Quarterly Report (10-q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

FORM 10‑Q

(Mark One)

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2019

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

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER: 001‑36485

ARDELYX, INC.

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE	26‑1303944
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NUMBER)

34175 Ardenwood Boulevard, Suite 200

Fremont, California 94555

(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES, INCLUDING ZIPCODE)

(510) 745‑1700

(REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Stock, par value $0.0001	ARDX	The Nasdaq Global Market

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

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

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

Large accelerated filer	☐	Accelerated filer	☒

Non-accelerated filer	☐	Smaller reporting company	☒
	
Emerging growth company	☒

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

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

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

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ARDELYX, INC.

	PAGE
PART I. FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements 	2
Condensed Balance Sheets as of March 31, 2019 (unaudited) and December 31, 2018	2
Condensed Consolidated Statements of Operations and Comprehensive Loss for the three months ended March 31, 2019 and 2018 (unaudited)	3
Condensed Consolidated Statements of Changes in Stockholders' Equity for the three months ended March 31, 2019 and 2018 (unaudited)	4
Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018 (unaudited)	5
Notes to Condensed Consolidated Financial Statements (unaudited)	6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3. Quantitative and Qualitative Disclosures About Market Risk	28
Item 4. Controls and Procedures	29

PART II. OTHER INFORMATION

Item 1. Legal Proceedings	30
Item 1A. Risk Factors	30
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	65
Item 3. Defaults Upon Senior Securities	66
Item 4. Mine Safety Disclosures	66
Item 5. Other Information	66
Item 6. Exhibits	67
Signatures	68

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PART I. FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

ARDELYX, INC.

CONDENSED BALANCE SHEETS

(in thousands, except share and per share amounts)


	March 31,		December 31,
	2019		2018
	(Unaudited)		(1)
Assets
Current assets:
Cash and cash equivalents	$	92,036	$	78,768
Short-term investments		59,524		89,321
Accounts receivable		7		85
Unbilled license revenue		—		5,000
Prepaid expenses and other current assets		2,745		3,197
Total current assets		154,312		176,371
Property and equipment, net		5,102		5,611
Right-of-use assets		5,371		—
Other assets		1,350		1,350
Total assets	$	166,135	$	183,332
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	2,925	$	1,148
Accrued compensation and benefits		1,634		2,723
Uncharged license fees		—		1,000
Current portion of operating lease liability		2,102		—
Accrued and other liabilities		14,165		12,857
Total current liabilities		20,826		17,728
Operating lease liability, net of current portion		4,069		—
Loan payable, long term		49,399		49,209
Other long-term liabilities		—		582
Total liabilities		74,294		67,519
Commitments and contingencies
Stockholders’ equity:
Preferred stock, $0.0001 par value; 5,000,000 shares authorized; no shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively.		—		—
Common stock, $0.0001 par value; 300,000,000 shares authorized; 62,600,443 and 62,516,627 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively.		6		6
Additional paid-in capital		483,479		481,357
Accumulated deficit		(391,656)		(365,512)
Accumulated other comprehensive loss		12		(38)
Total stockholders’ equity		91,841		115,813
Total liabilities and stockholders’ equity	$	166,135	$	183,332

⁽¹⁾

Derived from the audited consolidated financial statements included in the Company’s Annual Report on Form 10‑K for the year ended December 31, 2018.

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(in thousands, except share and per share amounts)

(Unaudited)


	Three Months Ended March 31,
	2019		2018
Revenues:
Licensing revenue	$	—	$	2,320
Cost of revenue		—		464
Gross profit		—		1,856
Operating expenses:
Research and development	$	20,381	$	13,350
General and administrative		5,117		6,191
Total operating expenses		25,498		19,541
Loss from operations		(25,498)		(17,685)
Interest expense		(1,434)		—
Other income (expense), net		790		670
Loss before provision for income taxes		(26,142)		(17,015)
Provision for income taxes		2		4
Net loss	$	(26,144)	$	(17,019)
Net loss per common share, basic and diluted	$	(0.42)	$	(0.36)
Shares used in computing net loss per share - basic and diluted		62,546,295		47,559,366
Comprehensive loss:
Net loss	$	(26,144)	$	(17,019)
Unrealized gain (loss) on available-for-sale securities, net of tax		50		(44)
Comprehensive loss	$	(26,094)	$	(17,063)

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2019

(in thousands, except share amounts)

(Unaudited)


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Stockholders'
	Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance as of December 31, 2018	62,516,627	$	6	$	481,357	$	(365,512)	$	(38)	$	115,813
Issuance of common stock under employee stock purchase plan	83,046		—		198		—		—		198
Issuance of common stock upon exercise of options	770		—		2		—		—		2
Stock-based compensation	—				1,922		—				1,922
Other comprehensive income	—		—		—		—		50		50
Net loss	—		—		—		(26,144)		—		(26,144)
Balance as of March 31, 2019	62,600,443	$	6	$	483,479	$	(391,656)	$	12	$	91,841

See accompanying notes to Condensed Consolidated Financial Statements

ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

For the Three Months Ended March 31, 2018

(in thousands, except share amounts)

(Unaudited)


								Accumulated
				Additional				Other		Total
	Common Stock			Paid-In		Accumulated		Comprehensive		Stockholders'
	Shares	Amount		Capital		Deficit		Income (Loss)		Equity
Balance as of December 31, 2017	47,534,979	$	5	$	417,568	$	(278,214)	$	(47)	$	139,312
Issuance of common stock under employee stock purchase plan	68,589		—		301		—		—		301
Stock-based compensation	—		—		2,425		—		—		2,425
Other comprehensive income	—		—		—		—		(44)		(44)
Adoption of ASU No. 2014-09 on January 1, 2018	—		—		—		4,000		—		4,000
Net loss	—		—		—		(17,019)		—		(17,019)
Balance as of March 31, 2018	47,603,568	$	5	$	420,294	$	(291,233)	$	(91)	$	128,975

See accompanying notes to Condensed Consolidated Financial Statements

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ARDELYX, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)


	Three Months Ended
	March 31,
	2019		2018
Operating activities
Net loss	$	(26,144)	$	(17,019)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation expense		675		674
Amortization of deferred financing costs		120		14
Amortization of deferred compensation for services		76		50
Amortization of premium on investment securities		(301)		(75)
Non-cash lease expense		439		—
Stock-based compensation		1,922		2,425
Change in derivative liabilities		37		—
Non-cash interest associated with debt discount accretion		113		—
Changes in operating assets and liabilities:
Accounts receivable and unbilled license revenue		5,078		10,796
Prepaid expenses and other assets		333		2,005
Accounts payable		777		(2,117)
Accrued compensation and benefits		(1,089)		(1,612)
Accrued and other liabilities		1,051		(1,945)
Net cash used in operating activities		(16,913)		(6,804)
Investing activities
Proceeds from maturities of investments		55,020		37,085
Sales and redemptions of investments		—		850
Purchases of investments		(24,874)		(39,015)
Purchases of property and equipment		(165)		(55)
Net cash provided by (used in) investing activities		29,981		(1,135)
Financing activities
Issuance of common stock upon exercise of options		2		—
Proceeds from issuance of common stock under stock plans		198		301
Net cash provided by financing activities		200		301
Net increase (decrease) in cash and cash equivalents		13,268		(7,638)
Cash and cash equivalents at beginning of period		78,768		75,383
Cash and cash equivalents at end of period	$	92,036	$	67,745

See accompanying notes to Condensed Consolidated Financial Statements.

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ARDELYX, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. ORGANIZATION AND BASIS OF PRESENTATION

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

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

Basis of Presentation

These unaudited condensed consolidated financial statements and the related footnote information of the Company have been prepared pursuant to the requirements of the Securities and Exchange Commission, or the SEC, for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information that are normally required by U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted pursuant to such rules and regulations. In the opinion of the Company’s management, the accompanying interim unaudited condensed consolidated financial statements include all adjustments (consisting only of normal recurring adjustments) necessary for a fair presentation of the information for the periods presented. The results for the three months ended March 31, 2019, are not necessarily indicative of results to be expected for the entire year ending December 31, 2019, or future operating periods.

The accompanying condensed consolidated financial statements and related financial information should be read in conjunction with the audited consolidated financial statements and the related notes thereto for the year ended December 31, 2018, included in the Company’s Annual Report on Form 10‑K filed with the SEC (the “2018 Form 10‑K”). The balance sheet at December 31, 2018, has been derived from the audited consolidated financial statements at that date, as filed with the 2018 Form 10‑K.

The accompanying condensed consolidated financial statements include the accounts of Ardelyx, Inc. and its wholly-owned subsidiary, Ardelyx Cayman Islands, which was placed into voluntary liquidation in December 2017 and dissolved in 2018, have been prepared in accordance with U.S. GAAP. Intercompany transactions and balances have been eliminated upon consolidation.

NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Use of Estimates

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

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Accrued Research and Development Expenses

As part of the process of preparing its financial statements, the Company is required to estimate its accrued expenses. This process involves reviewing open contracts and purchase orders, communicating with its personnel to identify services that have been performed on its behalf and estimating the level of service performed and the associated cost incurred for the service when the Company has not yet been invoiced or otherwise notified of the actual cost. The majority of the Company’s service providers submit its monthly invoices in arrears for services performed or when contractual milestones are met. The Company makes estimates of its accrued expenses as of each balance sheet date in its financial statements based on facts and circumstances known to the Company at that time. The Company periodically confirms the accuracy of its estimates with the service providers and makes adjustments if necessary. Examples of estimated accrued research and development expenses include fees paid to:

contract research organizations, or CROs, in connection with clinical studies;

investigative sites in connection with clinical studies;

vendors related to product manufacturing, development and distribution of clinical supplies; and

vendors in connection with preclinical development activities.

The Company records expenses related to clinical studies and manufacturing development activities based on its estimates of the services received and efforts expended pursuant to contracts with multiple CROs and manufacturing vendors that conduct and manage these activities on its behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract, and may result in uneven payment flows. There may be instances in which payments made to the Company’s vendors will exceed the level of services provided and result in a prepayment of the expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical trial milestones. In accruing service fees, the Company estimates the time period over which services will be performed, enrollment of subjects, number of sites activated and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from the Company’s estimate, the Company will adjust the accrued or prepaid expense balance accordingly. To date, there have been no material differences from the Company’s estimates to the amounts actually incurred.

Revenue Recognition

On January 1, 2018 the Company adopted the new standard for Revenue from Contracts with Customers, ASC 606, on a modified retrospective method as an adjustment to the opening balance of retained earnings of the annual reporting period. As a result of the adoption of the new standard, on January 1, 2018, the Company recorded the following: (i) a unbilled license revenue under current assets of $5.0 million representing a future receivable related to the first milestone under the Company’s license agreement with Kyowa Hakko Kirin Co., Ltd., or KHK, that KHK achieved in February 2019 , (ii) a uncharged license fees under current liabilities of $1.0 million representing a future payable related to the corresponding payment to AstraZeneca AB, or AstraZeneca, in accordance with the Company’s termination agreement with AstraZeneca and (iii) a related decrease in its accumulated deficit of approximately $4.0 million as the new standard permits revenue from milestones that possess certain criteria to be recognized earlier as the new standard contains different recognition criteria related to milestones than under the previous standard, Revenue Recognition, Multiple-Element Arrangements - Licensing revenues , ASC 605. As of March 31, 2019, based on KHK’s achievement of the milestone in February 2019, the balance related to unbilled license revenue was adjusted to zero. Correspondingly, the $1.0 million balance related to uncharged license fees, that the Company owed to AstraZeneca, was reclassed to accounts payable and fully paid to AstraZeneca in the second quarter of 2019 .

The Company enters into licensing agreements which are within the scope of ASC 606, under which it licenses certain rights to its product candidates to third parties. The terms of these arrangements typically include payment to the Company of one or more of the following: non-refundable, up-front license fees; development, regulatory and commercial milestone payments; and future royalties on net sales of licensed products. Each of these payments results in license, collaboration

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and other revenues, except for revenues from royalties on net sales of licensed products, which are classified as royalty revenues.

In determining the appropriate amount of revenue to be recognized as it fulfills its obligations under each of its agreements, the Company performs the following steps: (i) identification of the promised goods or services in the contract; (ii) determination of whether the promised goods or services are performance obligations including whether they are distinct in the context of the contract; (iii) measurement of the transaction price, including the constraint on variable consideration; (iv) allocation of the transaction price to the performance obligations; and (v) recognition of revenue when (or as) the Company satisfies each performance obligation. As part of the accounting for these arrangements, the Company must develop assumptions that require judgment to determine the stand-alone selling price for each performance obligation identified in the contract. The Company uses key assumptions to determine the stand-alone selling price, which may include forecasted revenues, development timelines, reimbursement rates for personnel costs, discount rates and probabilities of technical and regulatory success.

Milestone Payments: At the inception of each arrangement that includes development milestone payments, the Company evaluates whether the milestones are considered probable of being reached and estimates the amount to be included in the transaction price using the most likely amount method. Amounts of variable consideration are included in the transaction price to the extent that it is probable that a significant reversal in the amount of cumulative revenue recognized will not occur and when the uncertainty associated with the variable consideration is subsequently resolved. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals, are not considered probable of being achieved until those approvals are received. The transaction price is then allocated to each performance obligation on a relative stand-alone selling price basis, for which the Company recognizes revenue as or when the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect license, collaboration and other revenues and earnings in the period of adjustment.

Manufacturing Supply Services: Arrangements that include a promise for future supply of drug substance or drug product for either clinical development or commercial supply at the customer’s discretion are generally considered as options. The Company assess if these options provide a material right to the licensee and if so, they are accounted for as separate performance obligations. If the Company is entitled to additional payments when the customer exercises these options, any payments are recorded in other revenues when the customer obtains control of the goods, which is upon delivery.

Royalties: For arrangements that include sales-based royalties, including milestone payments based on the level of sales, and the license is deemed to be the predominant item to which the royalties relate, the Company recognizes revenue at the later of (i) when the related sales occur, or (ii) when the performance obligation to which some or all of the royalty has been allocated has been satisfied (or partially satisfied). To date, the Company has not recognized any royalty revenue resulting from any of its licensing arrangements.

Derivatives and Hedging Activities

The Company accounts for its derivative instruments as either assets or liabilities on the condensed balance sheet and measures them at fair value. Derivatives are adjusted to fair value through other (expense) income, net in the condensed consolidated statements of operations and comprehensive loss.

Leases

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

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

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

Recent Accounting Pronouncements

New Accounting Pronouncements - Recently Adopted

In August 2018, the SEC adopted amendments to certain disclosure requirements in Securities Act Release No. 33-10532, Disclosure Update and Simplification. These amendments eliminate, modify, or integrate into other SEC requirements certain disclosure rules. Among the amendments is the requirement to present an analysis of changes in stockholders’ equity in the interim financial statements included in quarterly reports on Form 10-Q. The analysis, which can be presented as a footnote or separate statement, is required for the current and comparative quarter and year-to-date interim periods. The amendments are effective for all filings made on or after November 5, 2018. In light of the anticipated timing of effectiveness of the amendments and expected proximity of effectiveness to the filing date for most filers’ quarterly reports, the SEC’s Division of Corporate Finance issued a Compliance and Disclosure Interpretation related to Exchange Act Forms, or CDI – Question 105.09, that provides transition guidance related to this disclosure requirement. CDI – Question 105.09 states that the SEC would not object if the filer’s first presentation of the changes in shareholders’ equity is included in its Form 10-Q for the quarter that begins after the effective date of the amendments. As such, the Company adopted these SEC amendments on November 5, 2018 and is presenting the analysis of changes in stockholders’ equity starting in this Quarterly Report on Form 10-Q. The adoption of these SEC amendments did not have a material effect on the Company’s financial position, results of operations, cash flows or shareholders’ equity.

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

Impact of Adoption

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

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	December 31,		Adjustments	January 1,
	2018		Due to Topic 842	2019
Right-of-use assets	$	—	5,810	$	5,810
Current portion of operating lease liability		—	1,892		1,892
Operating lease liability, net of current portion		—	4,684		4,684
Accrued and other liabilities		12,857	(184)		12,673
Other long-term liabilities	$	582	(582)	$	—

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


	March 31, 2019
	As Reported under Topic 842		Under Topic 840	Effect of Change
Right-of-use assets	$	5,371	—	$	5,371
Current portion of operating lease liability		2,102	—		2,102
Operating lease liability, net of current portion		4,069	—		4,069
Accrued and other liabilities		14,165	14,392		(227)
Other long-term liabilities	$	—	507	$	(507)


	Three Months Ended March 31, 2019
	As Reported under Topic 842		Under Topic 840	Effect of Change
Operating expenses:
General and administrative related to leases	$	648	582	$	66

In June 2018, the FASB issued ASU No. 2018-07, Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting . ASU 2018-07 is intended to reduce the cost and complexity and to improve financial reporting for nonemployee share-based payments. ASU 2018-07 expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. ASU 2018-07 supersedes Subtopic 505-50, Equity-Based Payments to Non-Employees. ASU 2018-07 is effective for the Company for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year and early adoption is permitted. On January 1, 2019, we adopted ASU 2018-07 and the adoption of this standard did not have a material impact on the Company’s condensed consolidated financial statements.

New Accounting Pronouncements Not Yet Adopted

In August 2018, the FASB issued ASU No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement . ASU 2018-13 considers cost and benefits, and removes, modifies and adds disclosure requirements in Topic 820. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty is to be applied prospectively for only the most recent interim or annual period presented in the initial fiscal year of adoption. All other amendments are to be applied retrospectively to all periods presented. ASU 2018-13 is effective for the Company for fiscal years beginning after December 15, 2019,

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including interim periods within that fiscal year and early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements.

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

NOTE 3. CASH, CASH EQUIVALENTS AND INVESTMENTS

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


	March 31, 2019
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	7,019		—		—	$	7,019
Money market funds		83,521		—		—		83,521
Commercial paper		1,496		—		—		1,496
Total cash and cash equivalents	$	92,036	$	—	$	—	$	92,036
Short-term investments
U.S. treasury notes		2,283		—		—		2,283
U.S. treasury securities		2,279		1		—		2,280
Corporate bonds		20,110		2		—		20,112
Commercial paper		30,559		5		—		30,564
Asset-backed securities		4,281		4		—		4,285
Total short-term investments	$	59,512	$	12	$	—	$	59,524
Total cash equivalents and investments	$	151,548	$	12	$	—	$	151,560


	December 31, 2018
			Gross Unrealized
	Amortized Cost		Gains		Losses		Fair Value
Cash and cash equivalents:
Cash	$	3,733	$	—	$	—	$	3,733
Money market funds		73,238		—		—		73,238
Commercial paper		1,797		—		—		1,797
Total cash equivalents and investments	$	78,768	$	—	$	—	$	78,768
Short-term investments
U.S. treasury securities	$	3,996		—		—	$	3,996
Corporate bonds		34,611		—		(21)		34,590
Commercial paper		41,371		—		(14)		41,357
Asset-backed securities		9,381		—		(3)		9,378
Total short-term investments	$	89,359	$	—	$	(38)	$	89,321
Total cash equivalents and investments	$	168,127	$	—	$	(38)	$	168,089

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

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All available-for-sale securities held as of March 31, 2019, had contractual maturities of less than one year. The Company’s available-for-sale securities are subject to a periodic impairment review. The Company considers a debt security to be impaired when its fair value is less than its carrying cost, in which case the Company would further review the investment to determine whether it is other-than-temporarily impaired. When the Company evaluates an investment for other-than-temporary impairment, the Company reviews factors such as the length of time and extent to which fair value has been below cost basis, the financial condition of the issuer and any changes thereto, intent to sell, and whether it is more likely than not the Company will be required to sell the investment before the recovery of its cost basis. If an investment is other-than-temporarily impaired, the Company writes it down through the statement of operations to its fair value and establishes that value as a new cost basis for the investment. The Company did not identify any of its available-for-sale securities as other-than-temporarily impaired in any of the periods presented. As of March 31, 2019, no investment was in a continuous unrealized loss position for more than one year and the Company believes that it is more likely than not that the investments will be held until maturity or a forecasted recovery of fair value.

NOTE 4. FAIR VALUE MEASUREMENTS

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

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

Level 1 – Valuations are based on quoted prices in active markets for identical assets or liabilities and readily accessible by the Company at the reporting date. Examples of assets and liabilities utilizing Level 1 inputs are certain money market funds, U.S. Treasuries and trading securities with quoted prices on active markets.

Level 2 – Valuations based on inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Examples of assets and liabilities utilizing Level 2 inputs are corporate bonds, commercial paper, certificates of deposit and over-the-counter derivatives.

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

The following table sets forth the fair value of the Company’s financial assets and liabilities measured on a recurring basis by level within the fair value hierarchy (in thousands):


	March 31, 2019
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds	$	83,521	$	83,521	$	—	$	—
U.S. treasury notes		2,283		2,283		—		—
U.S. treasury securities		2,280		2,280		—		—
Corporate bonds		20,112		—		20,112		—
Commercial paper		32,060		—		32,060		—
Asset-backed securities		4,285		—		4,285		—
Total	$	144,541	$	88,084	$	56,457	$	—

Liabilities:
Derivative liability for exit fee	$	570	$	—	$	—	$	570
Total	$	570	$	—	$	—	$	570

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	December 31, 2018
	Total		Level 1		Level 2		Level 3
Assets:
Money market funds	$	73,238	$	73,238	$	—	$	—
U.S. treasury securities		3,996		3,996		—		—
Corporate bonds		34,590		—		34,590		—
Commercial paper		43,154		—		43,154		—
Asset-backed securities		9,378		—		9,378		—
Total	$	164,356	$	77,234	$	87,122	$	—

Liabilities:
Derivative liability for exit fee	$	533	$	—	$	—	$	533
Foreign currency derivative contracts		52	$	—	$	52	$	—
Total	$	585	$	—	$	52	$	533

Where quoted prices are available in an active market, securities are classified as Level 1. The Company classifies money market funds, U.S. treasury securities and U.S. treasury notes as Level 1. When quoted market prices are not available for the specific security, the Company estimates fair value by using benchmark yields, reported trades, broker/dealer quotes and issuer spreads. The Company classifies corporate bonds, commercial paper, asset-backed securities and foreign currency derivative contracts as Level 2. In certain cases, where there is limited activity or less transparency around inputs to valuation, securities are classified as Level 3. There were no transfers between Level 1 and Level 2 during the periods presented.

In May 2018, pursuant to the loan and security agreement with Solar Capital Ltd. and Western Alliance Bank (see “Note 6. Borrowings”), the Company entered into an Exit Fee Agreement under which the Company agreed to pay $1.5 million in cash, or the Exit Fee, upon any change of control transaction in respect of the Company or if the Company obtains both (i) FDA approval of tenapanor in the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) FDA approval of tenapanor for the treatment of patients with IBS-C. Notwithstanding the prepayment or termination of the Term Loan, the Company’s obligation to pay the Exit Fee will expire May 16, 2028. The Company evaluated that the Exit Fee is a freestanding derivative which should be accounted for at fair value on a recurring basis. The estimated fair value of the Exit Fee is recorded as a derivative liability and included in accrued and other liabilities on the accompanying condensed balance sheet. As of March 31, 2019, the estimated fair value of the Exit Fee was determined to be $570,000, an increase of $37,000 compared with $533,000 , the estimated fair value as of December 31, 2018 , primarily as a result of changes to the inputs in the calculation including the estimated timing of payment and the time value of money, which are presented as a component of change in derivative liabilities in the Company’s condensed consolidated statements of operations.

The fair value of the derivative liability was determined using a discounted cash flow analysis and is classified as a Level 3 measurement within the fair value hierarchy since the Company’s valuation utilized significant unobservable inputs. Specifically, the key assumptions included in the calculation of the estimated fair value of the derivative instrument include: i) the Company’s estimates of both the probability and timing of a potential $1.5 million payment to Solar Capital Ltd. and Western Alliance Bank as a result of the FDA approvals, and ii) a discount rate which was derived from the Company's estimated cost of debt. Generally, increases or decreases in the probability of occurrence would result in a directionally similar impact in the fair value measurement of the derivative instrument and it is estimated that a 10% increase (decrease) in the probability of occurrence would result in a fair value fluctuation of approximately $0.1 million.

Changes in the fair value of recurring measurements included in Level 3 of the fair value hierarchy are presented as other income (expense), net, in the Company's condensed consolidated statements of operations and were as follows for the three months ended March 31, 2019 (in thousands):

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	Estimated Fair Value
	of Derivative Liability
Balance of Level 3 Liabilities at December 31, 2018	$	533
Change in estimated fair value of derivative liability for exit fee		37
Balance of Level 3 Liabilities at March 31, 2019	$	570

The carrying amounts reflected in the balance sheets for cash equivalents, short-term investments, accounts receivable, prepaid expenses and other current assets, accounts payable and accrued expenses approximate their fair values at both March 31, 2019 and December 31, 2018, due to their short-term nature.

NOTE 5. DERIVATIVE FINANCIAL INSTRUMENTS

Foreign Currency Exchange Rate Exposure

The Company uses forward foreign currency exchange contracts to secure a foreign currency exchange rate when a contract is executed involving payment in a foreign currency in order to minimize cash flow exposure to fluctuating exchange rates. Such exposure results from portions of the Company’s forecasted cash outflows being denominated in currencies other than the U.S. dollar, primarily the Swiss franc. The derivative instruments the Company uses to hedge this exposure are not designated as cash flow hedges, and as a result, changes in their fair value are recorded in other (expense) income, net, on the Company's condensed consolidated statements of operations and comprehensive loss.

The fair values of forward foreign currency exchange contracts are estimated using current exchange rates and interest rates and take into consideration the current creditworthiness of the counterparties. Information regarding the specific instruments used by the Company to hedge its exposure to foreign currency exchange rate fluctuations is provided below.

In March 2019, the Company settled its forward foreign currency exchange contract in the aggregate notional amount of Swiss francs 3.3 million and as of March 31, 2019 has no open forward foreign currency exchange contract. The net loss associated with the Company's derivative instrument of $60,558 is recognized in other (expense) income, net, on the condensed consolidated statement of operations and comprehensive loss for three months ended March 31, 2019. There were no expenses related to such derivative instruments for three months ended March 31, 2018.

NOTE 6. BORROWINGS

Solar Capital and Western Alliance Bank Loan Agreement

On May 16, 2018, the Company entered into a loan and security agreement, or the Loan Agreement, with Solar Capital Ltd. and Western Alliance Bank, or collectively the Lenders. The Loan Agreement provides for a $50.0 million term loan facility with a maturity date of November 1, 2022, or the Term Loan. The full amount of the loan was funded on May 16, 2018. The Company received net proceeds from the loan of approximately $49.3 million, after deducting the closing fee, legal expenses and issuance cost.

Borrowings under the Term Loan bear interest at a floating per annum rate equal to 7.45% plus the one-month LIBOR. The Company is permitted to make interest-only payments on the Term Loan through December 1, 2020 if the Company achieves its primary endpoint in the Phase 3 study of tenapanor for the treatment of hyperphosphatemia in end-stage renal disease patients on dialysis, prior to June 1, 2020; otherwise, the Company is permitted to make interest-only payments on the Term Loan only through June 1, 2020. Accordingly, beginning on either June 1, 2020 or December 1, 2020, as applicable, through the maturity date, the Company will be required to make monthly payments of interest plus repayment of the Term Loan in consecutive equal monthly installments of principal. The Company paid a closing fee of 1% of the Term Loan, or $0.5 million, upon the closing of the Term Loan. The Company is obligated to pay a final fee equal to 3.95% of the Term Loan upon the earliest to occur of the maturity date, the acceleration of the Term Loan, the prepayment or repayment of the Term Loan or the termination of the Loan Agreement. The Company may voluntarily prepay the outstanding Term Loan, subject to a prepayment premium of (i) 3% of the principal amount of the Term Loan

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if prepaid prior to or on the first anniversary of the Closing Date, (ii) 2% of the principal amount of the Term Loan if prepaid after the first anniversary of the Closing Date through and including the second anniversary of the Closing Date, or (iii) 1% of the principal amount of the Term Loan if prepaid after the second anniversary of the Closing Date and prior to the maturity date. The Term Loan is secured by substantially all the Company’s assets, except for our intellectual property and certain other customary exclusions. Additionally, in connection with the Term Loan, the Company entered into an Exit Fee Agreement, whereby the Company agreed to pay an exit fee in the amount of 3% of the Term Loan, or the Exit Fee, upon any change of control transaction in respect of the Company or if the Company obtains both (i) FDA approval of tenapanor in the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) FDA approval of tenapanor for the treatment of patients with IBS-C. Notwithstanding the prepayment or termination of the Term Loan, the obligation to pay the Exit Fee will expire 10 years from the Closing Date.

The Loan Agreement contains customary representations and warranties and customary affirmative and negative covenants. Additionally, if the Company elects to enter into an exclusive license agreement for the use of its intellectual property in the United States (other than for tenapanor for hyperphosphatemia or for our FXR and TGR5 agonist programs) and has not obtained the written consent of the Lenders to enter into such license agreement, the Company has agreed to maintain unrestricted cash and cash equivalents of at least $50.0 million, until the Company achieves its primary endpoint in the second Phase 3 study of tenapanor for the treatment of hyperphosphatemia in end-stage renal disease patients on dialysis. As of March 31, 2019, the Company was in compliance with all of the covenants set forth in the Loan Agreement.

In addition, the Loan Agreement contains customary events of default that entitle the Lender to cause the Company’s indebtedness under the Loan Agreement to become immediately due and payable, and to exercise remedies against the Company and the collateral securing the Term Loan, including our cash. Upon the occurrence and for the duration of an event of default, an additional default interest rate equal to 4.0% per annum will apply to all obligations owed under the Loan Agreement. As of March 31, 2019, to the Company’s knowledge, there were no facts or circumstances in existence giving rise to an event of default.

As of March 31, 2019, assuming the principal payments start on December 1, 2020, the Company’s future debt payment obligations towards the principal and final fee, excluding interest payments and exit fee, for the respective fiscal years are as follows (in thousands):


2019	$	—
2020		2,083
2021		25,000
2022		24,892
Total principal and final fee payments		51,975
Less: Unamortized discount and debt issuance costs		(991)
Less: Unaccreted value of final fee		(1,585)
Loan payable, long term	$	49,399

NOTE 7. LEASES

The Company has obtained the right of use for office space assets under two operating lease agreements. The Company has evaluated its facility leases and determined that, effective upon the adoption of Topic 842, the leases evaluated are all operating leases. The Company has performed an evaluation of its other contracts with suppliers and collaborators in accordance with Topic 842 and has determined that, except for the facility leases described below, none of the Company’s contracts contain a lease.

The Company obtained the right of use of office space located in Fremont, CA under a lease agreement entered into in September 2008, which was most recently amended in April 2016. The office space consists of 61,784 square feet, plus a further 10,716 square feet beginning in September 2019, and the entire lease terminating on September 10, 2021. The Company has an option to extend the term by five years as to the entire premises, by giving written notice of its election to exercise such option at least twelve months but not more than eighteen months prior to the end of the expiration of the lease term. This option to extend the lease term by five years has not been included in the calculation since currently the

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exercise of the option is highly uncertain and therefore deemed not probable. The Company also obtained the right of use of 3,250 square feet of office space located in Boston, MA in October 2018 that terminates on September 30, 2021.

All of the Company’s leases are operating leases. Certain of the leases have both lease and non-lease components. The Company has elected to account for each separate lease component and the non-lease components associated with that lease component as a single lease component for all classes of underlying assets. As of March 31, 2019, the weighted average discount rate used for the calculations was 12.99% and the weighted average remaining lease term was 2.5 years.

The following table provides additional details of the leases presented in the balance sheets:


	March 31, 2019
Facilities
Right of use assets	$	5,371

Current portion of lease liabilities		2,102
Lease liabilities, net of current portion		4,069
Total liabilities	$	6,171

Weighted-average remaining life		2.5	years
Weighted-average discount rate		12.99	%

The lease costs, which are included in operating expenses in our condensed consolidated statements of operations, were as follows (in thousands):


	Three Months Ended
	March 31, 2019
Facilities
Operating lease cost	$	648
Cash paid for operating lease		614

The following table summarizes the Company’s undiscounted cash payment obligations for its operating lease liabilities as of March 31, 2019 (in thousands):


Ending March 31, 2019
2019 (remaining nine months)	$	2,031
2020		3,065
2021		2,183
Thereafter		—
Total lease payments		7,279
Imputed interest		(1,108)
Total lease liabilities	$	6,171

NOTE 8. SHAREHOLDERS EQUITY

On May 22, 2018, the Company entered into an underwriting agreement with Jefferies LLC and Leerink Partners LLC, as representatives of several underwriters, or collectively the Underwriters, pursuant to which the Company agreed to issue and sell 12,500,000 shares of its common stock, par value $0.0001 per share, or Common Stock, to the Underwriters, or the Offering. The shares were sold at a public offering price of $4.00 per share, and were purchased by the Underwriters from the Company at a price of $3.76 per Share. Under the terms of the underwriting agreement, the

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Company granted the Underwriters the option, for 30 days, to purchase up to 1,875,000 additional shares of Common Stock at the public offering price.

On May 25, 2018, the Offering closed and the Company completed the sale and issuance of 12,500,000 shares of Common Stock. The Company received net proceeds from the Offering of approximately $46.7 million, after deducting the Underwriters’ discounts and commissions and offering expenses payable by the Company. Subsequently, on June 25, 2018, the Underwriters exercised their option to purchase the full 1,875,000 shares of Common Stock at the public offering price of $4.00 per share that were purchased by the Underwriters from the Company at a price of $3.76 per Share and the Company received additional net proceeds of $7.1 million, after deducting the Underwriters’ commissions. In aggregate, the Company completed the sale and issuance of 14,375,000 shares of Common Stock and received net proceeds from the Offering of approximately $53.8 million, after deducting the Underwriters’ discounts, commissions and offering expenses.

NOTE 9. STOCK-BASED COMPENSATION

The following table presents stock-based compensation expense recognized for stock options, restricted stock units, or RSUs, performance-based restricted stock units, or PRSUs, and the Company’s employee stock purchase program, or ESPP, in the Company’s statements of operations (in thousands):


	Three Months Ended
	March 31,
	2019		2018

Research and development	$	760	$	907
General and administrative		1,162		1,518
Total	$	1,922	$	2,425

In July 2018, the Company granted 903,374 PRSUs to its employees that vest upon the achievement of certain performance conditions, subject to the employees’ continued service relationship with the Company through the achievement date. At March 31, 2019, 878,289 of these PRSUs were outstanding. Based on the evaluation of the performance conditions at March 31, 2019, the Company has not recorded stock-based compensation expense for the three months ended March 31, 2019 related to these PRSUs. The Company will continue to evaluate the performance conditions for these PRSUs at each reporting period and will record compensation expense related to the PRSUs accordingly.

During the three months ended March 31, 2019, the Company had total unrecognized stock-based compensation expense, net of estimated forfeitures, of the following:



	Three Months Ended
	March 31, 2019
	Unrecognized Compensation Expense		Average Vesting Period
	($ million)		(Years)
Stock options grants	$	11.7	3.2
RSU grants		0.1	1.6
PRSU grants		—	—
ESPP		0.1	0.4

Option Exercises

For each of the three months ended March 31, 2019 and 2018, options were exercised to purchase 770 and zero shares, respectively, of the Company's common stock, with insignificant net proceeds to the Company in the three months ended March 31, 2019.

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Restricted Stock Units

For each of the three months ended March 31, 2019 and 2018, the Company issued zero shares of its common stock upon vesting of RSUs or PRSUs to its employees.

Employee Stock Purchase Plan

In February 2019, the Company sold 83,046 shares of its common stock under the ESPP. The shares were purchased by employees at a purchase price of $2.39 per share with proceeds to the Company of approximately $0.2 million. In February 2018, the Company sold 68,589 shares of its common stock under the ESPP. The shares were purchased by employees at a purchase price of $4.38 per share with proceeds to the Company of approximately $0.3 million.

NOTE 10. NET LOSS PER SHARE

Basic net loss per share is calculated by dividing net loss by the weighted-average number of common shares outstanding during the period, less shares subject to repurchase, and excludes any dilutive effects of stock-based awards and warrants. Diluted net loss per common share is computed giving effect to all potential dilutive common shares, including common stock issuable upon exercise of stock options, and unvested restricted common stock and stock units. As the Company had net losses for the three months ended March 31, 2019 and 2018, all potential common shares were determined to be anti-dilutive. The following table sets forth the computation of net loss per common share (in thousands, except share and per share amounts):


	Three Months Ended
	March 31,
	2019		2018
Numerator:
Net loss	$	(26,144)	$	(17,019)
Denominator:
Weighted average common shares outstanding - basic and diluted		62,546,295		47,559,366
Net loss per share - basic and diluted	$	(0.42)	$	(0.36)

For the three months ended March 31, 2019 and 2018 the total number of securities that could potentially dilute basic net loss per share in the future that were not included in the computation of diluted net loss per share because the effect would have been antidilutive was 9.9 million and 8.0 million, respectively.

NOTE 11. ACCRUED AND OTHER LIABILITIES

Accrued liabilities and other liabilities consist of the following (in thousands):


	March 31,		December 31,
	2019		2018
Accrued clinical and non-clinical expenses	$	8,981	$	9,790
Accrued contract manufacturing expenses		4,241		1,971
Derivative liability for exit fee		570		533
Accrued professional and consulting services		162		112
Foreign currency derivative contract		—		52
Other		211		399
	$	14,165	$	12,857

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NOTE 12. COLLABORATION AND LICENSING AGREEMENTS

Kyowa Hakko Kirin Co., Ltd., or KHK

In November 2017, the Company entered into an exclusive license agreement with KHK, or the KHK Agreement, for the development, commercialization and distribution of tenapanor in Japan for cardiorenal indications. The Company assessed these arrangements in accordance with Topic 606 and concluded that the contract counterparty, KHK, is a customer. Under the terms of the KHK Agreement, the Company received $30.0 million in up-front license fees which was recognized as revenue when the agreement was executed. Based on the Company’s assessment, it identified that the license and the manufacturing supply services were its material performance obligations at the inception of the agreement, and as such each of the performance obligations are distinct. Additionally, on January 1, 2018, the Company recorded a unbilled license revenue under current assets of $5.0 million and a uncharged license fees under current liabilities of $1.0 million related to the first milestone under the KHK Agreement that KHK achieved in February 2019, reflecting revenues and cost of revenue, respectively, that would have been recognized in the fourth quarter 2017 if the Company had adopted Topic 606 prior to January 1, 2018. As of March 31, 2019, based on KHK’s achievement of the milestone in February 2019, the balance related to unbilled license revenue was adjusted to zero. Correspondingly, the $1.0 million balance related to uncharged license fees, that the Company owed to AstraZeneca, was reclassed to accounts payable and fully paid to AstraZeneca in the second quarter of 2019.

In addition to the up-front license fee received of $30.0 million, the Company may be entitled to receive up to $55.0 million in total development milestones, of which $5.0 million has been received to date, and 8.5 billion yen in commercialization milestones, worth up to $76.1 million at the currency exchange rate on March 31, 2019, as well as reimbursement of cost, plus a reasonable overhead for the supply of product and high-teen royalties on net sales throughout the term of the agreement.

For the three months ended March 31, 2019 and 2018, no revenue was recorded related to the KHK agreement.

Shanghai Fosun Pharmaceutical Industrial Development Co. Ltd., or Fosun Pharma

In December 2017, the Company entered into an exclusive license agreement with Fosun Pharma, or the Fosun Agreement, for the development, commercialization and distribution of tenapanor in China for both hyperphosphatemia and irritable bowel syndrome with constipation, or IBS-C. The Company assessed these arrangements in accordance with Topic 606 and concluded that the contract counterparty, Fosun Pharma, is a customer. Under the terms of the Fosun Agreement, the Company received $12.0 million in up-front license fees which was recognized as revenue when the agreement was executed. Based on the Company’s assessment, it identified that the license and the manufacturing supply services were its material performance obligations at the inception of the agreement, and as such each of the performance obligations are distinct.

In addition, the Company may be entitled to additional development and commercialization milestones of up to $113.0 million, 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%.

For the three months ended March 31, 2019 and 2018, no revenue was recorded related to the Fosun Agreement.

Knight Therapeutics, Inc., or Knight

In March 2018, the Company entered into an exclusive license agreement with Knight Therapeutics, Inc., or the Knight Agreement, for the development, commercialization and distribution of tenapanor in Canada for hyperphosphatemia and IBS-C. The Company assessed these arrangements in accordance with Topic 606 and concluded that the contract counterparty, Knight, is a customer. Based on the Company’s assessment, it identified that the license and the manufacturing supply services were its material performance obligations at the inception of the agreement, and as such each of the performance obligations are distinct.

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Under the terms of the agreement, the Company is eligible to receive up to CAD 25 million in total payments including an up-front payment and development and sales milestones, reimbursement of supply costs on a schedule specifying cost per tablet, with a reasonable mark up for overhead, as well as tiered royalty rates on net sales ranging from the mid-single digits to the low twenties.

For the three months ended March 31, 2019 and 2018, zero and $2.3 million of revenue, respectively, was recorded related to the Knight Agreement, and zero and $0.5 million of cost of revenue, respectively, was recorded pursuant to the AstraZeneca Termination Agreement.

AstraZeneca

In June 2015, the Company entered into a termination agreement with AstraZeneca, or the AstraZeneca Termination Agreement, pursuant to which the Company remains liable to pay AstraZeneca license fees for (i) future royalties at a royalty rate of 10% of net sales of tenapanor or other NHE3 products by the Company or its licensees, and (ii) 20% of non-royalty revenue received from a new collaboration partner should the Company elect to license, or otherwise provide rights to develop and commercialize tenapanor or another NHE3 inhibitor, up to a maximum of $75.0 million in aggregate for (i) and (ii). To date in aggregate, the Company has recognized $9.9 million of the $75.0 million, recorded as cost of revenue comprising (i) $6.0 million and $2.4 million related to the KHK Agreement and Fosun Agreement, respectively, recorded in 2017 (ii) $0.5 million related to the Knight Agreement recorded in 2018 and (iii) $1.0 million related to the KHK Agreement associated with a milestone that KHK achieved in February 2019 for which the Company previously recorded a uncharged license fees under current liabilities in the period ended March 31, 2018 reflecting the amount that is owed to AstraZeneca upon achievement of the KHK milestone, which occurred in February 2019. The Company paid AstraZeneca the $1.0 million owed in the second quarter of 2019.

NOTE 13. CONTINGENCIES

From time to time the Company may be involved in claims arising in connection with its business. Based on information currently available, the Company believes that the amount, or range, of reasonably possible losses in connection with any pending actions against it in excess of established reserves, in the aggregate, not to be material to its consolidated financial condition or cash flows. However, losses may be material to the Company’s operating results for any particular future period, depending on the level of income or loss for such period.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the condensed consolidated financial statements and notes thereto included elsewhere in this report and with the audited consolidated financial statements and related notes thereto included as part of our Annual Report on Form 10‑K for the year ended December 31, 2018. This discussion and analysis and other parts of this report contain forward-looking statements that involve risk and uncertainties, such as statements of our plans, objectives, expectations and intentions. Our actual results could differ materially from those discussed in these forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those discussed in the section of this report entitled “Risk Factors”. These forward-looking statements speak only as of the date hereof. Except as required by law, we assume no obligation to update or revise these forward-looking statements for any reason. Unless the context requires otherwise, the terms “Ardelyx”, “Company”, “we”, “us”, and “our” refer to Ardelyx, Inc.

About Ardelyx

We are a biopharmaceutical company focused on developing first-in-class medicines to improve treatment choices for people with cardiorenal diseases. This includes patients with end-stage renal disease, or ESRD, suffering from elevated serum phosphorus, or hyperphosphatemia; and patients with chronic kidney disease, or CKD, and/or heart failure patients with elevated serum potassium, or hyperkalemia.

Our portfolio is led by the development of tenapanor, a first-in-class inhibitor of NHE3. In our cardiorenal pipeline, tenapanor is being evaluated in a second Phase 3 clinical trial, the PHREEDOM trial, for the treatment of hyperphosphatemia in patients with ESRD who are on dialysis, with topline results expected in the fourth quarter of 2019. This trial follows a successful first Phase 3 clinical trial completed in 2017, which achieved statistical significance for the primary endpoint. Tenapanor, if successfully developed and approved, would be the first therapy for phosphate management that is not a phosphate binder. We are also evaluating tenapanor in combination with phosphate binders in a Phase 3 clinical trial, the AMPLIFY trial, from which results are currently expected in the second half of 2019. If our AMPLIFY trial is successful, tenapanor would, if approved, be the first and only phosphate lowering therapy to be indicated as adjunctive therapy for use in combination with binders .

We are also advancing a small molecule potassium secretagogue program, RDX013, for the potential treatment of hyperkalemia. Hyperkalemia is a common problem in patients with heart and kidney disease, particularly in patients taking common blood pressure medications known as RAAS inhibitors, which inhibit the renin-angiotensin-aldosterone system. We believe that RDX013 has the potential to lower elevated potassium with a much lower pill burden than potassium binders and may provide significant advantages as a stand-alone agent or also in combination with potassium binders .

In addition to the development of tenapanor for the treatment of hyperphosphatemia for ESRD patients on dialysis, we have developed tenapanor for the treatment of patients with irritable bowel syndrome with constipation, or IBS-C. On September 12, 2018, we submitted a new drug application, or NDA, to the U.S. Food and Drug Administration, or FDA, for the treatment of patients with IBS-C and have been granted a target action date under the Prescription Drug User Fee Act, of September 12, 2019. The NDA submission was supported by a clinical package encompassing more than 3,100 patients and healthy volunteers who have participated in Ardelyx clinical trials and extensive clinical and preclinical data supporting the safety profile. The data include results from the completed IBS-C registration T3MPO program, which consisted of two Phase 3 trials, T3MPO-1 and T3MPO-2, and a long-term safety extension trial, T3MPO-3. Both the T3MPO-1 and T3MPO-2 trials achieved statistical significance for their primary endpoint and demonstrated that tenapanor had a durable effect on reducing constipation and abdominal pain for patients who experience IBS-C. The favorable safety profile of tenapanor, which has been shown across all clinical trials, was further supported by the completed T3MPO-3 study.

We have developed a proprietary drug discovery and design platform to discover targets found in the GI tract that regulate processes in the body and design products candidates that act upon those targets to take advantage of the gut’s ability to communicate with other organs.

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Since commencing operations in October 2007, substantially all our efforts have been dedicated to our research and development activities, including developing our clinical product candidate tenapanor and developing our proprietary drug discovery and design platform. We have not generated any revenues from product sales and have no products approved for commercialization. As of March 31, 2019, we had an accumulated deficit of $391.7 million.

On May 16, 2018, we entered into a loan and security agreement, or the Loan Agreement, with Solar Capital Ltd. and Western Alliance Bank. The Loan Agreement provides for a $50.0 million term loan facility with a maturity date of November 1, 2022. The full amount of the loan was funded on May 16, 2018. We received net proceeds from the loan of $49.3 million, after deducting the closing fee, legal expenses and issuance cost.

On May 25, 2018, we completed an underwritten public offering of 12,500,000 shares of our common stock at a price to the public of $4.00 per share, that were purchased by Jefferies LLC, or Jefferies, and Leerink Partners LLC, or Leerink, or collectively the Underwriters from the Company, at a price of $3.76 per share, and on June 25, 2018, we sold an additional 1,875,000 shares of our common stock at a price to the public of $4.00 per share, that were purchased by the Underwriters from the Company at a price of $3.76 per share, following the full exercise of the underwriters’ option to purchase additional shares of common stock. We received net proceeds from the offering of $53.8 million, after deducting the underwriting discounts, commissions and offering expenses.

We expect to incur operating losses for the foreseeable future as a result of our continued development of tenapanor and our preparations for the commercialization of tenapanor, including costs associated with completing the on-going Phase 3 development program for tenapanor for the treatment of hyperphosphatemia in patients with ESRD on dialysis, as well as the advancement of our research programs into the preclinical stage. To date, we have funded our operations from the sale and issuance of common stock and convertible preferred stock, funds from our collaboration partnerships, and funds from our Loan Agreement with Solar Capital Ltd. and Western Alliance Bank.

Financial Operations Overview

Revenue

We have not generated any revenue from product sales. Our past revenue performance is not necessarily indicative of results to be expected for the entire year ending December 31, 2019, or future operating periods. Our non-product revenue cannot always be predicted since it is dependent upon achievement of certain milestones. See “Note 2. Summary Of Significant Accounting Policies” for further detail.

During the first quarter of 2018, we executed a license agreement with Knight for the development, commercialization and distribution of tenapanor for hyperphosphatemia and IBS-C in Canada. Under the terms of the Knight license agreement, the Company received a license fee, which was recorded as revenue when the contract was executed. The agreement also provides for development and commercialization milestone payments, which will be recorded as revenue when we achieve the underlying milestone.

On January 1, 2018 we adopted the new standard for Revenue from Contracts with Customers, ASC 606, on a modified retrospective method as an adjustment to the opening balance of retained earnings of the annual reporting period. On January 1, 2018, we recorded a unbilled license revenue under current assets of $5.0 million reflecting a future receivable related to the first milestone under our license with KHK, that KHK achieved in February 2019, a uncharged license fees under current liabilities of $1.0 million reflecting a future payable related to the corresponding payment to AstraZeneca, in accordance with our termination agreement with AstraZeneca and a related decrease in its accumulated deficit of approximately $4.0 million as this standard permits revenue from certain milestones to be recognized earlier as this standard contains different recognition criteria related to milestones than under the previous standard, ASC 605. As of March 31, 2019, based on KHK’s achievement of the milestone in February 2019, the balance related to unbilled license revenue was adjusted to zero. Correspondingly, the $1.0 million balance related to uncharged license fees, that we owed to AstraZeneca, was reclassed to accounts payable and fully paid to AstraZeneca in the second quarter of 2019 .

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Cost of Revenue

Cost of revenue currently represents payments due to AstraZeneca, who under the terms of a termination agreement entered into in 2015 are entitled to (i) future royalties at a royalty 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 a new collaboration partner should we elect to license, or otherwise provide rights to develop and commercialize tenapanor or another NHE3 inhibitor, up to a maximum of $75.0 million in aggregate for (i) and (ii). We recognize these expenses as cost of revenue when we recognize the revenue that generates our liability for these license payments. To date in aggregate, we have recognized $9.9 million of the $75.0 million, recorded as cost of revenue comprising (i) $6.0 million and $2.4 million related to the KHK Agreement and Fosun Agreement, respectively, recorded in 2017 (ii) $0.5 million related to the Knight Agreement recorded in 2018 and (iii) $1.0 million related to the KHK Agreement associated with a future milestone that KHK achieved in February 2019 for which we previously recorded a uncharged license fees under current liabilities in the period ended March 31, 2018. As of March 31, 2019, based on KHK’s achievement of the milestone in February 2019, the balance related to unbilled license revenue was adjusted to zero. Correspondingly, the $1.0 million balance related to uncharged license fees, that we owed to AstraZeneca, was reclassed to accounts payable and fully paid to AstraZeneca in the second quarter of 2019.

Research and Development Expenses

We recognize all research and development expenses as they are incurred to support the discovery, development and manufacturing of our product candidates. Research and development expenses consist of the following:

external research and development expenses incurred under agreements with consultants, third-party CROs and investigative sites where a substantial portion of our clinical studies are conducted, and with contract manufacturing organizations where our clinical supplies are produced;

expenses associated with supplies and materials consumed in connection with our research operations;

employee-related expenses, which include salaries, bonuses, benefits, travel and stock-based compensation;

other costs associated with regulatory, clinical and non-clinical development activities; and

facilities and other allocated expenses, which include direct and allocated expenses for rent and maintenance of facilities, depreciation and amortization expense, information technology expense and other supplies.

We expect to continue to make substantial investments in research and development activities as we progress the development of tenapanor, as well as our other product candidates, advance our research programs into the preclinical stage and continue our early stage research. The process of conducting preclinical studies and clinical trials necessary to obtain regulatory approval is costly and time consuming. We may never succeed in achieving marketing approval for any of our product candidates, including tenapanor. Additionally, if marketing approval is received for tenapanor for the treatment of IBS-C, we may not be successful in securing one or more collaboration partners to commercialize tenapanor in the United States and other territories. The probability of success of each of the product candidates may be affected by numerous factors, including preclinical data, clinical data, market acceptance, sufficient third-party coverage or reimbursement, our ability to access capital on acceptable terms, competition, manufacturing capability and commercial viability.

We anticipate that we will make determinations as to which programs to pursue and how much funding to direct to each program on an ongoing basis in response to the scientific and clinical success of each product candidate, ongoing assessment as to each product candidate’s commercial potential, and our ability to access capital on acceptable terms. We will need to raise additional capital and will seek additional collaboration partnerships in order to complete the development and commercialization of tenapanor. If we are unable to access capital on a timely basis and on terms that are acceptable to us, we may be forced to restructure certain aspects of our business or identify and complete one or more strategic collaborations or other transactions in order to fund the development or commercialization of tenapanor or certain of our product candidates through the use of alternative structures.

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General and Administrative

General and administrative expenses consist primarily of salaries and related costs, including stock-based compensation. Other general and administrative expenses include facility related costs and professional fees for legal, accounting, investor relations and other consulting services.

We anticipate that our general and administrative expenses will increase in the future primarily because of (i) increased pre-commercial activities, personnel costs and professional fees for services to support the potential launch and commercialization of tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis and (ii) expenses related to costs of operating as a public company primarily preparing for future integrated audits.

Provision for Income Taxes

The provision for income taxes was not material for each of the three months ended March 31, 2019 and 2018. We expect to generate a net loss for the year ending December 31, 2019. Our deferred tax assets continue to be fully offset by a valuation allowance.

Critical Accounting Polices and Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with United States generally accepted accounting principles, or U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements, as well as the expenses incurred during the reporting periods. Our estimates are based on our historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. We consider certain accounting policies related to research and development expense, accruals and stock-based compensation to be critical policies. Other than the adoption of ASU No. 2016-02, Leases (Topic 842) on January 1, 2019, there have been no material changes to our critical accounting policies since we filed our 2018 Form 10-K with the SEC on March 6, 2019. For a description of our critical accounting policies, please refer to our Form 10-K we filed with the SEC on March 6, 2019.

RESULTS OF OPERATIONS

Three months ended March 31, 2019 and 2018

Revenue

Revenue for the three months ended March 31, 2019, as compared to the same period in the prior year, was as follows (in thousands):


	Three Months Ended March 31,
	2019			2018
Licensing revenue	$	—		$	2,320
Dollar change from prior year		(2,320)
Percent change from prior year		(100)	%

Licensing revenue was zero for the three months ended March 31, 2019, a decrease of $2.3 million, compared to $2.3 million for the three months ended March 31, 2018. For the three months ended March 31, 2018 we recognized revenue of $2.3 million related to a license fee.

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Cost of revenue

Cost of revenue for the three months ended March 31, 2019, as compared to the same period in the prior year, was as follows (in thousands):


	Three Months Ended March 31,
	2019			2018
Cost of revenue	$	—		$	464
Dollar change from prior year		(464)
Percent change from prior year		(100)	%

Cost of revenue was zero for the three months ended March 31, 2019, a decrease of $0.5 million, compared to $0.5 million for the three months ended March 31, 2018. For the three months ended March 31, 2018, cost of revenue of $0.5 million was due to the fees paid to AstraZeneca pursuant to the AstraZeneca Termination Agreement, corresponding to the revenue realized.

Research and Development

Research and development expenses for the three months ended March 31, 2019, as compared to the same period in the prior year, were as follows (in thousands):


	Three Months Ended March 31,
	2019			2018
Research and development	$	20,381		$	13,350
Dollar change from prior year		7,031
Percent change from prior year		53	%

Research and development expenses were $20.4 million for the three months ended March 31, 2019, an increase of $7.0 million, or 53%, compared to $13.4 million for the three months ended March 31, 2018. The increase consisted of a $6.6 million increase in our external program costs and a $0.4 million increase in our internal program costs.

The increase in our external program costs of $6.6 million included a $6.0 million increase in expense primarily related to our PHREEDOM and AMPLIFY trials, our tenapanor hyperphosphatemia studies and a $0.6 million increase related to the RDX013 program.

The increase in our internal costs of $0.4 million was primarily due to an increase in headcount and related personnel costs and an increase in professional services partially offset by a decrease in stock-based compensation expenses.

General and Administrative

General and administrative expenses for the three months ended March 31, 2019, as compared to the same period in the prior year, were as follows (in thousands):


	Three Months Ended March 31,
	2019			2018
General and administrative	$	5,117		$	6,191
Dollar change from prior year		(1,074)
Percent change from prior year		(17)	%

General and administrative expenses were $5.1 million for the three months ended March 31, 2019, a decrease of $1.1 million, or 17%, compared to $6.2 million for the three months ended March 31, 2018. The decrease was primarily due to a decrease in professional services and a reduction in stock-based compensation costs.

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Liquidity and Capital Resources

The following table displays a summary of our cash, cash equivalents and short-term investments as of March 31, 2019 and December 31, 2018 (in thousands):


	March 31,		December 31,
	2019		2018
Cash and cash equivalents	$	92,036	$	78,768
Short-term investments		59,524		89,321
Total liquid funds	$	151,560	$	168,089

On May 25, 2018, we completed an underwritten public offering of 12,500,000 shares of our common stock at a price to the public of $4.00 per share, that were purchased by the Underwriters from the Company at a price of $3.76 per share, and on June 25, 2018, we sold an additional 1,875,000 shares of our common stock at a price to the public of $4.00 per share, that were purchased by the Underwriters from the Company at a price of $3.76 per share, following the full exercise of the underwriters’ option to purchase an additional shares of common stock. We received net proceeds from the offering of $53.8 million, after deducting the underwriting discounts, commissions and offering expenses.

On August 9, 2018, we filed a prospectus supplement with the SEC pursuant to our previously filed shelf registration statement on Form S-3 (File No. 333-217441). The prospectus covers the offering, issuance and sale of up to $50.0 million of shares of common stock from time to time in “at the market” offerings pursuant to a Sales Agreement entered into with Leerink Partners LLC, or Leerink, on August 9, 2018. As of March 31, 2019, no shares have been offered or issued or sold against the Sales Agreement with Leerink.

Our primary sources of cash have been from the sale and issuance of common stock and convertible preferred stock, funds from our collaboration partnerships, and funds from our Loan Agreement with Solar Capital Ltd. and Western Alliance Bank. Our primary uses of cash are to fund operating expenses, primarily research and development expenditures. Cash used to fund operating expenses is impacted by the timing of when we pay these expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

We believe that our existing capital resources as of March 31, 2019 will enable us to fund our operating expenses and capital expenditure requirements for at least the next 12 months following our financial statement issuance date. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. In particular, our operating plan can change, and we may require significant additional capital to fund our operations, including to support the development, commercialization and manufacturing efforts for tenapanor. We may seek to obtain such additional capital through debt financings, credit facilities, additional equity offerings and/or strategic collaborations. We currently have no unutilized credit facility or committed sources of capital, and there can be no assurances that such sources of capital will be available to us when needed or on acceptable terms. Because of the numerous risks and uncertainties associated with the development and commercialization of our product candidates, and the extent to which we may be able to secure additional collaboration partnerships with third-parties to participate in the development and commercialization of our potential products, our future funding requirements will depend on many factors, including the following:

the progress, timing, scope, results and costs of our clinical trial program evaluating tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis, and if our clinical program is successful, the submission of an NDA with the FDA to request marketing authorization for tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis, as well as our decision whether or not to pursue other indications for tenapanor;

whether or not we receive approval from the FDA to market tenapanor for the treatment of patients with IBS-C;

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our ability to identify a collaboration partner and negotiate acceptable terms for a collaboration partnership for the commercialization of tenapanor in IBS-C in the United States;

our ability to successfully commercialize tenapanor, if approved, either alone or with one or more collaboration partners;

the manufacturing costs of our product candidates, and the availability of one or more suppliers for our product candidates at reasonable costs, both for clinical and commercial supply;

the selling and marketing costs associated with tenapanor, including the cost and timing of building our sales and marketing capabilities, should we elect to do so;

our ability to maintain our existing collaboration partnerships and to establish additional collaboration partnerships, in-license/out-license, joint ventures or other similar arrangements and the financial terms of such agreements;

the timing, receipt, and amount of sales of, or royalties on, tenapanor, if any;

the sales price and the availability of adequate third-party reimbursement for tenapanor, if approved;

the cash requirements of any future acquisitions or discovery of product candidates;

the number and scope of preclinical and discovery programs that we decide to pursue or initiate, and any clinical trials we decide to pursue for other product candidates;

the time and cost necessary to respond to technological and market developments;

the costs of filing, prosecuting, maintaining, defending and enforcing any patent claims and other intellectual property rights, including litigation costs and the outcome of such litigation, including costs of defending any claims of infringement brought by others in connection with the development, manufacture or commercialization of tenapanor or any of our product candidates; and

the payment of interest and principal related to our loan and security agreement entered into with Solar Capital Ltd. and Western Alliance Bank during May 2018.

The following table summarizes our cash flows for the periods indicated (in thousands):


	Three Months Ended March 31,
	2019		2018
Cash used in operating activities	$	(16,913)	$	(6,804)
Cash (used in) provided by investing activities		29,981		(1,135)
Cash provided by financing activities		200		301
Net increase (decrease) in cash and cash equivalents	$	13,268	$	(7,638)

Cash Flows from Operating Activities

Net cash used in operating activities during the three months ended March 31, 2019, was approximately $16.9 million. The net loss of $26.1 million was adjusted for (i) non-cash charges of $1.2 million related to depreciation, amortization, non-cash interest expense and change in derivative liabilities and $1.9 million for stock-based compensation, (ii) a decrease of $5.1 million in accounts receivable primarily related to the unbilled license revenue payment received from KHK upon its milestone achievement, (iii) a $0.3 million decrease in prepaid expenses primarily to vendors for clinical development and manufacturing, and (iv) an increase in accounts payable and accrued liabilities of $0.7 million primarily due to expenses incurred for the clinical manufacturing, process development, and clinical development activities for tenapanor.

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Net cash used in operating activities during the three months ended March 31, 2018 was approximately $6.8 million. The net loss of $17.0 million was adjusted for non-cash charges of $3.1 million related to depreciation, amortization and stock-based compensation expense, and an increase to cash of $7.1 million related to other working capital items associated with changes in our net operating assets and liabilities primarily related to a decrease of receivables related to the Fosun Agreement offset by working capital related to clinical development and manufacturing of tenapanor.

Cash Flows from Investing Activities

Net cash provided by investing activities was $30.0 million for the three months ended March 31, 2019, primarily due to maturities of investments of $55.0 million offset by purchases of investments of $24.9 million and purchases of property and equipment of $0.1 million.

Net cash used in investing activities was $1.1 million for the three months ended March 31, 2018, primarily due to purchases of investments of $39.0 million offset by maturities of short-term investments of $37.1 million and redemptions of investments of $0.8 million.

Cash Flows from Financing Activities

Net cash provided by financing activities for the three months ended March 31, 2019, was $0.2 million, primarily due to net proceeds of $0.2 million from issuance of common stock under the employee stock purchase plan, or ESPP.

Net cash provided by financing activities for the three months ended March 31, 2018 was $0.3 million, primarily due to proceeds from issuance of common stock under the ESPP.

Off-Balance Sheet Arrangements

None.

Recent Accounting Pronouncements

Refer to “Note 2. Summary Of Significant Accounting Policies” in the notes to our unaudited interim condensed consolidated financial statements in Part I, Item 1 of this Quarterly Report on Form 10‑Q, for a discussion of recent accounting pronouncements.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Foreign Currency Risk. The majority of our transactions occur in U.S. dollars. However, we do have certain transactions that are denominated in currencies other than the U.S. dollar, primarily, Swiss francs and the euro, and we therefore are subject to foreign exchange risk. The fluctuation in the value of the U.S. dollar against other currencies affects the reported amounts of expenses, assets and liabilities associated with a limited number of preclinical and clinical activities. During the three months ended March 31, 2019, we settled a forward currency exchange contract denominated in Swiss francs, that was not designated as a cash flow hedge, and was to secure a foreign currency exchange rate when a contract is executed involving payment in a foreign currency in order to minimize cash flow exposure to fluctuating exchange rates .

We do not use derivative financial instruments for speculative trading purposes, nor do we hedge foreign currency exchange rate exposure in a manner that entirely offsets the earnings effects of changes in foreign currency exchange rates. The counterparty to our forward foreign currency exchange contracts are creditworthy commercial banks, which minimizes the risk of counterparty nonperformance.

As of March 31, 2019, we had no open forward foreign currency exchange contracts.

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Interest Rate Risk. We are subject to interest rate fluctuation exposure through our borrowings under the Loan Agreement and our investment in money market accounts which bear a variable interest rate. Borrowings under the Loan Agreement bear interest at a rate equal to one-month LIBOR plus 7.45% per annum. A hypothetical increase in one-month LIBOR of 100 basis points above the current one-month LIBOR rates would have increased our interest expense by approximately $0.1 million as of March 31, 2019. We had $49.4 million aggregate principal amount of loan outstanding as of March 31, 2019.

We are subject to interest rate fluctuation exposure through our investments, however, the goals of our investment policy are the preservation of capital, fulfillment of liquidity needs and fiduciary control of cash. To achieve our goal of maximizing income without assuming significant market risk, we maintain our excess cash and cash equivalents in money market funds and short-term debt securities. Because of the short-term maturities of our cash equivalents, we do not believe that a decrease in interest rates would have any material negative impact on the fair value of our cash equivalents.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

As required by Rule 13a‑15(b) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), our management, under the supervision and with the participation of our principal executive officer and principal accounting and financial officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rules 13a‑15(e) and 15d‑15(e) under the Exchange Act) as of March 31, 2019. Any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objective and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on such evaluation, our principal executive officer and principal accounting and financial officer have concluded that, as of March 31, 2019, our disclosure controls and procedures were effective at a reasonable assurance level.

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Internal control over financial reporting has inherent limitations. Internal control over financial reporting is a process that involves human diligence and compliance and is subject to lapses in judgment and breakdowns resulting from human failures. Internal control over financial reporting also can be circumvented by collusion or improper management override. Because of such limitations, there is a risk that material misstatements will not be prevented or detected on a timely basis by internal control over financial reporting. However, these inherent limitations are known features of the financial reporting process. Therefore, it is possible to design into the process safeguards to reduce, though not eliminate, this risk.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

From time to time, we may be involved in legal proceedings arising in the ordinary course of business. As of March 31, 2019, there is no litigation pending that would reasonably be expected to have a material adverse effect on our results of operations and financial condition.

ITEM 1A. RISK FACTORS

Our business involves significant risks, some of which are described below. You should carefully consider these risks, as well as other information in this Quarterly Report on Form 10‑Q, including our financial statements and the related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, cash flows, the trading price of our common stock and our growth prospects. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.

Risks Related to Our Limited Operating History, Financial Condition and Capital Requirements

We have a limited operating history, have incurred significant losses since our inception and we will incur losses in the future, which makes it difficult to assess our future viability.

We are a clinical-stage biopharmaceutical company with a limited operating history. Biopharmaceutical product development is a highly speculative undertaking and involves a substantial degree of risk. To date, we have focused substantially all of our efforts on our research and development activities, including developing tenapanor and developing our proprietary drug discovery and design platform. To date, we have not commercialized any products or generated any revenue from the sale of products.

We are not profitable and have incurred losses in each year since our inception in October 2007, and we do not know whether or when we will become profitable. We have only a limited operating history upon which to evaluate our business and prospects. We continue to incur significant research, development and other expenses related to our ongoing operations. As of March 31, 2019, we had an accumulated deficit of $391.7 million.

We expect that our operating losses will substantially increase for the foreseeable future as we prepare for the potential commercialization of, and incur manufacturing and development costs for, tenapanor, including costs associated with completing the ongoing Phase 3 development of tenapanor for the treatment of hyperphosphatemia in end stage renal disease, or ESRD, patients on dialysis, and if such Phase 3 development is successful, preparing the new drug application, or NDA, for submission to the U.S. Food and Drug Administration, or FDA, to request marketing authorization for tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis, and continuing our discovery and research activities.

Our prior losses, combined with expected future losses, have had and will continue to have an adverse effect on our stockholders’ equity and working capital. Further, the net losses we incur may fluctuate significantly from quarter-to-quarter and year-to-year, such that a period-to-period comparison of our results of operations may not be a good indication of our future performance.

We have substantial net operating loss and tax credit carryforwards for Federal and California income tax purposes. Such net operating losses and tax credits carryforwards may be reduced as a result of certain intercompany restructuring transactions. In addition, the future utilization of such net operating loss and tax credit carryforwards and credits will be subject to limitations, pursuant to Internal Revenue Code Sections 382 and 383, as a result of ownership changes that have occurred previously and additional limitations may be applicable as a result of ownership changes that could occur in the future.

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

We have no products approved for sale and have never generated any revenue from product sales. Our ability to generate revenue from product sales and achieve profitability depends on our ability to successfully complete the development of, and obtain the regulatory and marketing approvals necessary to commercialize tenapanor for one or more indications, either on our own, or with one or more collaboration partners. We do not anticipate generating revenue from product sales for the foreseeable future. Our ability to generate future revenue from product sales or pursuant to milestone payments depends heavily on many factors, including but not limited to:

the successful completion of nonclinical and clinical development of tenapanor;

obtaining regulatory approvals for tenapanor, either on our own, or with one or more collaboration partners;

our ability to identify a collaboration partnership and negotiate acceptable terms for a collaboration partnership for the commercialization of tenapanor for IBS-C in the United States;

our ability to successfully commercialize tenapanor, if approved, either on our own, or with one or more collaboration partners;

developing a sustainable and scalable manufacturing process for tenapanor and establishing and maintaining supply and manufacturing relationships with third parties that can provide an adequate (in amount and quality) supply of product to support the market demand for tenapanor, if approved;

obtaining market acceptance of tenapanor, if approved, as a viable treatment option for the indications for which it is approved;

addressing any competing technological and market developments;

identifying, assessing, acquiring, in-licensing and/or developing new product candidates;

negotiating favorable terms in any collaboration partnership, licensing or other arrangements into which we may enter;

maintaining, protecting, and expanding our portfolio of intellectual property rights, including patents, trade secrets, and know-how, and our ability to develop, manufacture and commercialize our product candidates and products without infringing intellectual property rights of others; and

attracting, hiring, and retaining qualified personnel.

In cases where we are successful in obtaining regulatory approvals to market tenapanor for one or more indications, our revenue will be dependent, in part, upon the size of the markets in the territories for which regulatory approval is granted, the accepted price for the product, the ability to get reimbursement at any price and whether we are commercializing the product or the product is being commercialized by a collaboration partner, and in such case, whether we have royalty and/or co-promotion rights for that territory, and whether any royalty we have a right to receive from a collaboration partner is in excess of the royalty we owe AstraZeneca as a result of the termination of our License Agreement with AstraZeneca in 2015. See NOTE 12. COLLABORATION AND LICENSING AGREEMENTS for details on our obligations to AstraZeneca. If the number of patients suitable for tenapanor is not as significant as we estimate, the indications approved by regulatory authorities are narrower than we expect, coverage and reimbursement for tenapanor are not available in the manner and to the extent which we expect, or the reasonably accepted population for treatment is narrowed by competition, physician choice or treatment guidelines, we may not generate significant revenue from the sale of tenapanor, even if approved. Even if we achieve profitability in the future, we may not be able to sustain profitability in subsequent periods. Our failure to generate revenue from product sales would likely depress our market value and could impair our ability to raise capital, expand our business, discover or develop other product candidates or

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continue our operations. A decline in the value of our common stock could cause our stockholders to lose all or part of their investment.

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.

On May 16, 2018, we entered into a loan and security agreement with Solar Capital, Ltd. and Western Alliance Bank, or collectively the Lenders, pursuant to which the Lenders agreed to provide us a $50.0 million term loan facility with a maturity date of November 1, 2022. The full amount of the loan was funded on May 16, 2018 . Until we have repaid such indebtedness, the loan and security agreement subjects us to various customary covenants, including requirements as to financial reporting and insurance and restrictions on our ability to dispose of our business or property, to change our line of business, to liquidate or dissolve, to enter into any change in control transaction, to merge or consolidate with any other entity or to acquire all or substantially all the capital stock or property of another entity, to incur additional indebtedness, to incur liens on our property, to pay any dividends or other distributions on capital stock other than dividends payable solely in capital stock, to redeem capital stock, to enter into licensing agreements, to engage in transactions with affiliates, and to encumber our intellectual property. Our business may be adversely affected by these restrictions on our ability to operate our business.

Additionally, we may be required to repay the outstanding indebtedness under the loan facility if an event of default occurs under the loan and security agreement. An event of default will occur if, among other things, we fail to make payments under the loan and security agreement; we breach any of our covenants under the loan and security agreement, subject to specified cure periods with respect to certain breaches; the Lenders determine that a material adverse change has occurred; we or our assets become subject to certain legal proceedings, such as bankruptcy proceedings; we are unable to pay our debts as they become due; or we default on contracts with third parties which would permit the Lenders to accelerate the maturity of such indebtedness or that could have a material adverse change on us. We may not have enough available cash or be able to raise additional funds through equity or debt financings to repay such indebtedness at the time any such event of default occurs. In this case, we may be required to delay, limit, reduce or terminate our product development or commercialization efforts or grant to others’ rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves. The Lenders could also exercise their rights as collateral agent to take possession of and to dispose of the collateral securing the term loans, which collateral includes substantially all of our property (excluding intellectual property, which is subject to a negative pledge). Our business, financial condition and results of operations could be materially adversely affected as a result of any of these events.

We will require substantial additional financing to achieve our goals, and the inability to access this necessary capital when needed on acceptable terms, or at all, could force us to delay, limit, reduce or terminate our pre-commercialization efforts for tenapanor and our other product development and platform development activities.

Since our inception, most of our resources have been dedicated to our research and development activities, including developing our clinical product candidate tenapanor and developing our proprietary drug discovery and design platform. We believe that we will continue to expend substantial resources for the foreseeable future, including costs associated with completing the clinical program for tenapanor for the treatment of hyperphosphatemia in ESRD patients on dialysis, research and development, conducting preclinical studies and clinical trials for our other programs, obtaining regulatory approvals, developing and maintaining scalable manufacturing processes for our product candidates and sales and marketing. Because the outcome of any clinical trial and/or regulatory approval process is highly uncertain, we cannot reasonably estimate the actual amounts necessary to successfully complete the development, regulatory approval process and commercialization or co-promotion of any of our product candidates. Our future funding requirements will depend on many factors, including, but not limited to: