 31, 2021 our accounts receivable balance was comprised of $0.5 million from our collaborators.

Inventory

We capitalize inventory costs associated with the production of our products after regulatory approval or when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. Prior to the regulatory approval of drug product candidates, we incurred expenses for the manufacture of drug product that could potentially be available to support the commercial launch of our products or could be sold to our international partners under product supply agreements. We began to capitalize inventory costs associated with IBSRELA during the fourth quarter of 2021, when our intent to commercialize IBSRELA was established and we commenced preparation for the commercial launch of IBSRELA, which was when it was determined that the inventory had a probable future economic benefit.

Inventory is stated at the lower of cost or estimated net realizable value with cost determined under the first-in first-out method. Inventory costs include the cost of materials, third-party contract manufacturing, third-party packaging services, freight, labor costs for personnel involved in the manufacturing process, and indirect overhead costs. We primarily use actual costs to determine the cost basis for inventory. The determination of whether inventory costs will be realizable requires management review of the expiration dates of IBSRELA compared to our forecasted sales. If actual market conditions are less favorable than projected by management, write-downs of inventory may be required, which would be recorded as cost of revenue in the condensed statement of operations and comprehensive loss. A portion of inventory is included in other assets on our condensed balance sheets as a non-current asset. The non-current balance represents product that is not expected to be sold or used within the next 12 months.

Product Sales, Net

We account for our commercial product sales, net in accordance with Topic 606 - Revenue from Contracts with Customers. We received approval from the U.S. Food and Drug Administration (“FDA”) in September 2019 to market IBSRELA, the first and only sodium hydrogen exchanger 3 (“NHE3”) inhibitor for the treatment of irritable bowel syndrome with constipation ("IBS-C") in adults, in the United States ("U.S."). We began selling IBSRELA in the U.S. in March 2022. We distribute IBSRELA principally through major wholesalers, specialty pharmacies and group purchasing organizations ("GPOs") (collectively, our "Customers"). Our Customers subsequently sell IBSRELA to pharmacies and patients. Separately, we enter into arrangements with third parties that provide for government-mandated rebates, chargebacks and discounts. Revenue from product sales is recognized when our performance obligations are satisfied, which is when Customers obtain control of our product and occurs upon delivery.

Table of Contents

Reserves for Variable Consideration

Revenues from product sales are recorded at the net sales price (transaction price), which includes estimates of variable consideration, including discounts which may be settled in the form of off-invoice discounts, chargebacks, or rebates depending on the customer, wholesaler fees, group purchasing organization administrative fees, patient copay assistance programs, and estimated product returns. These estimates are based on the amounts earned or to be claimed for related sales and are classified as reductions of gross accounts receivable if settlement is expected to occur through a reduction in the amounts paid by our customers or a current liability if settlement is expected to occur through a payment from us. Where appropriate, these estimates are based on factors such as industry data and forecasted customer buying and payment patterns, our historical experience, current contractual and statutory requirements, specific known market events and trends. Overall, these reductions to gross sales reflect our best estimates of the amount of consideration to which we are entitled based on the terms of the contract. Variable consideration is included in the transaction price only to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur when the uncertainty associated with the variable consideration is subsequently resolved. Actual amounts of consideration ultimately received may differ from our estimates. If actual results in the future vary from our estimates, we adjust these estimates, which would affect product revenue and earnings in the period such variances become known. As we gain more historical experience, estimates will be more heavily based on the expected utilization from historical data we have accumulated since the IBSRELA product launch.

Rebates: Rebates include wholesaler fees, GPO fees, as well as mandated discounts under the Medicaid Drug Rebate Program ("Medicaid") and the Medicare Coverage Gap Program ("Medicare"). Estimates for rebates are recorded in the same period the related gross revenue is recognized, resulting in a reduction of product revenue and the establishment of a current liability which is included in accrued expenses on the condensed balance sheets. We estimate our Medicaid and Medicare rebates based upon the estimated payor mix, and statutory discount rates. Our estimates for payor mix are guided by payor information received from specialty pharmacies, expected utilization for wholesaler sales to pharmacies, and available industry payor information.

Chargebacks: Chargebacks are discounts that occur when certain contracted purchasers purchase directly from our wholesalers at a discounted price. The wholesaler, in turn, charges back the difference between the price initially paid to us by the wholesaler and the discounted price paid to the wholesaler by the contracted purchaser. Amounts for estimated chargebacks are established in the same period that the related gross revenue is recognized, resulting in a reduction of product revenue and accounts receivable. The accrual for wholesaler chargebacks is estimated based on known chargeback rates, known sales to wholesalers, and estimated utilization by types of contracted purchasers.

Discounts and Fees: Our payment terms are generally 30 to 60 days. Wholesalers, GPOs and specialty pharmacies are offered various forms of consideration, including off-invoice discounts which may be paid to GPOs and specialty pharmacies. Wholesalers and GPOs may also receive prompt pay discounts for payment within a specified period. We expect discounts to be earned when offered and therefore, we deduct the full amount of these discounts from product sales when revenue is recognized, resulting in a reduction of product revenue and accounts receivable.

Other Reserves: Patients who have commercial insurance may receive copay assistance when product is dispensed by pharmacies to patients. We estimate the amount of copay assistance provided to eligible patients based on the terms of the program and redemption information provided by third-party claims processing organizations and are recorded in accounts payable and accrued expenses and other current liabilities on the condensed balance sheets. Other reserves include estimated product returns which are recorded in the same period the related gross revenue is recognized, resulting in a reduction of product revenue as well as gross accounts receivable. We estimate our product returns reserve based upon our historical experience, and specific known market events and trends

Cost of Revenue

Cost of revenue consists of the cost of commercial goods sold to our Customers and international partners under product supply agreements, as well as royalty expense based on sales of tenapanor. We capitalize inventory costs associated with the production of our products after regulatory approval or when, based on management’s judgment, future commercialization is considered probable and the future economic benefit is expected to be realized. Otherwise, such costs are expensed as research and development. A portion of the costs of IBSRELA units recognized as revenue during the three and nine months ended September 30, 2022 were expensed prior to the fourth quarter of 2021, at which time our intent to commercialize IBSRELA was established and we commenced preparation for the commercial launch of IBSRELA.

Table of Contents

Cost of revenue includes payments due to AstraZeneca, which under the terms of a termination agreement entered into in 2015 (the "AZ Termination Agreement") is entitled to (i) future royalties at a rate of 10% of net sales of tenapanor or other NHE3 products by us or our licensees, and (ii) 20% of non-royalty revenue received from our collaboration partners as a result of the development and commercialization of tenapanor or certain other NHE3 inhibitors. We have agreed to pay AstraZeneca up to a maximum of $75.0 million in the aggregate for (i) and (ii). We recognize these expenses as cost of revenue when we recognize the corresponding revenue that gives rise to payments due to AstraZeneca. To date, we have recognized an aggregate of $12.4 million as cost of revenue under the AZ Termination Agreement.

Non-cash Interest Expense on Deferred Royalty Obligation

The net proceeds we receive from the sale of certain future royalties are recorded as deferred royalty obligation related to the sale of future royalties on our balance sheets. As we earn royalties and remit those royalties pursuant to the agreement, the balance of the deferred royalty obligation will be effectively repaid over the life of agreement and non-cash interest expense related to the sale of future royalties is recorded using the effective interest method. To determine the amortization of our deferred royalty obligation, we are required to estimate the total amount of future royalty payments we expect to earn. There are a number of factors that could materially affect the amount and timing of royalty payments, most of which are not within our control. We periodically assess the amount of royalty payments we expect to receive which are subject to the agreement and, to the extent that the amount or timing of such payments is materially different than our original estimates, we prospectively adjust the imputed interest rate and the related amortization of the deferred royalty obligation.

Recent Accounting Pronouncements

New Accounting Pronouncements - Recently Adopted

We have adopted no new accounting pronouncements other than those disclosed in our most recent Annual Report on Form 10-K.

Recent Accounting Pronouncements Not Yet Adopted

There were various accounting standards and interpretations issued recently, none of which are expected to a have a material impact on our financial position, operations or cash flows.

NOTE 2. CASH, CASH EQUIVALENTS AND INVESTMENTS

Securities classified as cash, cash equivalents and investments as of September 30, 2022 and December 31, 2021 are summarized below (in thousands):


	September 30, 2022
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	652	$	—	$	—	$	652
Money market funds	60,976		—		—		60,976


Total cash and cash equivalents	61,628		—		—		61,628
Short-term investments:
Commercial paper	$	20,616	$	—	$	(78)	$	20,538
U.S. government-sponsored agency bonds	1,480		—		(1)		1,479
Corporate bonds	1,005		—		(9)		996
U.S. treasury notes	6,008		—		(26)		5,982
Total short-term investments	29,109		—		(114)		28,995
Total cash equivalents and investments	$	90,737	$	—	$	(114)	$	90,623

Table of Contents


	December 31, 2021
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	1,253	$	—	$	—	$	1,253
Money market funds	71,175		—		—		71,175


Total cash and cash equivalents	72,428		—		—		72,428
Short-term investments
Commercial paper	$	31,936	$	1	$	(2)	$	31,935
Corporate bonds	7,025		—		(3)		7,022

Asset backed securities	5,306		—		(2)		5,304
Total short-term investments	44,267		1		(7)		44,261


Total cash equivalents and investments	$	116,695	$	1	$	(7)	$	116,689

Cash equivalents consist of money market funds with original maturities of three months or less at the time of purchase, and the carrying amount is a reasonable approximation of fair value. We invest our cash in high quality securities of financial and commercial institutions. These securities are carried at fair value, which is based on readily available market information, with unrealized gains and losses included in accumulated other comprehensive income (loss) within stockholders’ equity on our condensed balance sheets. We use the specific identification method to determine the amount of realized gains or losses on sales of marketable securities. Realized gains or losses have been insignificant and are included in other income (expense), net, in the statement of operations and comprehensive loss.

All short-term available-for-sale securities held as of September 30, 2022 had contractual maturities of less than one year. Our available-for-sale securities are subject to a periodic impairment review. We consider a debt security to be impaired when its fair value is less than its carrying cost, in which case we would further review the investment to determine whether it is other-than-temporarily impaired. When we evaluate an investment for other-than-temporary impairment, we review factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, intent to sell, and whether it is more likely than not we will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired, we write it down through the statement of operations and comprehensive loss to its fair value and establish that value as a new cost basis for the investment. We did not identify any of our available-for-sale securities as other-than-temporarily impaired in any of the periods presented. As of September 30, 2022, no investment was in a continuous unrealized loss position for more than one year and we believe that it is more likely than not that the investments will be held until maturity or a forecasted recovery of fair value.

NOTE 3. FAIR VALUE MEASUREMENTS

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

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


Level 1 –			Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by us 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 us to develop our own assumptions.

Table of Contents

The following table sets forth the fair value of our financial assets and liabilities that are measured or disclosed on a recurring basis by level within the fair value hierarchy (in thousands):


	September 30, 2022
	Total Fair Value		Level 1		Level 2		Level 3
Assets:
Money market funds	$	60,976	$	60,976	$	—	$	—
Commercial paper	20,538		—		20,538		—
U.S. government-sponsored agency bonds	1,479		—		1,479		—
Corporate bonds	996		—		996		—

U.S. treasury notes	5,982		—		5,982		—
Total	$	89,971	$	60,976	$	28,995	$	—

Liabilities:
Derivative liabilities for exit fees	$	1,127	$	—	$	—	$	1,127
Total	$	1,127	$	—	$	—	$	1,127


	December 31, 2021
	Total Fair Value		Level 1		Level 2		Level 3
Assets:
Money market funds	$	71,175	$	71,175	$	—	$	—
Commercial paper	31,935		—		31,935		—
Corporate bonds	7,022		—		7,022		—

Asset-backed securities	5,304		—		5,304		—

Total	$	115,436	$	71,175	$	44,261	$	—

Liabilities:
Derivative liability for exit fee	$	698	$	—	$	—	$	698
Total	$	698	$	—	$	—	$	698

Where quoted prices are available in an active market, securities are classified as Level 1. We classify money market funds as Level 1. When quoted market prices are not available for the specific security, we estimate fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. We classify U.S. government-sponsored agency bonds, U.S. treasury notes, corporate bonds, commercial paper, and asset-backed securities as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securities or derivative liabilities, such as the 2018 Exit Fee and 2022 Exit Fee, as defined and discussed in Note 9. Derivative Liability, are classified as Level 3.

The carrying amounts reflected in the condensed balance sheets for cash equivalents, short-term investments, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values at both September 30, 2022 and December 31, 2021, due to their short-term nature.

Fair Value of Debt

The principal amount outstanding under our term loan facilities is subject to a variable interest rate. Therefore, we believe the carrying amount of the term loan facility approximates fair value as of September 30, 2022 and December 31, 2021. See Note 8. Borrowing for a description of the Level 2 inputs used to estimate the fair value of the liability.

The carrying value of the deferred royalty obligation related to the sale of future royalties approximates its fair value as of September 30, 2022 and is based on our current estimates of future royalties and commercialization milestones expected to be paid to us by KKC over the life of the agreement. See Note 7. Deferred Royalty Obligation Related to the Sale of Future Royalties for a description of the Level 3 inputs used to estimate the fair value of the liability.

Table of Contents

NOTE 4. INVENTORY

We began capitalizing inventory during the fourth quarter of 2021, at which time our intent to commercialize IBSRELA was established and we commenced preparation for the commercial launch of IBSRELA. Inventory consisted of the following (in thousands):


	September 30, 2022
Raw materials	$	5,798
Work in process	2,907
Finished goods	1,069
Total	$	9,774
Reported as:
Inventory	$	1,250
Other assets	8,524
Total	$	9,774

Prepaid commercial manufacturing of $16.1 million and $9.4 million as of September 30, 2022 and December 31, 2021, respectively, consist of prepayments to third party contract manufacturing organizations for the manufacture of IBSRELA for production orders which we expect work to commence within the next 12 months. Prepayments for commercial manufacturing of $3.8 million as of September 30, 2022 that are expected to be converted into inventory after 12 months are included in other assets on our condensed balance sheets.

NOTE 5. PRODUCT REVENUE, NET

We received approval from the FDA in September 2019 to market IBSRELA, the first and only NHE3 inhibitor for the treatment of IBS-C in adults, in the U.S. We began selling IBSRELA in the U.S. in March 2022. We recorded net revenue for IBSRELA of $4.9 million and $6.9 million during the three and nine months ended September 30, 2022, respectively.

Sales to AmerisourceBergen Drug Corporation, Cardinal Health, and McKesson Corporation made up 26.4%, 25.2%, and 20.2% of our gross product revenue during the three months ended September 30, 2022 and 28.9%, 24.2%, and 20.9% during the nine months ended September 30, 2022.

The activities and ending reserve balances for each significant category of discounts and allowances, which constitute variable consideration, were as follows (in thousands):


	Discounts and Chargebacks		Rebates		Other Fees, Copay and Returns		Total
Balance as of December 31, 2021	$	—	$	—	$	—	$	—
Activity related to 2022 sales	358		1,158		1,115		2,631
Credits/deductions issued	(250)		(438)		(576)		(1,264)
Balance as of September 30, 2022	$	108	$	720	$	539	$	1,367

There were no product sales or gross-to-net accruals during the three and nine months ended September 30, 2021.

Table of Contents

NOTE 6. COLLABORATION AND LICENSING AGREEMENTS

Kyowa Kirin Co., Ltd. (“KKC”)

2019 KKC Agreement

In November 2019, we entered into a research collaboration and option agreement with KKC (the “2019 KKC Agreement”) for research associated with identifying two preclinical compounds that are ready for designation as development compounds (“DCs”). Pursuant to the 2019 KKC Agreement, upon completion of the research and designation by the research steering committee of one or more DCs, KKC has the right to execute one or more separate collaborative agreements relating to the development and commercialization of one or both DCs in certain specified territories.

Under the terms of the 2019 KKC Agreement, KKC paid us a non-refundable, non-creditable upfront fee of $10.0 million in two installments as follows: the first installment of $5.0 million within 30 days of November 11, 2019 (the “Effective Date”), and the second installment of $5.0 million on the first anniversary of the Effective Date. The original term of the 2019 KKC Agreement commenced on the Effective Date and was to end on the earliest of: (i) 2 years following the Effective Date, (ii) the nomination of a program DC for both programs, (iii) the nomination of one program DC and the decision by the parties to cease research for the other program, or (iv) the decision by the parties to cease research for both programs. We entered into three amendments to the 2019 KKC Agreement, which have resulted in the extension of the original term. Under the third amendment to the 2019 KKC Agreement entered into on June 28, 2022, the current term will end on February 28, 2023.

We have no material future obligations under the 2019 KKC Agreement and recorded no revenue under the 2019 KKC Agreement during the three and nine months ended September 30, 2022. During the three and nine months ended September 30, 2021, we recognized $0.9 million and $3.7 million, respectively, as collaborative development revenue under the 2019 KKC Agreement in the accompanying condensed statement of operations and comprehensive loss.

2017 KKC Agreement

In November 2017, we entered into an exclusive license agreement with KKC (the “2017 KKC Agreement”), under which we granted KKC an exclusive license to develop and commercialize certain NHE3 inhibitors including tenapanor in Japan for the treatment of cardiorenal diseases and conditions, excluding cancer. We retained the rights to tenapanor outside of Japan, and also retained the rights to tenapanor in Japan for indications other than those stated above. Pursuant to the 2017 KKC Agreement, KKC is responsible for all costs and expenses incurred in the development and commercialization of tenapanor for all licensed indications in Japan. We are responsible for supplying the tenapanor drug substance for KKC’s use in development and commercialization throughout the term of the 2017 KKC Agreement, provided that KKC may exercise an option to manufacture the tenapanor drug substance under certain conditions.

We assessed these arrangements in accordance with Accounting Standards Update (“ASU”) No. 2014-09, Revenue from Contracts with Customers (Topic 606) and related amendments (“ASC 606”) and concluded that the contract counterparty, KKC, is a customer. Under the terms of the 2017 KKC Agreement, we received $30.0 million in upfront license fees, which was recognized as revenue when the agreement was executed. Based on our assessment, management determined that the license and the manufacturing supply services were its material performance obligations at the inception of the 2017 KKC Agreement, and as such, each of the performance obligations is distinct.

Under the terms of the 2017 KKC Agreement, KKC paid us an up-front license fee of $30.0 million. We may be entitled to receive up to $55.0 million in total development and regulatory milestones, of which $10.0 million has been received and recognized as revenue as of September 30, 2022. We may also be eligible to receive approximately ¥8.5 billion for commercialization milestones, or approximately $58.7 million at the currency exchange rate on September 30, 2022, as well as reimbursement of costs plus a reasonable overhead for the supply of product and royalties on net sales throughout the term of the agreement. As discussed in Note 7. Deferred Royalty Obligation, the future royalties and commercial milestone payments we may receive under the 2017 KKC Agreement will be remitted to HealthCare Royalty Partners IV, L.P. pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement. The variable consideration related to the remaining milestone payments has not been included in the transaction price as these were fully constrained at September 30, 2022. Please see Note 16 Subsequent Events related to the October 31, 2022 KKC submission of a NDA to the Japanese Ministry of Health, Labour and Welfare for tenapanor for the improvement of hyperphosphatemia in adult patients with CKD on dialysis.

Table of Contents

On April 11, 2022, we entered into a second amendment to the 2017 KKC Agreement (the "2022 Amendment"). Under the terms of the 2022 Amendment, we and KKC have agreed to a reduction in the royalty rate payable to us by KKC upon net sales of tenapanor in Japan. The royalty rate will be reduced from the high teens to low double digits for a two-year period of time following the first commercial sale in Japan, and then to mid-single digits for the remainder of the royalty term. As discussed in Note 7. Deferred Royalty Obligation, the future commercial milestones and royalties we may receive under the 2017 KKC Agreement will be remitted to HealthCare Royalty Partners IV, L.P. pursuant to a Royalty and Sales Milestone Interest Acquisition Agreement. As consideration for the reduction in the royalty rate, KKC has agreed to pay us up to an additional $40.0 million payable in two tranches, with the first payment due following KKC's filing with the Japanese Ministry of Health, Labour and Welfare of its application for marketing approval for tenapanor and the second payment due following KKC’s receipt of regulatory approval to market tenapanor for hyperphosphatemia in Japan. The variable consideration related to the reduction in the royalty rate has not been included in the transaction price as these were fully constrained at September 30, 2022.

During the three and nine months ended September 30, 2022 we recognized no licensing revenue related to the 2017 KKC Agreement. During the three and nine months ended September 30, 2021, we recognized zero and $5.0 million respectively, as licensing revenue upon the initiation of phase 3 clinical studies by KKC in Japan to evaluate tenapanor for hyperphosphatemia. During the three and nine months ended September 30, 2022, we recognized $83 thousand and $1.0 million, respectively, as product supply revenue related to the manufacturing supply of tenapanor and other materials to KKC pursuant to the 2017 KKC Agreement. During the three and nine months ended September 30, 2021, we recognized $0.3 million and $0.4 million, respectively, as product supply revenue pursuant to the 2017 KKC Agreement.

As detailed below under the heading Deferred revenue - non-current, we have received prepayments from KKC for the manufacturing of tenapanor drug substance that will be used to satisfy KKC needs.

Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd. (“Fosun Pharma”)

In December 2017, we entered into an exclusive license agreement with Fosun Pharma (the “Fosun Agreement”), for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia and IBS-C. Under the terms of the Fosun Agreement, Fosun paid us a $12.0 million upfront license fee. We may be entitled to receive development and commercialization milestones of up to $113.0 million, of which $3.0 million has been received and recognized as revenue as of September 30, 2022, as well as reimbursement of cost plus a reasonable overhead for the supply of product and tiered royalties on net sales ranging from the mid-teens to 20%. The variable consideration related to the remaining development milestone payments has not been included in the transaction price as these were fully constrained at September 30, 2022.

During the three and nine months ended September 30, 2022, we recognized $9 thousand as product supply revenue pursuant to the terms of the Fosun Agreement. We recorded no revenue during the three and nine months ended September 30, 2021 related to the Fosun Agreement.

Knight Therapeutics, Inc. (“Knight“)

In March 2018, we entered into an exclusive license agreement with Knight (the “Knight Agreement”) for the development, commercialization and distribution of tenapanor in Canada for hyperphosphatemia and IBS-C. Under the terms of the Knight Agreement, Knight paid us a $